Transparency – Necessary, But Inadequate in Fighting Resource Curse

Africa needs an African solution to the multiple economic and political problems originating from its mineral resources, argues Binyam Mesfin - - an independent investment advisor. The Extractive Industries Transparency Initiative (EITI) can only form part of a comprehensive solution, he reflects in this commentary exclusively provided to Fortune.

The Extractive Industries Transparency Initiative (EITI) recently rejected Ethiopia’s bid to join. That seems ironic.

For most, finding Ethiopia and the “paradox of plenty” in the same sentence is a myth. If anything, the country is squeezing money from unlikely sources to fund projects.

As the country’s public debt to gross domestic product (GDP) sores to 30pc, its dependence on income from mineral export remains limited. For the year that ended in June 2013, it earned a mere 654 million dollars, mostly from decorative stones.

But Africa provides ample examples of mineral export dependence. According to a recent piece in this newspaper by Donald Kaberuka, president of the African Development Bank (AfDB), the continent expects to make 30 billion dollars a year from mineral exports over the next 30 years.

Few would disagree. Technological innovations are making oil discovery in the Rift Valley and the Gulf of Guinea possible. Thus, experts presume that twelve more African countries will soon become high-level oil exporters. While, currently, these twelve countries have 181 billion dollars in total GDP, they expect three trillion dollars from oil exports over the next 50 years.

Ethiopia makes it onto the list; Kenya, Malawi, Mauritius, Tanzania and Uganda are the others from East Africa.

The World Bank (WB) projects almost 50pc of Ethiopia’s total revenue will come from oil exports soon. Exploration works by Ethiopia’s South West Energy, Tullow Oil and Marathon Oil, at least, signal this impending discovery.

However, Kaberuka’s labelling of minerals as “huge blessings” is questionable. At least, they are yet to be proven so.

On the contrary, many developing countries, mostly African, have been battling the “resource curse”. The sudden discovery of minerals, mainly oil, has injected an influx of cash into economies. In turn, as Kaberuka pointed out, many expected rapid development and reduced poverty levels.

Yet, it has only been an illusion. Governments, given the opportunity, have failed to create lasting and incisive economic growth.

Shattering hopes of prosperity, mineral profusion has too often produced corrupt elites and incited armed conflict in many nations. Countries, such as Nigeria, Sudan, Angola, Democratic Republic of Congo (DRC) and Sierra Leon, are just few examples.

The Guardian estimates that in 2010, Nigeria and Angola alone received over 100 billion dollars in rent income. Such income, on average, amounts to about 45pc of total government revenue – a combination of tax and royalties in mineral rich countries. In 2012, rent income from oil export in Nigeria stood at 30pc of GDP. Yet, it has lost between 300 billion dollars and 400 billion dollars to corruption over the past 50 years.

Sudan’s oil income accounted for 18% of GDP, only to harbour continuous conflicts, notably in Darfur. Equatorial Guinea’s registered 35,000 per capita income in 2010, the highest in Africa, and 47pc of its GDP, comes from oil.

However, with the lowest corruption score in Africa, 75pc of its population lives on less than 700 dollars a year.  With 64pc of the GDP coming from rent income, the highest in Africa, DRC tops the list of the worst.

As Kaberuka pointed out, however, resources do not need to be a curse. For example, North America produces more oil than Africa, yet scores high on good governance scales. Canada remains among the top ten oil producers and yet is the least corrupt.

Similarly, Norway, the world’s largest producer of oil and natural gas outside of the Middle East, has the fourth-highest per capita income and the highest score on the United Nations Human Development Index (HDI).

While both Botswana and Sierra Leone are rich in diamonds, the former prospered whereas the latter continues to be a hub of endemic conflict. Even though Nigeria and Indonesia have enjoyed massive oil revenues since the 1970’s and had comparable economic standings to start with, the current Nigerian per capita income is just a quarter of that of Indonesia.

Thus, as Kaberuka noted, past mistakes can be mended and lessons learned. There is ample research to suggest that the “resource curse” is a mere result of mismanagement, rather than a foregone conclusion. Mineral abundance does not condemn a country to failure and does not necessarily result in rent-seeking politicians.

But, Kaberuka’s implied notion that the EITI is a blanket solution to the “resource curse” is misleading. To start with, parts of the problem are purely macroeconomic in nature.

One is the Dutch disease, which results from a sudden increase in a country’s export income, mostly following oil discovery, resulting in currency appreciation. This, in turn, makes the country’s other exports expensive and imports cheap, affecting trade balance.

Mineral-rich countries depend on a single commodity for most of their revenue. This exposes them to global price volatility, resulting in irregular cash flows. As mineral prices boom and bust, such countries suddenly become cash poor, reversing many of the economic gains during years of prosperity.

