sharing in governance of extractive industries
Over 50 countries in the developing world are generally considered as ‘resource-rich’. It may however create astonishment, that on a very basic level and on a very large scale the criteria for dependence and volatility are widely mistaken for richness. This contribution argues that in most country cases categorizing the natural resource-endowment as ‘resource-rich’ is biased – if not to say faulty, resulting to misguided policies, the misallocation of state revenues and aid, and – perhaps even more damaging – to an unrealistic, and conflict-prone management of expectations of the billions of people living in those countries. In order to get the policies right, sound and accurate analysis is vital. Even if the governance level is good, only in a few country cases, where there is a sufficient size of natural resources related to the size of the population, ‘wealth’ or ‘richness’ can be realized. Eventually the number of actual resource-rich countries may melt down from over 50 to less than 10 countries worldwide – depending on the development indicators applied and future quantitative research.
As it will be exemplified below, nowadays indicators tend to be chosen incoherently, in order to serve the purpose of underlining the argument of a ‘paradox of plenty’. By which the mainstream of the political and economic approaches towards natural resource-led development is being supported. The common notion to be tackled can be expressed as follows: “Developing country x is abundantly rich in natural resources, but due to – conflict / corruption / bad contracts / particularistic patronage / exploitation / multinationals – trapped in poverty.”
The natural resource endowment of countries with subsoil assets of oil, gas and minerals influences the peace and security environment, and the strategic options for poverty reduction and a successful development path. It forms the political economy of quite a range of fragile or developing countries, which are partners and subjects in developmental cooperation – such as Afghanistan, Burundi, Colombia, DR Congo, East Timor, Guatemala, Iraq, Ivory Coast, Liberia, Mali, Nigeria, Rwanda, Sierra Leone, South Sudan, among others.
A myriad of strategies, studies, papers and project documents by the Bretton Woods Institutions, Regional Development Banks, United Nations, bilateral donors, NGOs and research institutes associate the endowment of primary commodities with richness. The terms resource richness / wealth / abundance are loosely applied. What is the definition of resource-richness and the wider implication of the common interpretation?
The IMF-definition of “resource richness” spoils the scene
The authoritative IMF “Guide on Resource Revenue Transparency, 2007” lists 56 countries, categorizing all of them as mineral- and hydrocarbon-rich countries (pp. 54-56) by the following definition:
“A country is considered rich in hydrocarbons and/or mineral resources if it meets either of the following criteria: (i) an average share of hydrocarbon and/or mineral fiscal revenues in total fiscal revenue of at least 25 percent during the period 2000-2005 or (ii) an average share of hydrocarbon and/or mineral export proceeds in total export proceeds of at least 25 percent ...” (source: http://www.imf.org/external/np/fad/trans/guide.htm, p. 2).
Since only one of the two IMF criteria has to be met, this seems like a catch-all definition to cover as many countries as possible – to the detriment of accurateness: The average share of primary commodities export in total export is evidently a measure for dependence, not abundance or richness. Even the share of primary commodities revenues in total revenues is inadequate, since it would categorize a survival-struggling low-income country with a elitist patronage resource management system as resource-rich, in case it had low income just from some enclave mining sites or fields, if only the rest of the economy and fiscal income opportunities lay in ruins.
