Speaking notes for Round table on Natural Resources

convened by the Belgian mission for representatives of selected UN missions and officials.
(June 2, 2014, Mission of the Kingdom of Belgium to the UN, New York).

The presentation will be in three parts;

• the first will contain some reactions to the excellent presentation by our colleague from the UNEP,
• the second will outline some of the underlying negative economic, political and governance forces unleashed by the extractives – the type of natural resource mainly targeted and that undermine the potential benefits in situations of fragility, even as we celebrate the obvious “blessings” emerging from their exploitation.
• With this background, I will attempt to respond to the three areas of concern raised by the organisers; mechanisms and policies for good NRM, lessons on the transformation of NR wealth to peace dividends, and the role of the UN.

Reactions

Compliments to the presenter for the comprehensive treatment of the subject and noting that his positive stance was deliberate and intended to change the narrative from the negative image of natural resources to a more positive acknowledgement that it is not natural resources per se that are negative but weaknesses in the system of governance and management. His aim is to focus attention on how to enhance the positive. He cites British Columbia as a mineral dependent and successful economy, where the positives of mining are evident, and where they re a blessing.

British Columbia, although a mineral-rich and mineral dependent sub-economy is a magical place to live because

• it has strong institutions.
• The rule of law prevails (very senior government officials are arrested by the police for even traffic violations – cannot happen in a fragile state)
• there is stability in the political sphere; when elections approach very few people leave the country because of fear of impending violence,
• there is a thriving private sector to which failed politicians can return and therefore do not have to stay in power at all costs. In these circumstances the blessings of natural resource extraction can be enjoyed while the curse can be controlled. Not so for fragile states. In such states the four factors cited are virtually absent. Consequently, the benefits are enjoyed by very few while the majority suffer the effects of the curse.

While there is a large body of literature challenging the natural resource curse arguments, their case is that the negative consequences are related to inadequacies of the institutional and other arrangements for managing these resources rather than the resource themselves. In short they do not question the potential inherent in the exploitation of certain natural resources to produce negative consequences – indeed the evidence of correlation is hard to dispute; what they quibble about are the weaknesses in methodology when trying to show causation. But isn’t the evidence of correlation enough? In any event, for the citizen living in fragile states, and for a rural household in a community where the opening of a mine has coincided with changes in his lifestyle, only two considerations matter: there is a mine and now life is worse or better off either because of the negative changes to the environment and or to improvements in livelihoods. He/ she observes lower service delivery than promised, comparatively lower living standards, than seen elsewhere (thanks to information technology), she notes a deprivation of political rights, political leaders hardly consult them etc , All of these are observed after the opening of the mine. For them, the distinction between the mining operations and their predicament is confusing; a positive correlation is obvious. The mine has brought them hardship – and is a curse, or life is better and is a blessing!

The reality is that in countries with widespread poverty, weak governance and institutional arrangements, the exploitation of natural resources tend to undermine fledgling structures and in turn exacerbate poor management of the natural resource – all of which lead to disenchantment, dissatisfaction, and that sooner or later degenerates into instability and conflict.

Bad governance should not be separated from the operations of the sector. The initial weaknesses of effective checks and balances allow rent-seeking behaviour to prevail. Those in authority or their allies quickly capture and control the instruments that should have served as checks to any abuses. To illustrate, when the justice system is under the control of one group, it is unlikely for anyone in that group to be condemned except and only sometimes, in the most egregious circumstances. When the population loses confidence in the justice system, the rule of law disappears and they find other ways to obtain justice. Again when there is state-capture by one or two powerful businesses, they become untouchable and above the law. Yet again the rule of law is undermined and governance becomes subject to the whims and caprices of those in control. Exclusion, marginalization, patronage rapidly becomes the order of the day. IN THE EXTRACTIVES SECTOR THE SCALE OF THE OPERATIONS, AND THE AMOUNT OF MONIES INVOLVED IN THE CONTEXT OF A POOR COUNTRY, MAKE THOSE IN CHARGE OF THE MINE POWERFUL, LOCALLY. They can demand to and do see a Minister of Finance at any time – not so the small producer of flowers for export. With such power, the state apparatus including its governance mechanisms can be quickly controlled. Take the case of Australia and the attempt by the government to tax surplus profits. A government fell – and there they have a functioning and mature democracy with all its checks and balances available.

• This is what distinguishes the extractives sector from the rest.

Difficult Choices

The second point is that there are indeed very difficult choices faced by governments in fragile countries. Often it is between immediate results and longer term goals. It is not surprising therefore that a political party facing elections will almost always opt for short-term palliatives rather than longer term but more lasting and beneficial solutions. This is particularly true immediately after a conflict. Any post-conflict government realizes urgency of heralding that economic life is back to normal and therefore is prepared to pay a premium for that – justifiably so. Unfortunately this is the time when the political risk of doing business is very high. Governments therefore feel obliged to pay for that risk in the form of concessions to foreign private investments. In these circumstances, merely preaching to governments to refuse concessions is foolish and does not even make economic sense. The challenge is to prevent corruption from setting the parameters within which concession should be given by being transparent, and ensuring that there is adequate capacity to press for long term goals of the country.

