Lydia Munyi – A critical examination of the extractive industry transparency initiative: How can it benefit the poor in mineral dependent economies?
The natural ‘resource curse’ is the term used to describe the failure of resource-rich countries from benefitting from their natural wealth, (Sachs and Warner, 1997). This is clearly visible in Africa, where, Angola, the Democratic Republic of Congo and Sudan have been torn by civil strife (Humphreys et al., 2007) and in Nigeria, which despite being Africa’s largest oil producer and sixth in the world’s oil producing countries (OPEC, 2011), due to endemic corruption, has failed to deliver socio-economic development for most of its citizens (Gylfason, 2001). The ‘resource curse’ is a complex phenomenon characterised by two dimensions: economic and political (Stiglitz, 2002); the economic, also referred to as the ‘Dutch disease’, results due to high currency appreciation which negatively impacts other export industries, while the political results from poor institutional factors which lead to high levels of corruption and rent-seeking. The literature suggests that the curse is primarily a political and not an economic phenomenon (Auty, 1993; Karl, 2007; Bracking 2009).
Various attempts have been made to address the ‘resource curse’, one example being the EITI created by the World Bank and donor country governments in 2002. The EITI aims to tackle the political dimension of the ‘resource curse’ through increased transparency of revenues in the extractive sectors (EITI, 2008). Whilst this approach hopes to increase the governments’ accountability towards their citizens as well as build on Civil Society Organisations (CSOs) (EITI, 2008), various limitations inhibit the delivery of all that it promises. This will be the focus of this paper where to begin a broader perspective of the political dimension of the natural resource curse is explored, followed by a discussion on the functioning of the EITI before critically assessing its approach towards increased transparency in the extractive sector. To conclude, recommendations will be given on how the EITI can enhance its role in order to enable citizens to capture greater benefits from their natural wealth.
The political dimension of the natural resource curse
Humphreys et al. (2007) apply the principal-agent framework from institutional economics to analyse the various stakeholders in the extractive sector and how they interact with each other. They attribute the political aspect of the curse to three kinds of asymmetries: agency, information and bargaining power which is demonstrated in Figure 1. The principals are the citizens of recourse-rich countries (this is in accordance with modern political theory which assigns them ownership of their country’s natural resources) and so are the owners/ shareholders of extractive companies, while the agents are the States and the companies.
Source: Adapted from Olcer, 2009 p.33.
Humphreys et al. (2007) claim that asymmetric information between the agents and principals creates problems in the sector as agents can choose to not faithfully serve the interests of the principal. This coupled with the existence of asymmetric agency between the four stakeholders helps explain why resource-rich governments fall into a trap of corruption and rent-seeking. Whereas extractive companies act to please their owners through profit maximisation, the governments on the other hand owe allegiance either to their patronage networks or to themselves. First and foremost, most do not collect taxes from the people (Asiedu, 2006) and instead depend on revenues from the companies. This explains why such governments go to extremes in order to remain in power. Secondly, given their lower bargaining power in negotiations, they are more willing to accept bribes in pursuit of their personal interests (Bracking, 2009). The consequence is a lack of accountability to citizens which permits them to spend resource revenues in ways which are not necessarily conducive for socio-economic development. In Angola for example, more than US$ 4 billion in state oil revenues ‘disappeared’ between 1997 and 2002 (TI, 2008) while in Nigeria despite its net oil export revenue averaging at about US$ 411 per capita, 70 percent of the population live on less than a dollar a day (PWYP, 2006).
Benefits from the EITI
By increasing transparency, the EITI seeks to restructure the principal agent relationship in extractive sectors by reducing the information asymmetries (figure 1) in order to limit opportunities for corruption and rent-seeking. Even though there are other similar initiatives to the EITI, it has been accredited to playing a key role in directing the international community’s attention towards the extractive sector (Olcer, 2009). Figure 2 displays how the EITI works. Based on voluntary participation, governments and extractive companies are encouraged to disclose information which is later reconciled into a report by an independent administrator that is overseen by a Multi-Stakeholder group. The report is hereafter made publicly available and is expected to generate a debate and allow in-country CSOs to hold their governments accountable for any discrepancies (EITI, 2008).
Source: Olcer, 2009 p.14.
There are two categories of countries under the EITI: candidate and compliant countries. To date there are 27 candidate countries that have met all four indicators in the sign up stage to EITI principles: (I) committing to implement EITI; (II) working with civil society and the private sector; (III) appointing an individual to lead implementation; and (IV) producing a work plan that has been agreed with stakeholders. They can later graduate to be compliant countries (5 as of 2011) after fully implementing EITI as well as publishing and distributing their reports. Countries are expected to benefit from EITI through: the reduction of corruption and rent-seeking which in turn improves their access to capital and attracts more foreign investment and finally the strengthening of their CSOs (Olcer, 2009). Since the first of the five compliant countries was only validated in 2009, it is still early to assess the full impact of the EITI in bringing about these benefits. However we can analyse its approach in dealing with the ‘resource curse’ and assess the limitations which may prevent it from fully realising its promise to citizens of resource-rich countries.
Limitations of the EITI’s approach
Limited and poor quality of information
The EITI’s main approach towards mitigating the ‘resource curse’ focuses towards increased information on government revenues from extractive industries. However, this approach is limited as it only addresses the information asymmetries in one aspect of the extraction value chain (Kolstad and Wiig, 2008). As shown in figure 3, EITI attempts to shed light in the revenue collection but fails to capture information on earlier and latter stages. Given the heavy persistence of corrupt activities in the awarding of contracts (Global Witness, 2008) and the lack of accountability in public expenditure, such information is vital for citizens, especially for those in countries like Nigeria where majority of resource rents accruing to the government are spent on “wasteful” public investments such as building sophisticated military forces or for the suppression of opposition movements (Sala-i-Martin and Subramanian, 2003). Robinson et al. (2006) emphasise the importance of holding governments accountable in the use of public resources and argue that it is key in avoiding the ‘resource curse’, an area which the EITI does not focus on.