Despite this evident bias, the definition of a “resource-rich” country was subsequently taken from the IMF “Guide on Resource Revenue Transparency, 2007” explicitly by the perception-setting campaign Publish What You Pay (PWYP) and implicitly by all the major players in the international policy and advocacy scene of extractive industries. 10 examples:
PWYP mission statement: “A global campaign for revenue transparency in the oil, gas & mining industries – Despite billions of dollars of incoming revenues from oil, gas and mining extraction, citizens of more than 50 resource rich countries around the world remain steeped in poverty. If governments managed these revenues transparently and effectively, they could serve as a basis for successful economic growth and poverty reduction. This has proved to be the exception rather than the rule.” (source: http://www.publishwhatyoupay.org/en/mission)
EITI (Extractive Industries Transparency Initiative) mission statement: “3,5 billion people live in countries rich in oil, gas and minerals. Many of them suffer from poverty, corruption, and conflict …” (source: www.eiti.org)
RWI (Revenue Watch Institute) mission statement: “Through capacity building, technical assistance, research and advocacy, we help countries realize the development benefits of their natural resource wealth. RWI is the only organization dedicated exclusively to addressing the problems of countries that are resource rich. These are countries where poverty, corruption and armed conflict too often converge.” (source: http://www.revenuewatch.org/about)
Oxfam mission statement on oil, gas and mining: “More than 1.5 billion people live in countries rich with natural resources like oil and natural gas, but are forced to survive on less than $2 a day. For these people, living near oil and mining companies doesn't mean a share of the wealth – it means environmental damage, loss of land and human rights abuses.” (source: http://www.oxfamamerica.org/issues/oil-gas-mining/#background)
Oxford Centre for the Analysis of Resource Rich Economies: “OxCarre was established in October 2007 to become a global centre of excellence in the economics of resource rich countries. The Centre will conduct original and objective research to improve understanding of the performance of resource rich economies, and to inform policy design to improve this performance. It will also act as the core of a global network of researchers in this area.” (source: http://www.oxcarre.ox.ac.uk)
World Bank, Oil, Gas and Mining Policy Division: “The Policy Division supports governments of resource-rich developing countries in the responsible stewardship of the country’s hydrocarbon and solid mineral resources through policy advice, technical assistance, and financing.” (source: http://siteresources.worldbank.org/EXTOGMC/Resources/COCPObrochureF...)
European Commission, Raw Materials Initiative: “Resource-rich developing countries often suffer from a lack of transport, energy and environmental infrastructure which limits their ability to harness their mineral wealth for the benefit of their populations. The European Commission, the European Investment Bank (EIB), and other European development financing institutions, in co-operation with African national and regional authorities, will continue to assess how to promote the most appropriate infrastructure, and related governance issues, that can contribute to the sustainable use of the resources of these countries …“ (source: http://ec.europa.eu/enterprise/policies/raw-materials/files/docs/co..., p. 16)
Germany: BMZ Policy Paper, Mineral and Energy Resources as a Factor in Development: “Today, some 75% of the world’s poor live in countries rich in natural resources.” (source: http://www.bmz.de/en/publications/type_of_publication/strategies/St... first paragraph, p. 3)
Great Britain: DFID business plan 2012-2015, section 3, “boost wealth creation”: “Work in natural resource-rich developing countries, especially in Africa, to ensure that the benefits of natural resources (oil, gas and mining) are used to improve the lives of the poor.” (source: http://www.dfid.gov.uk/Documents/DFIDbusiness-plan2012.pdf, p. 8)
Natural Resource Charter, preamble: “The purpose of the Natural Resource Charter is to assist the governments and societies of countries rich in non-renewable resources to manage those resources in a way that generates economic growth, promotes the welfare of the population and is environmentally sustainable... The Charter is directed primarily at policy makers and citizens in resource-rich countries. These are not the only important actors: international companies, industry associations, international organizations, civil society groups, and the governments of resource-importing states all have roles which affect the ability of societies to harness their endowments. Still, the most important decisions rest with the governments of resource-rich countries, since they have both the sovereign right and moral responsibility, to harness natural wealth for the benefit of their people.” (source: http://naturalresourcecharter.org/content/preamble)
The “richness” of Congo and Nigeria revisited
The absolute figures may appear as astronomical sums of money, the relative figures – in developmental terms – are meager. A quite common line of loose notional associations goes like this: “DRC [Congo] is an often cited example of the so-called ‘paradox of plenty.’ Extremely rich in natural resources (80% of world wide resources of Coltan, 10% of world wide resources of copper), the population suffers of extreme poverty (80% of the Congolese population lives of less than US$ 0.20 a day).” (source: http://eiti.org/DRCongo). The more fundamental question is dropped, whether there is ‘plenty’ (related to measures relevant to a successful development path) and whether one can therefore genuinely speak of a paradox. The picture changes for example in the Congo country case, if one takes into account that the DR Congo earned annually roughly USD 405 million from the extractive sector and sets this into relation to the population figure. Given 74 million Congolese, this results to USD 0,015 – an insignificant one or two cent per capita per day.
