Economics Essays - Oil Developing Countries
Oil Developing Countries
Oil producing states of the developing world are currently experiencing the paradox of an unprecedented oil windfall and declining per capita income. This crisis of governance calls for urgent reviews to ensure that the window of opportunity the boom offers is not undermined by the entrenched corrupt practices of the political and industry elite. The sense of urgency is informed by the volatility of international oil prices, and the finite nature of oil reserves.
Revenue Transparency in developing countries rich in natural resources therefore assumes even greater significance as it is almost crucial for development, good governance and global energy security. Given that the entrenched opacity of revenue flows breeds corruption, a series of international initiatives targeting the extractive industries were established to ensure revenue transparency through public reporting. The assumption being that, a civil society armed with such information, will hold its government to account and as a result spur development and social equality.
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This work appraises the efficacy of international NGO initiatives (Global Witness, PWYP coalition), and initiatives led by multilateral organisations (EITI, OECD/EU standards), and the possible constraints posed by post-colonial Africa’s failure to build strong democratic and legitimate institutions.
The following section offers a theoretical analysis of current literature on the Resource Curse phenomenon and its effects on revenue management, regime type and institutional character. The third part presents a brief overview of selected initiatives: the Global Witness, the Publish What You Pay campaign, the Extractive Industries Transparency Initiative, the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, and the International Monetary Fund (IMF)’s Guide on Resource Revenue Transparency. The last section examines the interface between these international initiatives and the internal economic, political, and social realities in oil- rich countries with poor citizens.
While these initiatives have made great progress in holding host governments, multinational oil companies, home governments and indeed the international community to a new standard of fiscal responsibility based on transparency and accountability, this work argues that their efficacy is somewhat impaired due to the domestic structures of governance in the target states that aggravate the resource curse and eventual state failure.
2.0 The Resource Curse
The 'resource curse' is the phenomena whereby a country with an export-driven, natural resources sector, generating large revenues for government, leads paradoxically to economic stagnation and political instability. While analysts have put forward many logical solutions, fiscal systems characterised by a high degree of opaqueness lack the checks and balances needed to ensure prudent public spending. The resource curse literature encompasses several political economy aspects; some of these are discussed in the following sections.
2.1. Windfall Management
Countries who find themselves awash with petro-dollars face the challenge of establishing an efficient fiscal system that caters for the developmental aspirations of her citizens.
The major economic defect revolves around the ‘Dutch Disease’, which is the crowding out of other sectors of the economy occasioned by an unhealthy inflow of foreign exchange. As the natural resource sector diverts capital and labour away from agriculture and manufacturing, an economic dislocation occurs which results in higher costs, reduced competitiveness, and fewer exports and balance of payment deficits.
Resource-rich countries also experience budgetary difficulties. The volatility of oil prices in the international market means undermines government’s revenue cycle. It is thus faced with issues such as how much to save for future generations, how to achieve economic stability in the face of uncertain and widely fluctuating oil revenues and avoid "boom-bust" cycles, and how to ensure that spending is of high quality, whether in the form of subsidies, public consumption , or large investment projects.
Such challenges have led to the clamour for the establishment of Natural Resource Funds. These have only strengthened the temptation for rulers to loot or for all the gains to be wiped out by the emergence of an imprudent government.
2.2. Rent Seeking and Democracy
Terry Lynn Karl and Ian Gary describe Rent-seeking as "…widespread behaviour aimed at capturing petrodollars through unproductive and even corrupt means." The combination of unearned revenue generated by oil exploitation and wide-spread corruption presents a further challenge to the integrity of the democratisation process.
Collier identified two sets of rules of democracy: how power is achieved, which is determined by elections, and how power is used, which is concerned with the checks and balances the political system exerts on the government in a bid to prevent the abuse of office. These rules are routinely compromised as oil rents are employed for the dual political patronage purposes of vote buying and erosion of accountability.
The ability of oil-rich states to maintain low taxes and high patronage thus "…weakens the basis for democracy by reducing the public demand for accountable government.". In other words, resource rent negates the traditional social contract between the state and the electorate. A government that relies on rent does not have the same incentive to "perform" as a tax-receiving government.
