In the new World Bank report Rents to Riches?: The Political Economy of Natural Resource-Led Development, authors Naazneen Barma, Kai-Alexander Kaiser, Tuan Minh Le and Lorena Viñuela consider management of oil, gas and mining revenues in resource-dependent nations through a "political economy" perspective, weighing how political factors and interests can lead to unsound economic policies. In January, Kaiser spoke to RWI about the report.
What are the main findings of Rents to Riches?
Natural resources provide an incredible opportunity for developing countries, but in many cases that potential is squandered because governments pursue interests at odds with the public good. While we don't think there's a "resource curse" in the sense that you're doomed if you have resources, we do think that there are "resource paradoxes." The issue comes down to why governments pursue policies that seem quite short-term or in contradiction with sound policy. We've tried to highlight how policy paradoxes have occurred across more than a dozen case studies and how even countries with weak economies can take better advantage of the opportunity of natural resources.
What are the political economy dynamics in resource rich countries?
First, that the potentially huge rents in the resource sector are not only large but volatile. We've seen over the last few years, with the commodity price boom, that rents can increase significantly even as production stays the same.
Second, for many developing countries this is the main game in town, so all of the political interests are focused on getting a piece of it, and it can become quite contentious.
How does this impact development and public spending?
You'd think resource windfalls would present an opportunity, because here is almost free money. But from the political economy perspective, there are problems, primarily because these are volatile, often non-renewable, sources of income. Countries get into a boom and bust cycle in public expenditures, and there is a lot of volatility in money spent on buildings, schools, hospitals and infrastructure, and in maintaining that infrastructure or education funding.
The second issue is, when resource wealth is the only game in town, there's a lot of rent- seeking. Government becomes less about spending wisely or having tradeoffs than different groups making claims.
Finally, not only do you have vying economic interests, but an absence of groups pushing government to be accountable about tax spending.
How are tax regimes impacted by resource dependence?
Countries that directly capture rents from the oil or mining sectors tend to tax less overall than other countries, while at the same time they may overtax the resource sector. For example, Mexico, which we think of as fairly advanced, is actually quite dependent on oil revenues, and hasn't made a strong effort to tax non-resource sectors. Mexico may find itself in trouble over time because its oil sector may not be there to finance its development.
On the other hand, in the Democratic Republic of Congo, which has huge development needs and also very large natural resources, we found the government was only collecting about 15 percent of the revenue it was due from natural resource sector production. So you have a concrete example of very large development needs, an apparently abundant resource sector, but revenues that are not being taxed.
We see two things: either the neglect of non-resource taxation, because it's easier to tax the resource sector, or that, even with an appropriate tax regime, some countries don't actually collect what they're due.
Is it possible to make generalized prescriptions for all resource rich countries?
We don't think there's a silver bullet, because different resource rich countries are at very different levels of development. All countries have to consider the "four Ds": discovery of the resource, depletion, development effects and diversification. Some countries need to consider how to discover the stuff and get it out of the ground; others need to plan for development as they build infrastructure related to the mining sector; others have to ask how they can diversify their economy? There's no general prescription, because you need to consider your policy priorities for the life cycle of the resource and for the things you're trying to achieve.
One of the few cross-cutting recommendations we make is that we believe transparency is important and that the onus is on the people making an argument against transparency rather than those making an argument for it. Transparency can help shed light on how the sector is actually being managed.
Another lesson is that while transparency is an important ingredient in shaping the political economy, it doesn't guarantee that things will be done better. You need to consider where they are in the resource cycle: upstream in terms of harnessing the sector, or downstream in applying it for development.
How can the World Bank encourage governments to be more transparent?
We can advocate for transparency standards and good practices for public financial management. We can try to provide adequate technical assistance to resource-rich countries that want to do the right thing in both government and outside of government to manage the sector well. And I think we can build a very important bridge between government and civil society by providing information and analysis.
What is civil society's role?
In the past, natural resources were often seen as a matter between governments and large international companies. But when government and industry sort out resource management, we've seen them not always make the best choices.
Civil society has a critical role in seeing these resources better managed. Because mining and drilling impacts local communities, we need civil society involved for the "do no harm" policy. And also because resources are there for citizens and civil society can bring some sanity to the table, advocating for greater transparency and better policies in the public's interest.
Kathryn Joyce is RWI's web editor.
