Three billion people and a half live in countries endowed with oil, gas, and other mineral resources. Until the 80s, it was fashionable to say that these countries were blessed: mirroring the earlier examples of Australia or the US, natural resources would lead to a fast transition to industrialization, and hopefully, to escape from the poverty trap.
Over the last two decades, the trend has reversed: what was considered to be a blessing has turned out to be a curse. Many authors, including Jeffrey Sachs, have shown that, on average, resource-rich countries exhibit lower growth rates than their non resource-rich counterparts.
Certainly, you need to look beyond growth indicators to tell the difference between Botswana and Sierra Leone, both rich in mineral resources, but with dramatically diverging economic fates. The key factor in explaining such differences is increasingly found in the quality of public institutions.
Countries which have abundant stocks of mineral wealth – often dubbed "petrostates" – tend to develop similar institutional features, linked to the economic aspects of resource extraction. Drilling for oil or gas is a capital-intensive process, and poor countries do not usually have the technology or capital needed to exploit such resources on a large scale. Thus foreign companies come in to obtain permits from local governments, encouraging that kind of rent-seeking opportunistic behavior often found among local elites.
In addition to this, and in contrast with manufacturing- or services-led growth, extractive industries generate limited spillovers on the rest of the economy, while the receipts of mineral wealth are seldom redistributed to the general population, because there is no transparency on the allocation of revenues deriving from mineral concessions.
Angola is a case in point. Global Witness has published indicting reports on this country: A crude awakening in1999 and All the president's men in2002. The basic argument is that Western governments, oil companies, and foreign investors contribute to government corruption in resource-rich developing countries, with the majority of the population being excluded from the oil windfall. To provide an example, in 2001 one third of oil revenues ($1.5 billion total) disappeared from Angolan public coffers. This occurred because the economic details of oil concessions were kept secret, thereby giving ample room for graft by local elites. BP, which decided to come clean and publish the sums paid to local governments, saw its concession rescinded.
Such developments have brought to a concerted action involving the whole industry. Since 2002, this kind of action has been carried out by two main groups: "Publish What You Pay" – launched by George Soros and many international NGOs –
and the Extractive Industry Transparency Initiative – launched by Tony Blair, which mainly groups companies and governments.
In a world where "corporate social responsibility" is increasingly becoming an economic duty, lest profits be affected, adhering to transparency rules legitimizes the activities of those companies which are giving a positive contribution to the societies and countries in which they operate. Is transparency enough to make local governments accountable to their citizens? Maybe not, but it is definitely a necessary condition.
by Eliana La Ferrara,
Full Professor of Economics, Università Bocconi