Wonk love

‘Tis that time of the year again: long weekends and celebrations of national holidays, fireworks and hot-dogs. As I suspect many of you will be traveling this weekend (and throughout the summer), I thought I’d recommend one of my all time favorite podcasts: the Center for Global Development’s Global Prosperity Wonkcast. Usually hosted by Lawrence MacDonald, the podcasts usually last about 20 minutes and feature Center for Global Development (CGD) fellows, as well as other prominent guests. The themes discussed are always salient and topical, and the expertise is spot-on.


Last week, the Wonkcast had an excellent episode on the Gulf of Mexico gusher and Africa’s oil boom (mostly about the latter topic, really), with Todd Moss and Vijaya Ramachandran. The New York Times reports that “as many as 546 million gallons of oil spilled into the Niger Delta over the last five decades, or nearly 11 million gallons a year.” Unlike the outrage sparked by the Deepwater Horizon catastrophy, the response to the relentless flow of oil into the Niger delta has generated little action. There are different factors affecting the situation: criminal activity by rebel groups, which illegally tap pipelines and fail to cap them, is one major issue. But one point which the experts in the Wonkcast insist on is the responsibility of corporations.

Nigeria has a weak regulatory environment, and many of the companies drilling for oil do so out of sight – literally. With offshore platforms left unmonitored by the government or other independent bodies, the safety and security precautions taken by companies are determined internally. This leads to several issues related to poor maintenance of facilities (corroding and unsecured pipelines), environmentally destructive practices (gas flares, which are the result of burning off natural gas recovered during the extraction of crude oil), and a general lack of accountability and responsibility for the social and environmental impact of natural resource extraction activities.

The Nigerian authorities – both federal and local – and natural resource companies share the responsibility for what is occurring in the Niger Delta. If they are not directly responsible, they are at the very least guilty of omission. Todd Moss speaks of the need to drastically improve the regulatory framework that governs natural resource extraction in Nigeria. I would add that companies also need to adopt much stricter standards, and embrace good corporate citizenship. As we are seeing with BP in the Gulf of Mexico, the practice of putting profits and the bottom line ahead of any other concerns has to change.

Efforts to promote the value of corporate social responsibility have been gaining in importance in recent years. The notion of “triple bottom line” (people/planet/profits), for instance, is becoming the dominant approach to full cost accounting, which takes into account the full economic, social and environmental cost of operating a business. The Dow Jones Sustainability Index “comprises the leading companies in terms of sustainability around the world. It captures the top 10% based on long-term economic, environmental and social criteria out of the biggest 2500 companies worldwide.” The Extractive Industries Transparency Initiative, as well at the Global Reporting Initiative, are other examples of new accountability systems that are changing the way in which companies report on their activities. What ties all these initiatives together is the move towards taking into account all of the dimensions – economic, social, environmental – which a business necessarily impacts.

Another initiative, this time led by executives in the natural resource sector, is the International Council on Mining and Metals (ICMM). The ICMM’s mission is to help its member companies make their social and environmental commitments in line with sustainable practices, and to increase the overall sustainability of their operations. Having worked with the ICMM in the past, I can attest to the quality of the organization’s work. As far as I know, there is no similar initiative for the oil and gas industry.

Because of the nature of the natural resource extraction business,  negative externalities caused by these activities are often not on people’s radars. It took a massive disaster in the Gulf of Mexico for the general public in the United States to question the practice of deep-water, offshore drilling. In our day to day lives, we are not exposed to the environmental and social consequences of natural resource extraction – out of sight, out of mind.

For the estimated 30 million people living in the Niger Delta, however, the effects of poorly regulated oil extraction have very tangible consequences: destroyed ecosystems, depletion of fish stocks and wildlife (impacting the livelihoods of local fishermen and farmers), hampered agricultural production, pollution (leading to many health issues), insecurity (due to the presence of armed criminal groups), etc. Amnesty International released a comprehensive report last year, where these issues are explored in depth.

One of the solutions discussed by Todd Moss to decrease poverty in the Niger Delta is the institution of direct cash transfers to the local population. Under this scheme, the Nigerian government would redistribute 10% of its annual dividends directly to individuals in the region. By by-passing state coffers, and thus the possibility of funds being misappropriate or mismanaged, direct cash transfers are seen as a way to beat the “oil curse”, which has plagued natural resource rich countries with poor governance. This method of redistributing revenue is being used in Alaska since 1982, and Moss has been advocating for this approach to be adopted by West African nations such as Ghana and Nigeria.

In the podcast, Moss notes that this direct cash transfer proposal is creating strange bedfellows: on the one hand, progressive liberals believe that this allows citizens to have a stake in the wealth of their country, and, on the other hand, libertarians love the idea of cutting out the government middle man. Moss points out that the dividends paid to citizens should still be taxed by the government, in an effort to keep accountability loops. Nevertheless, I wonder about the indirect effects of such a system.

For example, under this system, the incentives for government accountability in terms of natural resource wealth management are reduced. In other developing nations, the approach has been to strengthen both the regulatory framework and redistribution channels, and to build the capacity of government agencies to manage natural resource wealth. While direct cash transfers may be a good short term solution, in the long term, it does not help resolve the overarching challenge of poor governance.

