Lifting the Resource Curse (or how to make finding oil a blessing)

February 25, 2010

     By Duncan Green     

flames and oilLifting the Resource Curse’, a new Oxfam paper, revisits the difficult question of how to ensure natural resources are a blessing, and not a curse, for poor countries. Countries like Angola, where oil revenues (which represent 80 per cent of national income) are estimated at $10bn per year, yet 70 per cent of the population live on less than $2 per day. By one estimate, between 1997 and 2002 more than $4bn in state oil revenues ‘disappeared’ from the Angolan treasury; an amount almost equal to total government spending on social services in the same period.

The first step for any country is to get your hands on the money. There are some successes to point to: Bolivia saw oil and gas revenues rise from $448m in 2004 to $1.531bn in 2006, due to the redistribution of profits agreed in contracts after 2005.

1920s Californian Beach with weak planning permission regimeBut then you have to use the money wisely (and not nick it). Indonesia and Norway are good examples of countries with significant revenue from natural resource extraction, where public spending is aligned coherently with long-term development goals. Oxfam’s research highlights some key ways to improve the opportunities offered by revenues from extractive industries: upgrading legal and fiscal frameworks in poor countries with natural resources; renegotiating contracts with big extractive companies; and putting in place or reinforcing public financial management systems. These systems should use extractive revenues for social spending, as well as for setting the foundations for the diversification of production, job creation, and to mitigate the social and environmental impacts of exploitation.
A cornerstone of such policies should be the promotion of transparency throughout the extractive industry supply chain, from the agreement of contracts to the allocation of revenues through public budgets.

If you have a government that wants to make natural resources into a national blessing, there is no shortage of advice. Numerous “best practice” guides have been developed in the last few years showing how to improve management of the extractive “value chain” – from licensing to government expenditures. These include the IMF’s Guide to Resource Revenue Transparency, the Natural Resource Charter developed by Paul Collier and others, a book, “Escaping the Resource Curse” edited by Macartan Humphreys, Jeffrey Sachs and Joe Stiglitz, and innumerable academic and NGO reports (the Oxfam report has over 4 pages of recommendations to be getting on with). African governments can access technical advice c/o the AfDB’s new African Legal Support Facility.

Fine, but what if you don’t have an effective state – if vested interests are skimming off revenues from oil and mining, and will do their best to stop you spending it on schools and hospitals? (This is where I try desperately to avoid using the phrase ‘political will’, banned by a previous blog). This is quite common since part of the curse of wealth is precisely that ‘money coming out of the ground’ often weakens the social contract between state and citizen (eg the state no longer needs to tax its people) and undermines institutional development.

At a national level, Lifting the Resource Curse argues, unsurprisingly, that the active involvement of civil society is essential both to increase the public pressure on governments to make the most of natural resource endowments and to act as watchdogs, tracking both the origins and uses of revenues from extractive exploitation. It is also of crucial importance to have public institutions that can support this process of participation and which are efficient in their control, monitoring, and enforcement of it.

But I think the paper could have gone a bit further with its power analysis on this – what other influential domestic groups have an interest in harnessing extractive industries for the national good? Answer, virtually all of them – business sectors (manufacturing, exporters, agriculture, finance), trade unions, media, national parliaments and local governments. Where and how have these kinds of coalitions formed and had an impact? There’s a lot more to life (and change) than CSOs.

At an international level, apart from the ever-expanding but voluntary Extractive Industries Transparency Initiative, there are moves in the US to introduce legislation that would require extractive industry companies that list on the New York Stock Exchange (basically all the big ones) to disclose payments to governments. Similar moves are under way in Spain. Clamping down on tax havens and international banking secrecy might also curb some of the outflows of stolen money. Export Credit Agencies could insist that any companies they support comply with the highest standards on bribery, corruption and transparency.

With high commodity prices looking set to continue, the ability to make natural resources work for the common good, rather than private evil, will play a big part in determining which countries prosper and which fail.

See also my recent post on a World Bank paper on this issue. Oh, and the black and white pic is apparently a Californian beach in the 1920s. Those were the days, eh?

February 25, 2010
Duncan Green