Source: Adapted from Alba, 2006 as cited in Kolstad and Wiig, 2008 p.528.
In addition, due to the complexity of financial flow processes involved in the extractive sector, the information in EITI reports has been suggested to be lacking in quality and consistency (Kolstad and Wiig 2008). Since numerous government entities such as tax and regulatory authorities as well as quasi-governmental organisations receive payments in various forms (taxes, royalties, bonuses, dividends and rents) this makes the process of documentation exceptionally difficult (Olcer, 2009). The EITI only requires the material payments between the two agents (Figure 1) to be reconciled and published and so long as the amounts agree, it is irrelevant whether the amounts reported are accurate (ibid.) A case in point would be in Nigeria where the administrator reported discrepancies in claimed payments by companies to the Central bank which the bank had no record of receiving. This was instead blamed on the differences in accounting styles and no further interrogation ensued (World Bank, 2008), suggesting persistence of non-transparency in the sector despite EITI’s efforts.
The EITI’s membership is on voluntary basis which allows the supporting governments and extractive industries discretion on whether and, to a certain extent, how they adopt its principles. So long as corrupt government officials or other stakeholders have vested interests in maintaining secrecy and non-transparency, expanding EITI membership and implementation is likely to remain as a challenge (Collier, 2008). At this point, it is important to draw a distinction between transparency and accountability to further explore this issue. According to Shedler (1999), accountability has three dimensions: the provision of information regarding actions and decisions, their justification and recourse to punishment in the case of misconduct. The EITI however only fulfils two of these, the first through promotion of transparency and the second through the oversight of the Multi-stakeholder groups (figure 2). It however does not formally consider or offer enforcement mechanisms which undoubtedly undermine the citizens’ ability to hold their governments accountable.
As an alternative form of accountability, the EITI assumes the existence of strong and effective CSOs in the implementing countries which can access and scrutinise figures presented in reports (despite limited information and the high complexity of the sector’s financial processes) and hereafter mobilise when discrepancies exist (Aaronson, 2008). This assumption nonetheless, is far from reality as the space for civil society activism on issues of corruption and transparency appears to be non-existent in most mineral-rich countries (PWYP, 2006). In a survey of 14 out of 38 companies supporting the EITI, ten reported that they did business in countries where civil society was arrested or hampered in its level of participation (Aaronson, 2008). Looking at Nigeria once again, this was evident when Nuhu Ribadu, the head of the Economic and Financial Crimes Commission (EFCC) was forced to resign and sent off for ‘further studies’ by the government following the EFCC role in bringing about the arrest of several governors (Economist, 5 January 2008).
Even where there seems to be success in the CSOs involvement as is required by EITI validation process, their role is substantially limited since it is governments which appoint the multi-stakeholder groups (EITI, 2006). The CSO’s may therefore fail to represent the people and instead extend the arm of in most cases corrupt governments (Olcer, 2009). All these factors weaken the EITI’s ability to reduce corruption within the extractive sectors since governments can voluntarily join the EITI and still make little progress in ameliorating the ‘resource curse’ given the weak enforcement mechanisms. In which case as Collier (2008) claims, the EITI risks being an instrument of toothless transparency which lacks full accountability.
Conclusion and recommendations
Given that almost a third of the world’s poor live in mineral dependent countries (Ross, 2003), initiatives such as the EITI are a crucial step towards decreasing information asymmetries between citizens and governments of these countries. However, the EITI’s strategy may fail to eliminate corruption from the sector given that it fails to address the weak bargaining power of governments relative to extractive industries (figure 1) and provides limited information on one area of the extractive value chain which often lacks in quality and consistency. In order for citizens of resource-rich countries to benefit from the EITI, this paper recommends the EITI to: (i) Provide stricter definitions and expectations on the level of information disclosed in country reports; (ii) Create a certification process, similar to the Kimberley Process Certification Scheme5 for diamonds, to provide information on how the resources are extracted and how revenues are spent; (iii) Enhance government accountability through two mechanisms: firstly, use of economic sanctions through collaboration with the World Trade Organisation to discourage members from importing non-certified resources. Secondly, linking with credible judicial institutions (for example the UN’s International Criminal Justice) to address agents (governments and extractive industries) that fail to cooperate; (iv) Continue to strengthen the CSOs’ position via increased education to increase their understanding of the complex financial processes of the sector; and finally, expand activities to assisting natural resource countries during contract bidding in order to increase their bargaining power in relation to extractive companies – this would lead to a higher retention of profits in the host country which if used appropriately can lead to socio-economic development.
Nonetheless, even with the EITI functioning at its best, it ought not to be assigned the role of the magic bullet that can alleviate the ‘resource curse’ for it only addresses the political dimension of the curse and not the economic (Collier, 2008; Bracking, 2009). Following this discussion, the EITI ought to not only encourage more countries and companies to effectively implement its principles but it needs to seek ways of incorporating other types of reforms given the complexity of ‘the resource curse’.
 The ownership of natural resources is an attribute of sovereignty, which according to modern political theory belongs to the people (Ferguson, 2005).
 Others include the IMF Guide on Resource Revenue Transparency, the Transparency obligation initiative of the EU and guidelines by the International Accounting Standard Board.
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