Even if granted that mining concessions have been awarded containing suboptimal clauses, corruption is widespread and state authorities do not collect all legal revenues, this figure can be doubled, multiplied tenfold or hundredfold: It is inconceivable, that any broad-based and ethnic inclusive uplifting out of poverty could be achieved by the “extremely rich” Congolese natural resource endowment. The proxy indicator of the Congolese share of world production or world resources is of little relevance to the assessment of richness or revenue generation in Congo.
The probably most widely known example of a ‘paradox of plenty’ in the developing world is Africa biggest oil producer, Nigeria. By trying not to be blinded by the absolute figures, highlighting the development-oriented relations of the core data, the notion of richness cannot be supported: Nigeria earned recently USD 59 billion per year in the crude oil sector, which makes at a population figure of 170 million a comparatively small sum of USD 0,95 per capita per day. This is below the lowest poverty line, even if the endogenous societal inequalities of income distribution would not exist. Here again, issues of peace and conflict, good governance and human rights would appear to be the foundations of any development policy, not the overcoming of a paradox, for which the ‘plenty’ is missing.
Nevertheless, perceptions like these coin the mission statements and actions of the governments and aid organizations, responsible for implementing the counter-measures to the ‘paradox of plenty’ phenomenon. For instance, the World Bank delivers through its “Oil, Gas, and Mining Unit“ advisory services to resource-rich [!], developing country governments”. The “resource-rich” countries to which the services are rendered are the just mentioned DRC and Nigeria, as well as notably Central African Republic, Gabon, Malawi, Mongolia, Papua New Guinea, South Sudan, Sierra Leone, Tanzania, Uganda and Yemen among others. The wording and mind-set is biased again, regarding richness, not taking into account the rather more factual assessments of country contexts characterized by the demographic factor, dependency, fragility and conflict.
One may conclude, that since the empirical analysis and categorization is not accurate when it comes to the basic quantitative terms, the policy options applied will fail.
The way forward
1) Criteria to evaluate resource-endowment:The common criteria (IMF etc.) of resource-richness are in need of revision. Any new categorization of countries ought to be compatible with the underlying quantitative basics and the political economy of social and economic development. Instead of striving to define ‘richness’ positively, ‘non-richness’ can be grasped easily. ‘Income-poverty’ is measured by the USD 2 average per-capita per-day income Purchasing Power Parity (PPP) poverty line, and ‘extreme income-poverty’ below the USD 1,25 average per-capita per-day income PPP. This may suffice, given low income and the inability to acquire the basic goods and services necessary for survival with human dignity constitute the core element of poverty. Although further characteristics like powerlessness, and in general insufficient capacity and opportunity to better one’s life are essential, but may be left aside for this argument. Only in cases above the USD 2 income-poverty line the necessary condition for speaking of a resource-rich country (e.g. Botswana, Equatorial Guinea, Qatar) seems to be fulfilled. In all other cases, including those where there is severe data limitation to such an extent, that one cannot draw conclusions of ‘richness’ and ‘abundance’, any falling back on dubious and misleading proxy measures should be avoided.
Upon acceptance of the revised criteria, the strategy and policy papers and action plans of the countries, formerly assessed as ‘resource-rich’, and their international partners would need an overhaul by distinguishing in theory and practice between resource abundance and resource dependency. Furthermore cross-country analysis and quantitative research informed by on the ground facts and figures are to be done, in order to apply indicators like the Gini index (and applying further criteria like resource availability, resource location plus political, social, geographical and resource-specific variables). This means that policies and programs dealing with the extractive industries would tend to focus less on fiscal issues, revenue distribution and the building up of management capacity, and more on reducing the negative effects of production, which may include issues like managing perceptions of policy makers and administrations in capitals, grievances in mining areas, human rights, funding of conflict or autocratic rule and macroeconomic distortions.
Multi-stakeholder initiatives at the intersection of government, extractive industries and civil society will have the continuing ability to mitigate those negative effects by setting and implementing benchmarks and standards for transparency and accountability – in particular in fragile and weak governance conditions.