Furthermore, Ross argues that an industrialised society creates an urban middle class which in turn provides stability for a country’s democratic institutions. In a country like Nigeria therefore, where the oil industry has led to the neglect of the manufacturing sector, the absence of the middle class deprives the polity of such needed ingredient.
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Another feature of resource rent is its ability to attract politicians motivated, not by genuine desire to serve the people, but by innate ambitions to have "a slice of the national cake" via access to the corridors of power. The incentive to win power at all costs encourages the politics of patronage, which is financed in turn by embezzlement of public funds, thereby exacerbating the problem of public revenue management.
2.3. Rent Seeking and Corruption
Analysts have drawn a correlation between the presence of natural resources and corruption occasioned by the rent seeking campaigns of government and the elite. For instance, Tobias Kronenberg argues that the absence of rents eliminates corruption as vested interests lose the incentive to sabotage reforms and maintain the status-quo of rent protection. The enclave nature of the extractive industry often results in an illicit alliance between oil companies lobbying for oil licenses and the host government. A situation where oil wealth is concentrated in the hands of a few elite leads to financial abuse and which in turn, impacts negatively on the country’s economic competitiveness.
2.3. Institutional Character
The quality of institutions in developing countries rich in natural resources comes under scrutinyhere due to the perceived failure of the government to translate resource endowment into political goods for its citizens.
An increasing number of scholars have attempted to explain the paradoxical situation where the economic and political performances of a resource rich country are diametrically opposed to each other, as a function of the existing system of governance. Lederman Daniel and William F Maloney, for instance, underlined the intrinsic neutrality of natural resources; as being "…neither curse nor destiny for developing countries", and argued that what is required is the competent transformation of these resources into economic growth.
Similarly, Acemoglu argues that the institutions hypothesis best explains the economic prosperity or otherwise of nations. This hypothesis emphasises the role of good human influences in instituting a society conducive for economic investment and activity. Institutions, crucially, are also to be relied upon for the equitable distribution of income amongst the various strata of society and constraining the excesses of political elites.
3.0 International Initiatives
3.1. Global Witness
Established in 1993, Global Witness was the premier organisation responsible for exposing the corrupt exploitation of natural resources and international trade systems, to drive campaigns that end impunity, resource-linked conflict, and human rights and environmental abuses. It indeed takes credit for the global focus on the links between the exploitation of natural resources, conflict and corruption. Such efforts provided huge incentive for subsequent major international mechanisms and initiatives that have been established to address these issues.
Their investigations and powerful advocacy are largely informed by their firm belief that breaking the cycle of poverty in Africa and other areas of the developing world requires an international partnership of governments and industry committed to transparency that ensures natural resources remain a benefit and not a curse.
3.2 Publish What You Pay (PWYP)
Started in 2002, The Publish What You Pay campaign is currently a coalition of over 300 NGOs. Its primary focus is to promote good governance of natural resources by providing citizens of resource-rich developing countries with the revenue information. The objective being that citizens will in turn, hold their governments to the equitable management of revenues from the extractive industries.
Revenues from the extractive industries have the potential to alleviate poverty and stimulate economic development, rather than corruption, conflict and social divisiveness. Hence, PWYP calls for the mandatory disclosure of the payments made by oil, gas and mining companies to all governments for the extraction of natural resources.
3.3 The Extractive Industries Transparency Initiative (EITI)
The EITI, a coalition of governments, companies, civil society groups, investors and international organizations, was established in 2002 by the government of British Prime Minister, Tony Blair under the auspices of the Department for International Development (DFID) in recognition of the immense benefits responsible governance and exploitation of natural resources can bring to the approximately 3.5 billion citizens of countries rich in oil, gas and minerals, particularly in achieving sustainable development and poverty reduction. This objective, it sought to actualise via the instrumentality of promoting transparency and accountability of accruing revenues.
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The major concerns regarding the EITI focus on the voluntary approach to establishing transparency in the extractive industry. Analysts observe that this provides room for industry actors to circumvent the process. The lack of enforcement mechanism also encourages a free-rider mentality: non-compliant countries can hide under the guise of being EITI implementing countries, while pursuing a regime of non-transparency.