In my mind, building the institutional capacity of resource-rich countries is the most critical element of turning the “resource curse” into a blessing. Chile and Peru are examples of countries that, not very long ago, were struggling with poverty. Both of these nations have instituted reforms and focused on attracting and managing foreign investors and natural resource companies. The government of Peru has a complex taxation and redistribution system in place, which seeks to ensure that the wealth generated by mining is shared based on principles of equality.

A study by the Fraser Institute supports this view (emphasis mine):

“The authors of the report, after considering new and existing data, come to the conclusion that whether a country benefits from natural resources depends largely on the integrity of its institutions and economic freedom — government bureaucracy, legal structure, property rights, monetary policies and international trade. Simply put, the higher the level of economic freedom a country enjoys, the greater the benefit from resources.”

For Nigeria, direct cash transfers can probably help alleviate poverty to some degree. Nevertheless, I don’t think the egregious violations of human rights, the environmental destruction and insecurity will subside unless: 1. the government of Nigeria improves governance and regulation, and 2. natural resource companies self-impose stricter standards for safety, security and work much harder on mitigating the negative social and environmental impact of their activities.

These aren’t short term projects, but they should accompany any initiative that seeks to diminish the negative impact of natural resource extraction in the region.

The Devil’s Excrement

That’s how Juan Pablo Pérez Alfonzo, Venezuela’s oil minister in the early 1960s and one of the founders of the Organisation of the Petroleum Exporting Countries, characterized black gold in 1975:

“I call petroleum the devil’s excrement. It brings trouble…Look at this locura—waste, corruption, consumption, our public services falling apart. And debt, debt we shall have for years.”

He, like many others, contends that natural resource wealth is a curse for developing countries. It’s a hot issue, and it seems that not a day goes by without a new article about squandered wealth or the mismanagement (to put it mildly) of natural resources.  Seriously, if I had a penny for every time I read something that opens with: “In spite of its vast wealth in natural resources, [insert poor “cursed” country name] is still poor”…

And, indeed, the “devil’s excrement” has been a curse for a number of developing countries: causing or fueling protracted conflicts, resulting in entrenched corruption and institutional greediness, all the while precipitating environmental destruction and often leading to political and social unrest.

In 2007, a report by Global Witness noted that “Although it is now universally accepted that revenue from natural resources provided the logistics for war in countries such as Angola, Cambodia, Liberia and Sierra Leone, the international community has yet to address this problem effectively and systematically.” Over the years, reports that detail the links between natural resource extraction and commercialization and protracted conflict have accumulated. The Global Policy Forum maintains a database of key UN and NGO documents that describe these links in painstaking detail.

Beyond fueling all out armed conflict, natural resource wealth is also linked to underdevelopment and systemic corruption. In a recent op-ed in the Financial Times, Moises Naim contends that

Oil is a curse. Natural gas, copper and diamonds are also bad for a country’s health. Hence, an insight that is as powerful as it is counterintuitive: poor but resource-rich countries tend to be underdeveloped not despite their hydrocarbon and mineral riches but because of their resource wealth. One way or another, oil – or gold or zinc – makes you poor. This fact is hard to believe, and exceptions such as Norway and the US are often used to argue that oil and prosperity for all can indeed go together.

Oligarchies and despotic regimes have been built on the wealth generated by the exploitation of natural resources, and looking at countries as different as Russia, Venezuela or Equatorial Guinea, it is clear that, as Paul Collier argues, poor management of natural resource wealth leads not only to protracted conflict, but also to stunted political, economic and social development.

What I find troubling about the natural resource curse argument is that it it is inherently pessimistic, and, to a certain extent, deterministic. In his op-ed Naim notes that “the rarity of such exceptions [U.S. and Norway], however, not only confirms the rule, but shows what it takes to avoid the misery-inducing consequences of wealth based on natural resources: democracy, transparency and effective public institutions that are responsive to citizens.”

Indeed, while it’s true that nations endowed with natural resources have historically squandered the wealth generated by exploiting them, it is not always the case, and it certainly doesn’t need to be so. Naim cites the examples of Chile and Botswana in his op-ed as countries that have “mysteriously” managed to avoid the natural resource curse. I would argue that there is nothing “mysterious” about what these countries did to avoid turning their natural wealth into the “devil’s excrement”. Naim cites “democracy, transparency and effective public institutions” as pre-conditions for effective natural resource management. I agree – but by looking at examples of successful natural resource wealth management, we can also find some valuable – practical – lessons that go beyond the vague policy prescriptions of “democracy” or “transparency.”

How can developing countries benefit from natural resources without falling victim to the “curse”?

Much has written about the topic, and the next few posts will be a round-up of insights regarding how some countries have successfully avoided the “curse” or have managed to extricate themselves from it. This topic is full of nuances: for example, Peru’s strong economic performance over the last decade has been in large part due to the commodity boom. And while the country has experienced sustained economic growth (even this year), the gap between rich and poor continues to grow and many resent the exploitation of natural wealth by multinational corporations. In spite of lagging human development indicators and a still young and somewhat inefficient decentralized administration, Peru is succeeding – at least to some degree – in managing natural resource wealth to benefit the country.

There is no silver bullet. The exploitation of natural resources is extremely lucrative, and it’s no surprise that corrupt governments, armed groups, and remorseless corporations are vying for a piece of the pie. In spite of the relentlessness of these greedy actors, there are ways to avoid or break the curse. Stay tuned…