Developmental factor: From the position of the poor the feasibility of using sub-soil assets for a sustainable and broad-based development path needs – at least – to be measured against the size of the population. The developing country’s share of world resources / production or the absolute or relative scarcity of the resource in other regions of the world is of little relevance to the poverty reduction in the country, where the natural resources have been found. The perspective of the general public in the resource-endowed developing countries needs to be reinforced. Not the perspective of a domestic government elite (where extractive industries means abundance for a few, thus coining the image of “richness” of the EI sector) or the one of foreign governments or processing industries in resource-scarce consumer countries (where the position as an importer of much needed resources leads to the notion that they must somehow come from countries, which are “rich” in natural resources).
Management of expectations: If a country is poor in developmental terms – despite the occurrence of subsoil assets, which may be relevant to another importing country or even to the world market – this poorness or dependency is to be named and categorized as such. Otherwise inaccurate analysis leads to biased domestic sector policies and development policies. Misleading perceptions about the actual size of natural resource endowment and its overestimated potential to alleviate poverty and to create social welfare by distributive policies contribute to an unrealistic management of expectations. In consequence the political and societal systems are burdened with a general process of long-term delegitimation through high-flying expectations, pro cyclical spending, overspending, debt traps, new dependencies beyond the control of the electorate and contingent instability.
I'm glad you raise this Lutz as I have often thought the same thing: that the definition of the entire governance and transparency movement of countries where these issues are vital is based on this slender definition from one IMF document five years ago. And like you I have felt there is something not quite right about the 25% of either exports or budget definition.
However I think I come to radically different conclusions from the same starting point, mainly as a result of working in Arab Spring countries these past two years. You make the nice distinction between resource dependency and resource abundance (as others have... so for instant the natural resource industries of the USA are massive but fall within a $16 trillion economy). But my strong (subjective of course) feeling is that in terms of Resource Curse, the IMF definition *understates* the importance of extractive industries, in that it presupposes that the industries must reach a certain critical mass in terms of the economy as a whole before they have serious impact. Whereas the reality is that the sums required to create rent that people will fight over, and attempt to capture the state to control, can be miniscule compared to macro-economic trends.
I offer the cases of Egypt and Syria: both of them small oil and gas producers. Syria actually exports a tiny amount (100,000 barrels a day before sanctions kicked in) and Egypt has become a net energy importer in the last decade. Hydrocarbons in both cases amount to less than 10 percent of GDP (though arguable in Egypt's case might reach 15% if they were domestically priced at anything close to market rates). So neither of them qualify for the IMF definition. And yet oil revenues have been absolutely critical to the political economy of both countries over the last generation. The Syrian government has actually got more receipts through tourism than oil in the last decade. But it turns out it is a mistake to rank the importance of economic sectors based on that one simple variable. A dollar is not a dollar is not a dollar in terms of political economy. The $2.5 billion the government got from tourism came up through a dense network of government agencies and small private business: 50,000 restaurant permits, 5 million visa fees etc. Administered by thousands of people in regular government departments. Whereas the $2 billion the government got from oil was managed by perhaps 10 people, including some who are not in any public position at all but rather belong to the deep state. There is no question that the Assad's ability to appropriate funds for, say, arming the shabiha in Homs and Aleppo is much more linked to that paltry amount of oil exports than the larger amount of tourism receipts. Petrodollars are that much more fungible. The Five Percent companies and clever stuff nobody ever sees (despite EITI) in cost recovery.
Same deal in Egypt, where there is no question that the rents from the oil sector have been a key part in spoil sharing in the Mubarak regime, a key factor in Egypt's military-industrial complex, with concomitant issues such as the gas deals with Israel, and so on.
Viewed then from the perspective of Resource Curse, the IMF's definition is not comprehensive *enough*. It would be a mistake to classify the costs of bad governance in these industries as only those sums misappropriated - the externalities are in fact huge. The analogy that comes to mind would be to try and calculate the cost of the alcoholism of the head of a family by the amount he spends on whisky. In theory, one might find an alcoholic who is conscientious, a dedicated carer and bread winner and fair with his children and dependents - and so one could just calculate the cost of the whisky. But that's a bit like saying you can cross a six lane motorway with your eyes shut. It's much more likely that the children will be neglected, relationships will be dysfunctional in other ways etc etc.