3.4. The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions
In recognition of the adverse distortions corruption imposes on the economic developmental efforts of states, the OECD countries embarked upon a vigorous anti-corruption regime culminating in the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Coming into force in 1999, the Convention required its signatories to criminalise and sanction the bribery of foreign public officials by both individuals and companies, as well as confiscate any profits obtained through such practices.
But as Collier observed, the enforcement strategy of OECD countries presents a challenge. It is much easier to circumvent the legislation by "…dress(ing) up a bribe as a ‘facilitation payment’." This stems from home governments conflicted by a desire to guarantee energy supplies and provide strategic advantages for their companies in an increasingly competitive industry.
3.5. Guide on Resource Revenue Transparency (GRRT)
The IMF Guide on Resource Revenue Transparency was designed to address "…the unique set of problems faced by countries that derive a significant share of revenues from natural resources." The IMF, World Bank, and others providing technical support are of the view that the huge volume of resources translate into complex fiscal problems owing to the price volatility, and finite nature of the resources. Thus a Manual on Fiscal Transparency that enshrines a set of generally recognized best practices for transparency of resource revenue management is deemed necessary.
Resource wealth however affords target states the immunity from pressures to deliver better fiscal practices. For instance, a Global Witness report asserts that the Angolan government has systematically failed to implement reforms regarding transparency and accountability as stipulated by the IMF. Its policy of non-disclosure of basic payments to the state provides the stage for the persistent and widespread looting of public revenue currently being experienced in Angola.
As Auty and Le Billon observe, only a limited number of resource-dependent states adhered to the more general IMF Code of Good Practice in Fiscal Transparency and undertook the Reports on the Observance of Standards and Codes (ROSCs) that gives the code a measure of efficacy. His assessment therefore is that the GRRT may suffer the same fate, precisely because such states have no need for loans from multilateral lending agencies, and the obligations that often accompany them. He thus argues for the mandatory implementation of GRRT, greater civil society participation and effective publishing of ROSCs.
4.0. Domestic Governance andInternational Morality
The international system is comprised of strong or empirical and failed or juridical states. Juridical states, according to Rotberg and Jackson, are products of the "international society of states", whose membership is limited to states and international organisations formed by states. Its central theme of the doctrine of sovereignty however excludes non-governmental organisations and other private groups and, often conflicts with the doctrine of international human rights.
The dilemma posed by the seeming inability of juridical states to satisfy the political and economic aspirations of their citizens and thus prevent the spread of anarchy across national borders, therefore provides the background to the clamour for a new standard of international morality by international initiatives targeting the extractive industries.
Jackson identifies some peculiar attributes of the juridical state:
… their governments are often deficient in the political will, institutional authority and organised power to protect human rights or provide socioeconomic welfare. The concrete benefits which have historically justified the undeniable burdens of sovereign statehood are often limited to fairly narrow elites and not yet extended to the citizenry at large whose lives may be scarcely improved by independence or even adversely affected by it."
Similarly, Terry Lynn Karl contrasts the "stateness" of European and developing states: while state-building in Europe involved negotiations between rulers and their citizens that resulted in a competent administrative apparatus anchored on the rule of law, meritocracy, equitable distribution of resources and citizens’ representation, the developing world was a product of artificial borders, foreign manipulation and a peripheral position in an international arena already dominated by powerful states. These emerging states were consequently bequeathed the dubious qualities of non-transparency, weakness and vulnerability to state capture by foreign and domestic interests that persist to the present time.
It can thus be argued that the effectiveness of these initiatives will be severely limited without a long drawn out process of nation-building involving domestic governments and their populations.
4.1. Democratising the Decision-Making Process
The basic premise of international initiatives is that providing citizens with access to revenue information will empower and galvanise them to action - hold their governments to a higher standard of governance. The reality often times, is that the capacity of civil society and state institutions require strengthening, if it is to perform its role of monitoring public budgets.
