The U.S. Is Making a Mistake by Withdrawing from the EITI

Last month, the Trump Administration announced that the United States would be withdrawing from the Extractive Industries Transparency Initiative (EITI). The decision was not wholly unexpected, especially since the Department of the Interior announced last spring that it would no longer host regular talks among a group of U.S. stakeholders that included representatives from the industry as well as activists and government representatives — one of the requirements of membership in the EITI. Nonetheless, the U.S. decision to withdraw from the EITI is a significant setback to the fight against corruption and misgovernance in the resource sector.

To understand the likely impact of the U.S withdrawal from the EITI, it’s useful first to review what the EITI is—both its mechanics and its objectives. Continue reading

Lifting the Resource Curse: Beyond Potions, Incantations, and EITI

Thanks to Google those who have had a curse put on them can find numerous ways to lift it: from drinking a special potion on the first night of the waxing moon to repeating a certain incantation 13 times while holding a rabbit’s foot.  (Here, here and here for useful sources.)  But Google is not nearly so helpful for policymakers looking to lift the resource curse: the corruption, violence, and misgovernment that befall a poor country with plentiful quantities of hydrocarbons or other natural resources.

The best Google does for them is tout the Extractive Industry Transparency Initiative, a voluntary compact where the government agrees to disclose the monies it receives from the companies that produce its resource and the companies agree to report the monies they pay government.  As the 300,000 plus “hits” on EITI in Google explain, the theory is that civil society will use the disclosures to hold government and the companies accountable. Unfortunately for the policymaker looking for solutions to the resource curse, Google will also pull up a long list of studies (here and here for examples) showing that so far it has had little to no effect on corruption and governance in resource rich poor countries and that at best the relief it promises is many years away.

With this post I hope to persuade Google’s powers that be to modify the search algorithm so that when a user enters “resource curse – how to lift” something besides “EITI” is returned.  That something is Continue reading

Why the Repeal of the U.S. Publish-What-You-Pay Rule Is a Major Setback for Combating Corruption in the Extractive Sector

Bonnie J. Palifka, Assistant Professor of Economics at Mexico’s Tecnológico de Monterrey (ITESM) contributes today’s guest post:

Last Friday, following the U.S. House of Representatives, the Senate voted to repeal a Securities and Exchange Commission (SEC) regulation that required oil, gas, and minerals companies to make public (on interactive websites) their payments to foreign governments, including taxes, royalties, and “other” payments. The rule was mandated by Section 1504 of the 2010 Dodd-Frank Act, but had only been finalized last year. President Trump’s expected signature of the congressional resolution repealing the rule will represent a major blow to anticorruption efforts, and a demonstration of just how little corruption matters to his administration and to Congressional Republicans.

The extractive industry had lobbied against this rule, arguing that having to report such payments is costly to firms and puts them at an international disadvantage. Some commentators have supported their efforts, arguing, for example, that the Section 1504 rules are unnecessary because the Foreign Corrupt Practices Act (FCPA) already prohibits firms under SEC jurisdiction—including extractive industry firms—from paying bribes abroad. This argument misses the mark: The extractive sector poses especially acute and distinctive corruption risks, which the FCPA alone is unlikely to remedy if not accompanied by greater transparency. Continue reading

Fighting Natural Resource Corruption: The Solomon Islands’ Challenge

 

On September 8 & 9 the Government of Solomon Islands, the UN Office on Drugs and Crime, and the UN Development Program will host a workshop in Honiara to discuss the national anticorruption strategy the government is preparing.  One issue almost certain to arise is how the government can intensify the fight against corruption in the logging and mining sectors. Both sectors are critical to the nation’s economic well-being.  Commercial logging is currently the largest source of export revenues, but earnings are expected to decline sharply over the coming decade as forest reserves are depleted (due in no small part to corruption).  The hope is that increases in the mining of the country’s ample reserves of bauxite and nickel will replace losses from forestry.

Corruption in both sectors has been documented by scholars (here, here, and here for examples), the World Bank (here), and the Solomon Islands chapter of Transparency International.  The government has not only acknowledged the problem but has committed to addressing it.  Its recently released National Development Strategy 2016 – 2035 makes controlling corruption in logging and mining a priority.  As the strategy explains, corruption in the two sectors robs government of needed revenues and deprives local communities of the benefits from the development of resources on or under their lands.

Identifying a problem is one thing.  Coming up with solutions is another, particularly in the case of resource corruption in the Solomons where the combination of geography, poverty, and huge payoffs from corrupt deals make curbing it especially challenging.  The remainder of this post describes the hurdles Solomon Islanders and their government face and suggests ways they might overcome them.       Continue reading

Is the Resource Curse a Myth?