Another very difficult set of choices relate to dealing with the symptoms of the Dutch Disease. Take the changes in the patterns of production that results from the movement of factors from one sector to the other, or one part of the country to the other. What are the policy choices available to a government in this case?

After the discovery of diamonds in the East of Sierra Leone many young men left agriculture for alluvial and often illicit mining with dire consequences for agricultural production, social stability etc. Another example is the appreciation of the currency as large revenue flows in from mining. At the time when reforms are aiming to boost other exports and diversify the economy, such appreciation would render our exports more expensive and less competitive. As revenues soar, so will pressures to increase budget expenditures on election-winning initiatives that could flounder because of inadequate preparation or sharp drops in commodity prices.

Very few countries know the extent of their natural resource endowments. It is very difficult to negotiate or plan for its extraction in the absence of information. The result is sub-optimal agreements and sub-optimal strategies for exploitation of these resources.

I do agree with my colleague that all natural resources do not produce the same effects, and that the culprit for invoking the curse is the extractives sector. However the new phenomenon of land grabbing is beginning to create the same, if not worse havoc. Here we are observing the dispossession of land from the rural masses, inadequate compensation, and potentially negative consequences in the near future for rural livelihoods if not managed well.

Diversification is easier said than done.

There is some difficulty in moving into other sectors when extractives are the first source of economic activity after a conflict. The influx of mining activities in an otherwise stagnant or declining economy raises the costs of factor services to other sectors. This, in turn leads to high set up and running costs for industries and even for the service sectors rendering them uncompetitive internationally. In the end lower cost imported goods put them out of business or they press for life support from the government. All of this happened in the70s and 80s in the DRC, SL, Liberia, etc. What fragile countries are in dire need for results from careful research of empirical evidence for solutions to many of these intractable problems.

While some of the solutions appear self-evident the question is why are they not being applied or if so, why are they not effective?

In my view the answers are multiple in nature, vary from country to country, and call for global action from international institutions, donor partners, the private sector and support to change agents within each country. It also requires shifts in the model for development of fragile countries recognizing that the world has changed and the solutions to yesterday’s problems may be quite inappropriate for today’s world.

II Underlying negative forces in Natural resources exploitation

Despite the obvious benefits (blessings) that exploitation of natural resources present why do countries experience negative effects to the point of the exploitation being referred to as a curse? Below are some of the key factors at play as well as the key considerations confronted by decision – makers. How they respond determines largely whether NR end up being more of a curse than a blessing.

Economic

• Genuine pressures and desire for quick returns lead to the granting of excessive concessions as trade-offs for resumption of economic activities(Rutile in SL 2002)
• Overall employment in extractives is small but at local level, they are the dominant employer and a small incident can ignite a national movement. Authorities therefore tend to protect the interests of the miner.
• During early stages of production, initial revenue and other figures presented are to entice financiers and government. Almost inevitably there are shortfalls with severe repercussions on national budget and development programmes (Ghana and SL 2011/2012). Note that once the mine development is complete, the multiplier effects are small compared to services or manufacturing sector.
• Mining operations immediately after a conflict raise wages and the cost of services above national averages. This can distort production patterns.
• Extractives become the new cash cows taking more of governments’ attention and resources, often at the expense of expanding the tax base
• Extractives by nature benefit only a few and so contribute to a widening of income inequalities and by extension opens up its accompanying tensions
• High GDP growth rates due to mining operations are false indicators of general economic performance that could reinforce weak governance, raise expectations and weaken the thrust for true diversification. (SL spectacular high growth of 2012 was due – 75% – to investment and commencement of production in two mines only)

Political

• In a poverty stricken country where the private sector is small, the public sector is the major single source of wealth. Upon commencement of mining, the mines become the new source of revenues for both the private and for the public sector. In the circumstances it becomes the target for those in power either to secure a larger share for the state, or in the absence of checks and balances, for those in control. Patronage and corruption ensue, leading` to state capture, and the rest is well known
• Being the single largest source of domestic funds, the extractives unwillingly or sometimes even knowingly fund the ruling party. The result is that the opposition then becomes hostile and could even fan the instability in the sector.
• Where there is a large and dominant investment, state capture with widespread ramifications occur. The consequences include undermining the democratic practices and institutions being built. Decision-making and policy reforms become subservient to the interests of the dominant investor. Laws that may affect the interests of those in power get delayed and not announced or passed.

Governance

• The pressure on companies for corporate social responsibility at the local level can sometime inadvertently undermine accountability of governments to the local community. Companies provide high cost services for health, water supply, sanitation and even education. The local community then looks to the company for what should be delivered by Governments. This could easily lead to government’s abdication of such responsibilities and dilute the social contract with the electorate.
• Rent-seeking behavior of government officials nurtured by the operations of extractives tend to transfer decision-making to the informal level. Policy changes therefore occur with little transparence or the opportunity for tapping into the country’s best human resources.
• Patronage reinforce ruling class dominance as scholarships, subcontracts etc go to relatives and friends rather than allocation by merit. This gradually builds resentment and marginalization deepens.

