Turning the Resource Curse into a Blessing

My AFR article today is on the Natural Resource Charter.
Break the Resource Curse, Australian Financial Review, 17 May 2011

One of the most robust results in development economics is the fact that developing nations who have more natural resources are more likely to be poverty-stricken dictatorships. This ‘resource curse’ arises because mineral endowments tempt despots into fighting their way into power and filching the wealth.  It’s difficult for an autocrat to steal incomes from farming, industry or services. But diamonds are a dictator’s best friend.

The curse can be seen today in the Democratic Republic of Congo, where conflict over the country’s minerals has grown particularly fierce since the mid-1990s, with bands of thugs murdering five million people, raping half a million women, and impoverishing a nation. The vast majority of Congo’s population would be better off if their country had no natural resources.

In The Plundered Planet, Oxford economist Paul Collier points out that if we can help developing nations to make better use of their natural resources, the resulting fiscal flows could help societies to transform themselves for the better. In developed nations, oil and mineral assets generally benefit the entire population (though we’re currently working to get all Australians an even better deal though the Minerals Resource Rent Tax). But in most low-income countries, the opposite is true.

If developing countries can benefit from their minerals, the payoff could dwarf anything that aid might hope to deliver. Collier points out that in rich nations (where geologists have carefully surveyed the land), the typical square kilometre has subsoil assets worth US$114,000. In all probability, the same is true for the developing world. On those figures, Africa’s natural resources would be worth $3.5 trillion, more than 70 times the amount of foreign aid it receives each year.

To help developing nations make better use of their natural resources, a group of ex-politicians and entrepreneurs (working with academics like Collier) have proposed a Natural Resource Charter, which they hope will be adopted by governments, businesses and NGOs. The Charter aims to go beyond the ideological slanging match that has characterised natural resource use in developing nations, and offer practical ways in which governments can ensure the people get a better deal.

First, the Charter proposes that financial flows be fully transparent. Mining generates relatively few jobs, so what happens to the royalties is critical. Through the Publish What You Pay campaign and the Extractive Industry Transparency Initiative, mining companies are encouraged to release information about the payments that they make to governments. This makes it harder for corrupt officials and politicians to siphon it off into private bank accounts, and enables citizens to pressure governments into spending the money on much-needed infrastructure, such as hospitals, schools and roads.

Second, the Charter argues that extraction rights should be sold by auction. Once a handful of bidders participate, it becomes difficult for them to collude, and the final price is likely to reflect what the rights are actually worth. Collier uses the example of the UK, which was on the verge of negotiating a £2 billion deal to sell mobile phone spectrum when it was persuaded to try an auction instead. The auction raised £22.5 billion.

Third, the Charter suggests that developing country governments should maximise the amount of information about the country’s subsoil assets. If governments or aid donors conduct geological surveys and make them publicly available, then the people of that nation are more likely to get a fair share of their natural resources. Another way to increase information is to require that auction winners begin prospecting within a fixed period of time. If one miner strikes it lucky, this will raise the sale price when nearby parcels are auctioned off.

Fourth, the Charter requires that local peoples should be made better off by mining. Before lending to extraction projects, the World Bank requires ‘free, prior and informed consent’: a principle that the Charter argues should also extend to the way that national governments manage local consultations. Provocatively, it also suggests that where mining companies promise to conduct environmental reclamation, they might be kept to their word via the use of an escrow account.

Since the Eureka uprising, Australians have been debating the best way of managing our natural resources. Both sides of politics won’t always agree on the specifics, but our position as a developed nation with bountiful mineral wealth means that we have much to teach low-income countries about how to handle underground assets. With the right policies, developing nations can turn the resource curse into a resource blessing.

Andrew Leigh is the federal member for Fraser. The Charter may be found at www.naturalresourcecharter.org.

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