The "participation deficit", Karl argues, is entrenched by a rentier culture which neutralises citizens’ sense of ownership of natural resources. A government reliant on foreign sources of funding, Humphreys et al argue, creates weak linkages between the state and its citizens.
According to Transparency In Nigeria, the Federal Inland Revenue Service should be empowered to not only ascertain the exact petroleum profits tax that each oil company operating in Nigeria should pay, but also how much is being repatriated abroad.
4.2. Elite Interests
As has been noted, the political elite in resource rich countries have a vested interest in sustaining the rentier state and thus resist reforms of the extractive sector. The perceived lack of political will to conform to regulation and global standards in the natural resource sector of a producer country can be attributed to the need to create an environment for abuse of public power to maximise their private profits.
In seeking to deflect calls for improved transparency of oil revenues, the Angolan government argues that the conflict era had undermined the country’s capacity to account for future and past oil transactions. A Global Witness Report however, exposed the intricate and sophisticated mechanisms Sonangol employs to ensure its revenue remains offshore, and questions whether it’s actually a case of a "lack of capacity or lack of application?" Such thinkingillustrates the reluctance of host governments to ensure revenue transparency occur where it is most needed, and thus weaken EITI’s effectiveness.
4.3. Unmasking Sovereignty and Secrecy
Countries wishing to exploit the opacity of oil revenues for private gain oftenclaim national sovereignty concerns. This argument is however spurious; a government that fails to discharge its legitimate obligations to its citizens effectively surrenders its right to sovereignty.
Such governments are also quick to invoke confidentiality and secrecy clauses in their contracts with oil companies. While the host government may thus be free of the burden of accountability and even misappropriate revenues, the oil companies risk being viewed as accomplices in the states’ governance and human-rights abuses. This has long term implications for its corporate reputation and return on investment.
4.4. Governance Contradictions
The prevailing patterns of governance in these states usually involve a high degree of personalisation of formal political institutions and subsequent circumvention of constitutional provisions; blur the separation of powers between the executive and the judiciary, leading to abuse of legitimate political power. Such conditions pervert the institutional ability of states to abide by the rules of political behaviour.
For instance, Nigeria’s pledge to institutionalise oil revenue transparency, and the subsequent signing into law of The Nigeria Extractive Industries Transparency Initiative (NEITI), under the guiding principles of the EITI, appears somewhat contradictory. Indeed, the reform agenda of former President Obasanjo is coming under intense scrutiny owing to allegations he illegally appointed himself as the Petroleum Resources Minister contrary to the 1999 Constitution and never rendered accounts of the oil revenue to relevant agencies like the Revenue Mobilisation, Allocation and Fiscal Commission (RMAFC).
This is contrary to the objectives of NEITI, which, according to the act establishing it, include to "ensure due process and transparency in the payments made by all extractive industry companies to the federal government and statutory recipients, and to monitor and ensure accountability in the revenue receipts of the federal government from extractive industry companies."
Furthermore, closerscrutiny must also be brought to bear upon national oil companies, as evidence has shown that the while foreign oil companies may disclose payments, national oil companies, who are often joint venture partners, conveniently fall off the transparency radar. For instance, the Conference of Nigerian Political Parties (CNPP) maintains that Nigeria lost over $130 billion unaccounted revenue between 2000-2006, and that for eight years Obasanjo unilaterally withdrew over N1 trillion from the Nigeria National Petroleum Corporation (NNPC) and the Federation Accounts.
As these practices are at variance with the principles of EITI implementing countries, critics have argued that the main incentive for joining EITI has been for governments and companies to deflect criticism and gain domestic and international legitimacy. Unless robust implementation / compliance and accountability procedures are put in place, Oli Brown argues, the EITI stands the risk of compromising its reputation.
4.5. Towards an Ethical International Banking System
Given the steady flow of illicit funds from developing countries into the world’s financial centres of London, New York, Switzerland and other tax havens, Nicholas Shaxson has argued for the expansion of the corruption debate to include the tax havens and the international financial system that facilitates the supply side of corruption.