Perhaps one of the most surprising and influential findings in development economics research is the so-called “resource curse”: the idea that a large natural resource endowment (and, consequently, a significant role for natural resource exports in the national economy) actually leads to slower economic growth, and lower per capita incomes (at least in the long term). The resource thesis has the appealing feature that although it’s initially counter-intuitive (and so people like me can seem and feel clever when we point it out), one can immediately think of many salient examples that seem to corroborate the idea, and it’s fairly easy to construct plausible stories as to why it would be true. Although such stories originally focused on exchange rate appreciation (so-called “Dutch Disease”), contemporary research (see, e.g., here and here) tends to focus more on the impact of natural resource abundance on institutional quality, governance, and corruption. The hypothesized causal chain (at least one version) runs roughly as follows: Natural resource wealth creates opportunities for massive economic rents for those who control the government; the competition for these resources fosters corruption, and makes currying favor with the government more important than entrepreneurship or productive investment. Furthermore, and perhaps even more importantly, natural resource wealth enables corrupt or otherwise inefficient governments can use their control over resource rents to secure their power, alleviating pressure that these governments might otherwise feel to reform their institutions and govern more fairly and effectively. And indeed, many studies (see here and here) show a strong negative correlation between natural resource wealth (especially oil wealth) and various measures of institutional quality (including accountability, checks & balances, and control of corruption). The bad institutional environment that natural resource wealth fosters, the argument continues, has adverse effects on long-run economic performance that outweigh the boost to economic performance associated with natural resource wealth. This, the causal chain runs from resource wealth to bad institutions to poor(er) economic performance; absence of resource wealth tends to generate incentives for institutional improvements that ultimately lead to better performance.

The resource curse thesis grows mainly out of quantitative cross country research that finds a negative correlation between resource wealth and GDP growth (controlling for a range of factors). Some more recent research has refined or qualified the thesis in important ways. For example, (see here and here) suggests that the “curse” is only associated with particular sorts of resources, particularly “point source” resources (such as oil or certain minerals). Other research (see here and here) has suggested that countries that already have relatively good institutions prior to the discovery of resource wealth seem immune from the curse. Still, even with these qualifications, the core idea remains: If a relatively poor country, with less robust governance institutions, discovers oil, its economic prospects over the longer term are actually worse—largely because of the relationship between resource wealth and corruption.

But what if that’s all wrong? What if there is no “resource curse”? What if resource wealth—even from point source resources, even in countries with lower levels of transparency and accountability—is, on average, associated with higher rather than lower economic growth? And what if natural resource wealth actually has no consistent discernable impact on institutional quality? For many years I’d been entirely convinced of the resource curse thesis (at least in qualified form). But I recently read an excellent 2009 paper by the economists Michael Alexeev and Robert Conrad which has forced me to reconsider. I’m still not sure exactly what I think, and I hope to spend the next few months delving more into this research (so I may eventually do a follow-up post), but I thought it would be worth discussing the essence of Alexeev & Conrad’s critique and reassessment of the resource curse thesis. Continue reading

“Charitable Giving” — A Way Around the FCPA? Part I

The facts below were alleged in a recent case involving Hyperdynamics Corporation, an American firm whose sole asset is an oil concession in Guinea:

* In 2005 the Secretary General of Guinea told the company that “further review” of its concession was necessary.  On August 1, 2006, the company’s CEO founded the NGO American Friends of Guinea and on September 22, 2006, the government approved a renegotiated concession.

* In September 2007, following critical reports in the local news about the renegotiated concession and government threats to cancel it, the Secretary General visited Hyperdynamics’ Houston office.  Over the next year American Friends of Guinea “delivered and paid for antibiotics and glucose fluids for men, women, and children who were stricken with cholera and . . . planned new water well projects to get to the source of solving the problem.”

* On September 11, 2009, the Guinean government and the company signed a memorandum affirming with modifications its oil concession.  On September 29 Hyperdynamics donated stock in the company to American Friends of Guinea.

* In September 2011 after a new, transition government was installed, a further dispute about the concession arose.  That year the firm donated $20,000 worth of computer equipment to the Ministry of Mines and some $8,000 -$10,000 to the Guinean Offshore Department of Environment.

Assuming these allegations are true, do they amount to a “payment . . .  to [a] foreign official for purposes of influencing any act or decision of such foreign official in his official capacity” and thus constitute a violation of the U.S. Foreign Corrupt Practices Act? Continue reading

Guest Post: Hosting Proceeds Down Under — Australia and the G20 Anticorruption Agenda

Professor Jason Sharman of Griffith University, Australia, contributes the following guest post:

On November 15th–two days from now–the latest G20 leaders’ summit kicks off in my home town of Brisbane, Australia, with anticorruption once again on the agenda. Though the G20 Anti-Corruption Working Group has made some important progress, many of the member states have been letting down the side. Specifically, Australia tends to receive less critical scrutiny than it should when it comes to international action against corruption, particularly in terms of hosting stolen assets from other countries in the region. And the G20 leaders’ summit is as good a time as any for the international community to press Australia for its many failures to deal with its status as a regional haven for money laundering in the Asia-Pacific. Continue reading