At least 80 percent of countries considered fragile or affected by conflict are home to valuable extractive resources that the global economy hungers for. Earth’s riches like oil, gas, and minerals often fuel conflict, trapping all but the elites in poverty amid vast wealth.
On the margins of the October 2013 Annual Meetings of the IMF and the World Bank, the Bank hosted a high-level panel to discuss how to make the Earth’s riches work for poor and fragile countries. They gathered leaders from Shell, the Extractive Industries Transparency Initiative, Revenue Watch Institute, Norway’s Minister of International Development, and the Prime Ministers of two resource-rich countries with very different experiences: Timor-Leste and the Democratic Republic of the Congo.
The panelists pronounced their own positions, and maybe needled each other a little, but there was little genuine dialogue. I take this to mean that there will be plenty of mediation and dispute resolution work for professional neutrals and forums between firms, governments, local communities and international NGOs.
Each panelist had their own idea of the necessary conditions for a fair agreement with investors and a fair distribution of the benefits of the resultant revenue windfall.
Two key points went unsaid. The rents and the investment opportunity exist because the state is fragile, not in spite of it. Any country possessed of the listed attributes isn’t fragile. And if the country had had these attributes for any length of time, well, the reserves would already have been discovered and extracted.
The other key point: Every jurisdiction that is deemed a success at managing resource wealth has found it’s own institutions and practices, suited to its own demographic and political context. After an exhaustive review of literature and practices around the world, and many years of grappling with discovery (and exhaustion) of natural resources in countries rich and poor, I’ve concluded that “best practice” is a bit of a conceit. Sure, there are principles, models and hypotheses to consider, and international examples to refer to, but nothing that comes in a box. Each jurisdiction has to work out how to manage the first-class problem of unexpected realization of wealth. It can take several tries (even a paragon like Norway has revised it’s framework periodically) and it’s going to involve some waste. This struck me as the reverse of the oft-quoted line from Tolstoy’s Anna Karenina: Happy families are all alike; every unhappy family is unhappy in its own way.
There is no guarantee of success, but what seems to have helped most is long-term technical assistance to reform-minded government leaders as early in the process as possible, ideally before resource revenue flows have grown large enough to distort public finances and corruption is entrenched. In jurisdictions where resource exports and revenues are large, this can require a systematic review of existing agreements (e.g., Guinea, Mali), a process that threatens major entrenched interests and requires patience, mutual respect and effective consultations.
What also seems to have helped is the emerging international transparency norm. These are increasingly backed up by legislation in OECD jurisdictions, requiring firms to stake their access to capital on adhering to the transparency norm. In the short run, firms can be caught with otherwise lawful contracts in host jurisdictions that demand confidentiality. In the long run, the effect isn’t obvious to me. I’m concerned that it could lead to only “bad” firms investing in “bad” countries.