It is therefore not enough to identify or even condemn public officials who steal from their citizens; OECD countries must discourage these practices by actively denying corrupt officials entry and safe haven for their assets: investments, luxury goods, real estates, yachts, private jets, and also assist countries in recovering and repatriating stolen funds.
In conclusion, international initiatives targeting the extractive industries must be commended for promoting the transparency and monitoring of oil revenues. However, these initiatives are perhaps not as effective as they should in combating corruption, conflict and misery. Of particular concern is the challenge posed by defective democratic institutional arrangements and administrative incapacity of the developing world.
A system devoid of the necessary checks and balances imposed by transparency, accountability and fairness does not engender good governance but on the contrary, serves the vested interests of an elite few that profit, not from effective extractive industry reform, but from entrenching the status quo.
The transformation of a country’s natural resource into a blessing requires a global commitment to a new fiscal contract that ensures the equitable allocation of natural resources’ revenues for the benefit of citizens.
1. SECONDARY SOURCES
1.Auty, Richard and Philippe Le Billon , Managing Revenues from Natural Resources and Aid, Chapter 6 in: Brown, Oli et al (eds): Trade, Aid and Security, An Agenda for Peace and Development, (London : Earthscan, 2007)
2. Collier, Paul, The Natural Resource Trap, Chapter 3 in: The Bottom Billion.: Why the Poorest Countries are Failing and What Can Be Done About It, (Oxford, Oxford University Press, 2007)
3. Gelb, A.H., Oil Windfall: Blessing or Curse? (New York: Oxford University Press, 1988)
4. Humphreys M, J D. Sachs and J. E. Stiglitz, What is the problem with Natural Resource Wealth?, Chapter 1 in: Humphreys Macartan, Jeffrey D Sachs and Joseph Stiglitz (eds) Escaping the Resource Curse, (New York, Columbia University Press, 2007)
5. Karl, Terry Lynn (2007): Ensuring Fairness. The Case for a Transparent Fiscal Social Contract, Chapter 10 in: Humphreys M, J D. Sachs and J. E. Stiglitz (eds.), Escaping the Resource Curse, (New York, Columbia University Press, 2007)
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William F. Maloney (eds.), Natural Resources: Neither Curse nor Destiny ( Palo Alto,
CA : Stanford University Press ; Washington, DC : World Bank, 2007)
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8. Tobias Kronenberg, The Curse of Natural Resources in the Transition Economies, Economics of Transition, Volume 12 (3) 2004, 399–426.
1.3 Internet Sources
1. Acemoglu, Daron, Root Causes: A Historical Approach to Assessing the Role of Institutions in Economic Development, Finance & Development, June 2003. http://www.imf.org/external/pubs/ft/fandd/2003/06/pdf/Acemoglu.pdf (last visited on November 5, 2006)
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3. Ian Gary and Terry Lynn Karl. Bottom of the Barrel: Africa’s Oil Boom and the Poor (Catholic Relief Services, June 2003): 1-110
(Last visited on January 22, 2008)
4. IMF (2007): Guide on Resource Revenue Transparency,
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6. Robert Rotberg Failed States, Collapsed States, Weak States: Causes and Indicators
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3. Global Witness (2004): Time for Transparency Coming Clean on Oil, Mining and Gas Revenues.
- Open Society/Revenue Watch Institute (2005): Follow the Money. A Guide to Monitoring Budgets and Oil and Gas Revenues, Open Society Institute, New York http://www.soros.org/initiatives/cep/articles_publications/publications/money_20041117/follow_money.pdf (Last visited January 22, 2008)
- Save the Children (2005): Beyond the Rhetoric. Measuring Revenue Transparency. Home government requirements for disclosure in the oil and gas industries. http://www.savethechildren.org.uk/mt/gov.pdf
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1. EITI Sourcebook and Validation Guide http://www.eitransparency.org (Last visited on November 6, 2007)
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OECD Guidelines for Multinational Enterprises http://www.oecd.org/department/0,2688,en_2649_34889_1_1_1_1_1,00.html (Last visited on January 20, 2008)
3. The OECD fights foreign bribery
(Last visited on January 20, 2008)
1.4 Other Sources
1. The Sun Newspaper, December 30, 2007
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