Your argument is persuasive in terms of managing expectations, and the risk of undue attention being given to industries which are going to lift us all out of our current situation. And I think a review of these definitions would help enormously, in that the issues around governance and transparency could be primarily seen for what they are, political problems, not issues of development economics. You may need to be numerate and have a large number of technical assistance tools in your bag when it comes to laying down specific policies.
But you (we) need to address the fact that these are primarily issues of political will, constituency and agency - in my view why the oil dividend option should be considered widely, and outside its normal prism of development economics, first and foremost as a mobilising political tool.
You have raised a very critical issue here: it is the politics. And this is exactly what contemporary economic measurements fail to capture. The question that begs is: what kind of politics? Regardless of the sizeable contribution of the resource in question, it must be noted that they sustain economic development and also condition the lives of people, particularly those in mineral extraction areas.
I very much agree that this notion of "resource richness" really needs to be dissected. When you see these kinds of calculations about the value of the resource per person even in a country like Nigeria (which has far larger oil and gas reserves than most other oil producers in sub-Saharan Africa), you realise that the prospects for many EITI countries are pretty precarious, even if the waste and misallocation caused by corruption (or the revenue losses caused by corporate tax-dodging) could be significantly scaled back.
One could have a long conversation about why particular terms come to be widely used in particular historical contexts - this one clearly has something to do with the commodity boom and the various hopes and anxieties that it's given rise to. If that historical moment is coming to an end, then this is a good time to be reevaluating some of its stock notions.
(I also agree with Johnny's point that the ease with which a revenue stream can be captured for patronage purposes - its "lootability", if you like - may be more important in political terms than its size relative to other income streams.)
I don't have any conclusion to suggest other than that we need to look more closely at the interaction between the scale and character of resource extraction, the economy and politics in any given country, rather than fitting them all to the same template. Having done that, though, one would still have to package the conclusions into relatively simple concepts if one wants policymakers to respond to them.
Lutz, I have only a few comments to add to those of our colleagues regarding your excellent, thought-provoking article. Indeed, there is confusion in current terminology regarding the difference between richness and dependency. Obviously, IMF's two criteria for classifying countries as resource-rich describe fiscal and trade dependency, respectively, rather than richness. Assuming, however, that the notion of "resource richness" is relevant nevertheless, how should we define it? Possessing a high percentage of the known gold reserves, for example, could qualify a country as resource-rich (in this case as gold-rich), but if effective access to these reserves is quite limited i.e. exploitation is marginal, then the classification as such is not very relevant for policy matters. In any case, there is need for more discussion around the classification issue. For example, the weight of the extractive sectors and downstream processing and manufacturing in total labor and salaries might be considered as another yardstick for resource-dependency. Whatever, your conclusions ("The way forward") seem to make sense even without redefining the above categories. Putting more focus on issues beyond the realm of government revenue and expenditure is already on the agenda of many institutions and initiatives including EITI. The question remains, whether a narrow focus on fiscal issues is still justifiable under certain circumstances. My answer would be yes: Even for governments and economies with low resource-dependency, improved governance in extractive industries can be cost-effective and make good political sense too. With this, to focus on problems of fiscal transparency and accountability can be a good starting point for a broader governance reform process, with potential longer-term impulses and benefits for non-extractive sectors as well.
Thanks for your post, Lutz!
I think there are quite a number of important points you and the comments touch upon, three of which I would like to briefly comment on.
The first one is of course that resource wealth (or rather abundance?) is only in part a fiscal issue. The second relates to the fact that in terms of economic development, resource wealth and success of natural resource management should not be based on the absolute value of natural resources. There is both a greater downside and upside of comparatively small resource revenues. The third is one of discourse - indeed resource-rich in the parlance of development has become more or less synonymous with “countries where there are problems related to resource extraction” (it’s certainly easier to handle).
