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Marcelo Giugale Headshot

Blessed by Nature, Cursed by Politics

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The evidence is as strong as it is puzzling: countries that have a lot of natural resources -- things like oil, gas and minerals -- tend to be poorer than those that don't. Over time, they grow slower, become less competitive and innovative, and suffer from more corruption and pollution. No wonder many say that "commodity wealth" is actually a curse. If it is, then we have a serious problem. The rents generated by extractive industries are growing super-fast and, by now, are worth some five trillion dollars per year -- that's almost a tenth of the annual value of all goods and services produced by the entire planet. And most of that money is going to developing countries -- especially Africa -- where it has the potential to cause the most "damage".

Of course, if you ask economists, they'll tell you that they have already figured out ways to turn this curse into a blessing. They know what central banks need to do to keep the local currency from appreciating beyond the point at which our non-commodity industries are destroyed by cheaper imports. They speak of "fiscal rules", "multi-year budgets" and "sovereign wealth funds" -- all things that act like speed-bumps so governments don't waste money too quickly. They have techniques to make public spending, especially investments in infrastructure, a bit more productive. And they have teamed up with NGOs, think-tanks, academia, credit rating agencies, and even churches, to insist that exploration, exploitation and expenditures be as clean and as green as possible.

So, if we know exactly what to do to avoid the commodity curse, then why doesn't it get done? Why, in spite of bad experience after bad experience, of libraries full of technical ideas, and of warning calls from all corners of society, do most countries endowed with natural wealth end up wasting it? A new book -- Rents to Riches? -- looks around the world and concludes that the culprit lies in "political economy" -- that is, in the interplay of vested interests that smothers reform. Here is how it happens, as well as a few hints at a solution.

First, you have to convince investors -- especially foreign ones -- to explore your land and, if they find something valuable, to extract it, ship it out, and give you a cut. To do that, they will have to put huge amounts of cash up-front -- the average, deepwater oil well costs about 100 million dollars to drill, and has a one-in-ten chance of succeeding. How do those investors know that, once they find something, you will not break the contract and tax their rents away? You see, "contractual security" is the first consideration in the extractive business. Think of a gas pipeline or an oil platform: what happens if, a few years after you build it, a radical politician comes into office and wants to expropriate it? Will you be able to defend your rights in court? Who's court? That kind of credibility is crucial. The less you can trust a country's political and legal systems, the larger the share of the discoveries you will demand to take the investment risk in the first place.

Second, you have to convince your own citizens. They will support the sale of natural resources only if they feel that they, not corrupt officials, will benefit from it -- if they feel "included" in the deal. That means governments who spend the commodity revenue well -- on "public goods" like primary education, basic health and safety. It also means opening access to information, auctioning extraction rights in a transparent way, and holding officials accountable for the results they achieve -- or don't achieve. Rarely would all that happen in non-democracies.

So, if your country is politically stable and socially inclusive, then it is possible to reach consensus on what needs to be done to turn commodities into a blessing (best example: Norway). Whether it is managing the currency, monitoring the budget, or protecting the environment, stability and inclusion make things much easier to agree on. But what do you do when your leaders keep changing on the whims of violence and your people think extractive industries are a scam that favors only the elite? That's when you are likely to see concessions that smack of giveaways, politicians that seem to take turns in enriching themselves, little or no economic development, and citizens that hate it all. What do you do in that case?

Well, you can improve at the edges. The international community can put pressure on countries and corporations to get all concession agreements disclosed, to make contracts as standard as possible, and to get independent parties to monitor them. You can make the government's share of the rents increase automatically when prices balloon -- so old contracts don't look like sweetheart deals at times of bonanza. You can make public investment as professional and as decentralized as possible. You can form coalitions of the interested: help civil society get organized and have a say on the whole process, especially around the locations where mines, wells and pipelines will be constructed.

If all that fails, you can always do the unthinkable: give citizens a direct stake in their own national resources. The biometric and logistical tools to transfer a portion of commodity rents to every man, woman and child already exist; in fact, the cost of identifying and reaching individuals has collapsed over the past decade. This would make people really interested in how the government spends the rents that it does not transfer. They would begin to care more about how well the industry is managed than about the nationality of whoever manages it. And they would definitively feel "included". Will this not just foster private consumption at the expense of public investment? Not necessarily. If the new scrutiny reduces corruption, you may end up with more money than before to build ports, bridges and power-plants. Sure, developing countries are not Alaska, where this kind of transfers has been common practice for decades. But with so much at stake in the coming years, the idea is certainly worth a try.