Can Transparency in Extractive Industries Break the Resource Curse?

By Susan Aaronson, Associate Research Professor of International Affairs, George Washington University.

The resource curse has stymied development in numerous oil-rich economies. This column uses World Bank and UNCTAD data from 2006 to describe how the Extractive Industries Transparency Initiative might help business, government, civil society and citizens alleviate the curse.

Policymakers in resource-rich countries often become addicted to oil industry revenues. They rarely use these funds to diversify their economy or to invest in other productive sectors such as agriculture, education, and manufacturing. Instead, these officials frequently pad their bank accounts and ignore the needs of their constituents as well as producers from other sectors. Moreover, these officials rarely disclose the royalties that oil companies pay to extract oil resources, increasing the potential for revenue misappropriation.

The Extractive Industries Transparency Inititative

The EITI can change the behaviour of oil exporters without conditionality or force. It empowers reformist interests in resource-rich countries and effectively acts as an incentive for oil company executives and petro-state policymakers to change their behaviour.

Moreover, the EITI is a holistic approach to governance. Extractive industry governments choose to participate in EITI, but participating governments insist upon certain behaviour from energy firms, policymakers, and their citizens in return. As of July 2008 some 23 countries, or almost half of the world's developing country extractive industry exporters, have chosen to implement EITI.

Does it work?

In 2007, I performed a preliminary review of governance and human rights statistics for EITI-implementing countries (24 countries) and compared their performance to 25 other developing county extractive exporters. Using UNCTAD, World Bank, and OECD data, I found that eleven countries were able to improve the business climate (economic growth regulations), and on average they performed better than their non-EITI peers (Figure 1).

[img_assist|nid=440|title=Figure 1: EITI and "Doing Business" improvements|desc=|link=none|align=center|width=479|height=294]

 

I also found the voice and accountability scores (the ability of citizens to influence government and hold it accountable) improved significantly more for EITI than non-EITI countries on average (Figure 2).

[img_assist|nid=441|title=Figure 2: EITI's influence on voice and accountability|desc=|link=none|align=center|width=481|height=245]

 

However, while some of the EITI countries such as Azerbaijan, Liberia, Cameroon, Kazakhstan and Mali have reduced corruption, many others have not yet been able to effectively change their countries' culture of opacity. However, I relied on a dataset that measures perceptions of corruption rather than actual corruption. As the EITI may facilitate greater public criticism of government, people may perceive corruption in rising in countries adopting EITI, as the EITI process may stimulate greater discussion of corruption (Figure 3).

 

[img_assist|nid=442|title=Figure 3: Trends in corruption|desc=|link=none|align=center|width=500|height=264]

 

This data does not show that EITI is causing these changes; but EITI is associated with these changes. The EITI seems to facilitate creation of a feedback loop between business, citizens, and their government, which could gradually spill over into the polity as a whole. As citizens learn to influence governance in one sphere, they may demand similar transparency and accountability in other aspects of governance. The World Bank and UNCTAD have just updated statistics for 2007; it will be interesting to see whether these trends hold.

It is rare when the business interest and the public interest are aligned. The EITI presents both an opportunity and a process to allow these often adversarial interests to collaborate to thwart the resource curse. It deserves greater international support.

This text is an abridgement of a longer article that is available at http://voxeu.org/index.php?q=node/1395.