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Thanks for this analysis. I share your view that lower prices can potentially lead to better governance as government systems need to be more effective in order to meet fiscal targets. However, I would suggest to test your hypothsis with addtional indicators. Sometimes the CPI can be misleading as it merely measures perceptions. Lower commodity prices also mean less money to corrupt officials and hence fewer corruption cases are found and reported about. That means the perception of corruption will fall even without any improvement in governance. I would be interested if the World Bank's Worldwide Governance Indicators show similar effects to those in your analysis.

Hi Kristian,

thanks for your comment. We agree that it would be interesting to test whether a similar trend can be observed using other indicators. The main reason why we chose the CPI over other indicators was that the 2015 figure was already out, which provided another data point that we thought would be particularly relevant to include for oil producing countries in the sample. Apart from using the Worldwide Governance Indicators, it would also be interesting to use NRGI's Resource Governance Index once out, given that this indicator isolates the extractives sector. With additional data points, it may also be worth doing a more rigorous statistical analysis to test significance and causation, both aspects that we did not do for the purpose of this blog.



Thank you for this article. I agree that significant price falls increase the pressure on governments and may draw their attention to revenue collection. However, it seems simplistic to conclude that this necessarily leads to better governance. With massive revenue pressure and a certain level of desperation, governments’ focus rather shifts to mere numbers (tax collection targets), no matter what it takes to hit them, than (medium or long-term) measures to improve good governance. It also does not mean more efficient spending and that sectors like health or education will be prioritized “automatically” in the national. It might be interesting to analyze spending priorities in more detail.
At the same time, not all improvements regarding governance in the past five years can be attributed to the price downturn. The multi-ministerial task force in Sierra Leone which you mention in paragraph III originates from the introduction of a new cadaster system and the need to share payment receipts and consolidate data between fiscal institutions and the line ministry for mining. It is a great achievement for the Government of Sierra Leone and certainly contributes to better governance of the sector. However, the commodity price fall did not play a prominent role here.
Dear Kathrin,

thank you for your comments and we agree with your observations that the price fall does not necessarily lead to better governance and that not all governance improvements can be attributed to the price downturn. The CPI actually falls in some resource rich countries during that timeframe (we are happy to share the underlying calculations with you if interested). As mentioned in the blog and also in response to Kristian's comment, we are also not suggesting causation. A more stringent econometric analysis was beyond the scope of the blog and not possible with the dataset of limited observations since the fall in commodity prices. What we illustrate is that on average governance in resource rich countries is at least impervious to the price downturn and less investment, and at best, the low prices are an opportunity to refocus government on some important aspects of governance.

While there are many factors that influence governance of the sector, in Sierra Leone we do believe that the fall in iron-ore prices has created additional pressure on the Government and the companies to improve the efficiency of managing its resources, which in turn has contributed to improved governance. There is greater scrutiny of concession documentation, more focus has been placed on auditing and monitoring practices, and public finance allocations have become more stringent. Of course, this is not to say that all good governance initiatives in Sierra Leone can be traced back to the fall in iron-ore prices, nor that all aspects of good governance have improved over that timeframe.

Kind regards,

Herbert, Lisa and Nick