Prosper or Plunder? Extractive Industries' Checkered Past With Development

On Tuesday, September 20th, President Obama delivered the welcome news that the U.S. will now implement the Extractive Industries Transparency Initiative (EITI), the global transparency standard for oil, gas and mining. "Today, I can announce that the United States will join the global initiative in which these industries, governments and civil society, all work together for greater transparency so that taxpayers receive every dollar they're due from the extraction of natural resources," said Obama.

The U.S. implementation of EITI is an important milestone, as for each success story of well-managed natural resource wealth lifting a country out of poverty, seemingly endless counterexamples exist as a cautionary tale of the horrors of "resource curse" -- kleptocratic governments, environmental degradation, deepening gender disparities, loss of livelihoods and widespread violations of human rights. At the Civil Society Policy Forum of last week's World Bank/IMF Annual Meetings held in Washington, D.C., several panels tackled the issue of the extractive industries, resource management and economic development.

On Wednesday, September 21st, Oxford economist, Paul Collier addressed civil society at a launch event for his newest publication, Plundered Nations? Successes and Failures in Natural Resource Extraction. Collier was joined by Karin Lissakers, Director of the Revenue Watch Institute as well as Deputy Director, Antoine Heuty.

Using eight case studies to illustrate the varying approaches countries have taken to natural resource management, Collier's Plundered Nations? aims to prescribe steps to ensure good governance of resources and the wealth they can provide, resulting in poverty alleviation in the world's resource rich yet impoverished countries.

Heuty posed the question as to what factors explain the divergent experiences in resource management, from the successes of Malaysia and Chile to the failures in Cameroon and Nigeria. Collier pointed out that success and failure in resource management does not hinge on a singular decision, but rather on an entire chain of decisions. He continued, in order to "harness the enormous opportunity of natural resources," each of these decisions in the chain must be sound and sanctioned by the public and governments. Collier laid out four key nodes in the resource management decision-making chain: Resource discovery, capturing of rents, government use of revenues and how the resources not used for immediate consumption are invested.

Collier explained the first link in the chain, resource discovery, by citing data comparing the current underground mineral wealth values of OECD countries ($110,000 per km2) versus sub-Saharan African countries ($23,000 per km2). He pointed out that the apparent disparity exists not because there is less natural resource wealth in sub-Saharan Africa but rather, the discovery process in these countries is less advanced, thus resulting in fewer discoveries of resource deposits.

The second link in the chain is the capture of economic rents or, in other words, proper taxation of resources. The Revenue Watch Institute's Karin Lissakers stressed the importance of having "solid tax structures embedded in law versus contract-by-contract negotiation." Collection of economic rents in resource rich countries captures varies widely country by country, explained Lissakers, contrasting the experience of Norway, who captures approximately 78 cents on every dollar of oil wealth as compared to many Latin American and African countries who capture between 10 and 15 cents. She continued, "Bad deals and weak laws damage wealth."

How the government spends natural resource-derived revenues or the balance of spending on the present versus the future is the third link of the chain. Collier asserted that "plunder comes in two forms: the few can steal from many or the present can steal from the future." He highlighted the importance of balancing the needs of the poor in the present with investment in the future, leading into the fourth link, government investment. In developing countries such as Nigeria, Guinea or Chad, "sound, productive domestic investment" is imperative to spur economic development and alleviate poverty, explained Collier.

Although great strides have been made in the development of global transparency standards work remains. According to Lissakers, approximately 35 countries (soon to include the United States) are now implementing the EITI and global momentum is growing. Last year, the U.S. Congress passed the Cardin-Lugar Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, mandating country-by-country and project-by-project reporting on natural resource projects for companies registered in the U.S. with the Securities and Exchange Commission (SEC) and the EU is currently discussing similar regulations. However, echoing Colliers remarks, Lissakers stressed that "successful resource management requires transparency and good decisions across the entire chain."

The World Bank is no stranger to the pitfalls and destruction wrought by poorly managed extractives projects. One must look only as far as their questionable investments in the highly problematic Chad-Cameroon pipeline and the West African Gas pipeline. At last year's Annual Meetings of the World Bank and IMF, economist Jeffrey Sachs declared the Chad-Cameroon pipeline as "completely useless from Chad's development perspective" given the lack of contract transparency in spite of the large investment of public funds as well as improper planning and project implementation that resulted in virtually no spillover effects for the local communities.

On Thursday, September 22nd, the Heinrich Boll Foundation, Friends of the Earth International and Gender Action hosted an event at the Carnegie Endowment for International Peace, highlighting the destructive gender impacts of these two projects. From loss of livelihoods resulting in severe malnourishment and increased gender inequality to ballooning HIV/AIDS rates along the pipelines and in the region, community after community suffered as a result of these projects, all in the name of "development." As was the case in both the Chad-Cameroon and West African Gas pipelines, neither would have gone ahead without World Bank involvement as the private sector oil consortia involved found the projects far too risky, socially and environmentally, to proceed without World Bank backing. Many civil society actors strongly believe that the World Bank, as a publicly funded institution, has no role in such projects.

The stakes are high when betting on extractives investments to fund development in impoverished countries. Transparency and accountability is but the first step of many towards transforming the "resource curse" into prosperity.