You and the others criticise the poor choice of measures: but this is only partly true. It depends on what one is looking at: The IMF definition of resource wealth does work – but it does so only for the purposes it was designed for. It captures countries where resource revenues are of such magnitude that the sector is likely to warrant special attention for macroeconomic policy. If every country where resources are extracted becomes designated as resource-rich we do indeed get a problem of expectation management, therefore lower threshold is ill-advised (lest one wants to set up natural resource funds in even the most insignificant producer) – it’s simply a matter of looking at different measures, or even better, the (whole) context in which extraction takes place. The problem with the focus on resource wealth in monetary terms obstructs the view of the bigger picture – and your examples of the DR Congo and Nigeria demonstrate this: the others have mentioned it, and during the past 15 years or so there has been an impressive body of literature showing what damage natural resource extraction can do. It does of course not tell us anything about the impact in other areas, be they related to corruption, conflict, environmental degradation, human rights abuses and the like. It also introduces some bias as it implies that resources extraction happens in the formal economy, is at least somewhat adequately taxed and thus results in significant government revenues. The share of resource in exports, their contribution to GDP or fiscal revenues are at best in part indicators, that a country might suffer from these failures. Nor do they capture negative consequences of resource extraction that is geographically limited (as a result of their focus on the country as a unit) or the production of resource that is less valuable (as Jim Bennett pointed out).
But the problem is not that appropriate management or resources would only add a dollar or two to per capita income. Your examples implicitly assume that the only transmission mechanism between natural resource wealth and development or welfare would be the direct distribution of revenues that then would only result in a modest increase per capita income and have thus little potential for the reduction of poverty. (By that logic, we might as well terminate all aid programmes, because their value, in per capita terms, is likely to be minuscule). If that were the case the most producers of natural resource should indeed be stripped of their attribute “rich”. There’s a lot more potential (and as the others pointed out, danger, too) in smaller revenues. But if well managed, even comparatively small resource revenues can be used for investments, e.g. in infrastructure or education, which in the medium term will help create economies that are strong and not dependent on rents. Of course, this is not easy, because first all the (potential) negative impacts of resource abundance would need to be addressed.
This ties in with the third issue, which is related to the management of expectations. Here, there is a problem of discourse: the IMF definition was adopted by organisations whose remit is not limited to the fiscal aspects of resource abundance. Their adoption of this measure and focus on wealth betrays some disregard for the importance of context, though it may be rooted in the desire to use a legitimate, generally accepted definition. Or it may simply be a relic: earlier academic studies though over time the focus moved from studies on the links between resource abundance and economic growth to institutions, human rights, conflict and the environment. Development practice, too, has added a larger array of resource related issues to the original core focus on revenues and management of the economy. Be that as it may, the discourse still overblows the potential of resource abundance, by playing on the opposition between poverty and resource wealth as if the only possible result of properly managed resource were fabulous wealth. Expectation management is important, both in resource abundant countries and in terms of what development assistance and adequate policies (whatever they might be) can do: Realistically, we should advertise damage control and try not to make things worse rather than the rather lofty claims about creating economic miracles, even if that is a rather sobering prospect.
Thanks a lot for your post, Lutz, I enjoyed it very much. I agree with your analysis regarding the misleading concept resource richness. And I very much like your idea of considering the richness per capita aspect.
I am however not entirely convinced as to the pertinence of using state income per capita as an indicator to assess and classify importance and potential of the mining sector in a developing economy due to the following reasons:
1) State income from the mining sector varies due to price fluctuations on the world markets. They also vary according to project cycles, especially in large scale, long term and capital intense projects: In the below graph you will find Chilean state income (in million US$) from the mining (primary copper) production. (Data source: DIPRES; Estado de operaciones de gobierno). State income is strongly influenced by rise of the copper price as of 2004 plus the fact that some of the large projects initiated in the nineties reached the net income area at about the same time.
2) Hence, state income increases between 2004 und 2008 aprox. 20-fold. But of course it bears no relation to the resource richness of the country or per capita: Chile has definitely not become 20 times resource- richer between 2004 and 2008.
3) A further problem when using state income as a parameter for resource riches or their potential for development is that that royalty and tax regulations are national and vary from one country to the other which hampers comparability between countries.
4) Among all possible indicators, in my view, production by value (eventually per capita) seems to be the only parameter with a logical link to mineral resource wealth, meaning the actual physical nature-given asset: A natural deposit becomes an asset only when it is found and when mining is proven technically and economically feasible. Mining companies do permanently explore their deposit and adjacent areas for future production. The probability of a commercial deposit being found is therefore highest in producing countries and thus the general principle applies that the present mining countries are also the mining countries of the next few decades.