Posted by Teresa Dabán
photo by Ellie Sandercock (CC)
The chances of resource-rich countries to avoid the resource curse hinge on the existence of sound institutions. While several initiatives have emerged to promote the transparency and sound management of natural resource revenues (NRR)— including IMF’s Resource Revenue Transparency Guide and the EITI, there is still a need to develop an overall framework for the assessment of NRR-related political economy and governance challenges. Against this background, the Bank has launched a project to develop a framework to assess and promote good governance in each of the stages of the “value chain” of NRR, from their extraction to their use, and incorporate political economy issues in the dialogue with resource-rich client countries. To refine such a framework, and concretize the timeframe for its implementation, the Bank held a workshop on October 16, 2008. The workshop revealed that the adoption of the usually proposed mechanisms to mitigate NRR-related governance challenges raises complex issues.
The “value chain” approach to the management of NRR
The EITI and related transparency ventures, with its focus on public disclosure and management of NRR, only address some of the challenges faced by resource-rich countries. This observation has prompted the World Bank to promote the “value chain” approach for the management of NRR. The new holistic approach, also referred by some as the EITI++ approach, identifies the five “critical components” of a sound management of NRR: a transparent sale of resource rights; a rigorous regulatory regime; a tax regime free of corruption; sound macroeconomic management; and a policy framework to ensure that NRR are effectively used to support sustainable growth and poverty reduction (see Figure 1 and http://www.worldbank.org.). The new holistic approach also provides a framework to understand the cross-cutting political economy drivers and the interactions between the stakeholders across the “value chain”.
A framework to analyze the political-economy challenges of resource-rich countries Drawing on the “value chain” approach, and with the support of the Bank-Netherlands Partnership Program, the Bank has launched a two-year project to conduct a cross-country diagnostic of main NRR-related governance and political economy challenges of resource-rich countries. The project’s main goals are to (i) pinpoint a set of “good enough” and feasible reforms to mitigate NRR-related governance challenges; (ii) define a set of NRR-related governance indicators to monitor reform progress; and, (iii) identify key entry points to enhance the dialogue on governance issues between the Bank and resource-rich client countries. To support the project implementation, the Bank has developed an analytical framework to identify the main stakeholders (government, the Bank, civil society, etc), political economy drivers, vulnerabilities, and institutional arrangements that shape the governance structure of a set of pilot countries at each point of the “value chain”. The Bank-supported workshop of October 16, 2008 helped refine the analytical framework and concretize the timetable for its implementation. It also facilitated the discussion of the planned country case studies, including DRC, Ghana, Guinea, Mauritania, Nigeria, East-Timor, Mongolia and PNG, whose completion is anticipated for Spring 2009. Participants concurred on the convenience of implementing this project in coordination with other TA providers and international institutions.
The political-economy challenges of promoting sound management of NRR
Preliminary assessments produced for the planned country case studies revealed the difficulties of drawing resource-rich countries into agreements conducive to sound management of NRR. One of the difficulties arises from the dynamic environment in which such agreements are reached upon and implemented. Main changing conditions include the rise of insurgent movements threatening to topple the incumbent government, an unexpected strong opposition showing at the polls, soaring resource prices, and an increase in the competition in the upstream resource markets. These changing conditions may alter the interests and bargaining power of different stakeholders, some of whom may then have strong incentives to renege on the agreements. Some participants noted that the dramatic rise in oil prices between the negotiation of the agreement between the government of Chad and the Bank and the coming to stream of oil production, starkly altered the bargaining power of the government, partially contributing to Chad’s ability to write off Bank support.
The usually proposed mechanisms to promote sound management of NRR
Participants discussed several mechanisms that could help prevent stakeholders from reneging on their commitments to governance reform if circumstances change. Focusing on governments’ uses of resource revenues, these mechanisms include depositing NRR accrued to the government in off-shore accounts, establishing parallel budgetary institutions, and allowing resource companies to spend directly NRR on local public goods. However, most participants noted that these mechanisms run the risk of prompting national backlash from local stakeholders who may perceive them as an interference on national sovereignty. Some participants also noted that the benefits of creating parallel budgetary institutions need to be carefully weighted against the risks they may create. The main risks include (i) increased opportunities for misappropriation and excessive accumulation of power by the parallel bodies; and (ii) fragmentation of the budget process, especially in countries with poor information-sharing practices. A few participants noted that in the case of very adverse political economy environments, international partners, including the Bank, may consider advising client countries to leave the resources in the ground.
What are the lessons for the future?
Most participants concurred that it would be difficult to persuade countries to leave resources in the ground when resource prices are high or when alternative investors are active. Moreover, as the case of Colombia and Angola shows, natural resources can be successful produced in extremely challenging circumstances. This situation calls for a continued effort by international donors to engage resource-rich countries in the promotion of sound management of NRR. It also underscores the need for donors’ advice to take all possible changing conditions into account and seek to enhance, instead of replacing, existing budgetary institutions. Participants concurred that the design of mechanisms for the management of NRR would need to be based on well-informed political economy analysis.