However there are solutions to the above that other countries have applied with success. Admittedly these are more difficult to apply in fragile countries. Let me therefore turn to
Mechanisms or policies to ensure good NRM that contributes positively to the country’s development objectives and helps the avoidance of future conflicts. Note however:

• No one size fits all. The opportunities for development of a particular country must fashion the arrangements for NRM (small/ landlocked/common geological structures etc)
• Community relations (delicate and it is important to avoid government abdication) must be treated with caution and avoid the temptation to take them for granted.
• Monitoring of obligations of parties to the contract (who is the neutral party when Govt is part of the company – overtly or by patronage). The best approach is to set up independent institutions that are accountable to government. Ghana, Tanzania
• Management of revenues (more important to secure accountable budget processes than elegant fiscal rules). Here lies the biggest danger. Transparency and credible audit process are key, but the governance of the budget process must be reinforced.
• Politicization of relations and state capture (companies, especially small bottom-feeders are willing and have tools to perpetuate control of state apparatus. Where do they hide?). The only option during the fragile stage is to open up the relations to public scrutiny.
• Bigger questions relate to the problems of the Dutch disease (More studies and practicable policy recommendations needed)

Lessons on how to transform NR wealth to peace dividends and drive post-conflict recovery.

• There is no model even though there are many successful Sovereign Wealth Funds. Each country must fashion a facility according to its circumstances.
• Need a special development path for fragile countries where special groups of supporters agree on harmonizing policies and actions for taking the road to sustainable development. Just as DDRR should not be implemented outside the longer term framework for development so should NRM be part of a longer term strategy embraced by all partners for the country’s long term growth.
• At the onset of resource exploitation before revenues flow in; robust checks and balances must be put in place. Salone is attempting to do so with the Transformation fund but concerns are now being expressed about the delays in setting it up, two years after its announcement in the development plan.
• At the DRC Peace talks in 2002 the key document dealing with the economic development of the country was adopted by ignored, and all attention went to the political agreements on power sharing (the infamous 1 + 4) implementation/ elections and the DDRRR. It is no wonder that the instability continues after so many scandals over the natural resource exploitation.
• Dangerous to conceive of peace dividends outside development plans. Ie DDR must anchor the R in the development plans.
• Peace building fund and its use should be re-visited. In Sierra Leone it is not obvious how its use has helped build the peace.
• Are member states Governments in control when they start off with weak institutions? NO. However this provides an incredible opportunity to get it right. Sadly, among international partners there are too many agendas and insufficient coordination of policies as distinct from programmes. The claims of “delivery by one” is not borne out by the evidence of overlapping and even conflicting policies in Sierra Leone.
• Decentralisation of authority over extractives to community and local levels must be approached with caution. It is not clear that the disfunctionality observed at the national level is not reproduced at the local level.
• Programmes showing preliminary signs of success were presented by the last speaker but this could be derailed at short notice by the emergence and eventual prevalence of all the negative tendencies.

What should the UN do?

• Need a power broker between those who hold the reins of power and the rest, to ensure the development of correct processes, institutions and laws for managing NR is not hijacked by the desire to hold on to power. In the absence of strong institutions the ruling class becomes largely immune from the rule of law, impunity reigns, and the negative tendencies of NR exploitation take over.
• An honest broker can educate the down-trodden so they know and can press for effective checks and balances in the system;
• UN can bring all stakeholders to the table for genuine dialogue. To play that role the UN must be well equipped, have enough resources, and collaborate with researchers to design empirically based solutions to local NRM problems.
• The sub-regional approach to NRM that focuses on joint exploration and exploitation would go a long way towards maximizing benefits, opening up excluded and remote areas, reducing inter-country tensions, and promote diversification within a bigger market

THE GOOD NEWS, Increasingly efforts at the international level to deal with the negative consequences of NRM are coalescing into a set of measures, incentives , policies and actions at both the global and local levels. These include:

• Frank Dodd Act of the US and similar Acts in the UK and Canada – I understand – that permits court action in the US for behavior in fragile states.
• UN Guiding Principles on Business and Human Rights – more and more companies are seeking help to incorporate them
• World Bank, UNDP and ADB funding for Extractives; and IMF support for effective taxation in the extractives
• The group of activists promoting a facility for supporting negotiations (Peter Eigen and EU/OECD plans)
• Univ of Columbia, Univ of California (Bekerly) and LSC are setting up portals/ toolkits etc
• Natural Resource Charter promoting principles
• WEF Council on Fragile States issuing guidance to fragile states
• Plus isolated actions by Revenue Watch. ISLP. Global Witness etc

I hope this meeting will lead to a concerted effort to harmonise all these measures, so we do not experience an overload of different advice and support that end up confusing us.
Thank You
Herbert P M’cleod