For example, Gold price reversed its 30 years rise, losing 25pc of its value between April and June 2013 – its biggest quarterly loss since 1968. In June, Gold lost 200 dollars in just two days. As a result, the African Gold Index lost 50pc of its value in one year.

South Africa, which has 140,000 gold mining companies and where gold provides 6opc of its export revenue, felt the pinch. A crisis loomed, but miners could do little about it. About 80,000 workers went on strike demanding wage increases, whilst the revenue of mining companies was continuously dipping.

Similarly, Algeria, Equatorial Guinea, Libya and Nigeria get 90pc of their export revenue from coal and oil, whereas Botswana’s minerals, mostly diamond, accounts for 80pc of export revenue. Congo Brazzaville, Gabon, Guinea, Sierra Leone, Sudan, Mali, Mauritania, Mozambique, Namibia and Zambia are all dangerously dependent on mineral exports.

Therefore, exasperated by the Dutch disease, other parts of the economy usually weaken. History shows that manufacturing and agriculture suffer, which are chief to a well-diversified and well-footed economy.

Although the EITI has the tools to assist during such macroeconomic fallouts, it is not its overarching goal.

Rather, the EITI owes its existence to rampant corruption in mineral-rich, mostly developing nations. Mineral exports induce large cash flows into countries with weak institutions to handle them. This causes revenue to become untraceable, or their accounting lags, enticing officials to misappropriate funds with impunity.

As rent income replaces tax as the major sources of government revenue, the democratic fabric between citizens and their elected officials breaks down. Government officials could stamp off the needs of their people with little reaction.

Unlike aid money, that comes with strings attached and tries to hold governments accountable, rent income is free and discretionary. The weak democracy and authoritarian governance in many resource-rich developing countries only fuels this fire further.

Since the early 2000’s, when Tony Blair brought it forward, the EITI has managed to enrol 40 members. Twenty-three are fully compliant, whereas the rest are either candidates or suspended members. Further, although similar efforts exist, like Equator and OpenOil, the EITI managed to be the most trusted and widely understood.

Its logic rests on a simple assumption: public data enables citizens to the degree that accountability by governments will naturally follow. Before May 2013, the EITI tried to achieve this goal by demanding compliant and candidate countries to report revenues from mineral exports. Then, the EITI matches government declared revenue figures against counter reports from the companies that bought the minerals. Citizens access the data, creating transparency and accountably.

In May 2013, the EITI responded to criticism that this simple revenue reporting and matching falls seriously short. Experts argued that corruption occurs throughout the complexities of the discovery, extraction and exporting of minerals, as well as revenue collection and spending by officials. So, the EITI issued a new and more comprehensive compliance guideline, adding licensing and granting mining land as part of its reporting standards.

With this, the EITI provides some advantages. It engages multiple parties. It tries to use links between the government, businesses, citizens and civil societies to advance its goals. The May 2013 accord positioned civil societies at the forefront in examining government compliance.

It also provides a good diagnostic tool for bad practices. Compliance, or the lack of it, signals commitment by governments to tackling misappropriations.  Membership could also provide confidence to prospective investors on a sector filled with instability in the past.

But, even here, the EITI has weaknesses. It just audits and merely points to improprieties. Even when it unravels mismanagement, it cannot demand wider and effective reforms, and neither have the tools to enforce them. Therefore, beyond the ability to provide a “pass or fail” stamp yearly, it seriously lacks the muscle to mitigate corruption.

Essentially, it leaves the enforcement to the beneficiaries – citizens of countries. This seems naïve.

The assumption that transparency translates to an automatic accountability is faulty. Whether civil societies are free or not, citizens in most developing countries lack the necessary technical and analytical knowhow to understand the EITI’s reports, let alone pressure their government on the basis of them.

Even if we were to assume that they could, precarious politics in low income countries would not allow it. Mali and Niger are prime examples.

To the contrary, compliance with the EITI depends on the political will of officials it aspires to control. As it stands, countries can end membership with little outfall.

Minerals are always in high demand. A resource hungry world has always been oblivious to how governments use mineral exports earnings. Blood diamonds, despite wide media coverage and demands for certification, find their way to designer rings and wealthy fingers. Oil is no different.

And then there is China. So far, Sino-African relations have rested on mutual understandings that internal issues are essentially internal.

Many African countries are progressively turning East, rather than West for the majority of their economic needs. This is as the result of China’s “hands-off” policy on internal politics and governance.

Aid from the East comes with little political strings attached, aiming for a win-win environment – at least in the eyes of politicians.  Therefore, if developed countries were to demand the EITI compliance before sourcing, China just picks up most of the slack.

Therefore, the EITI is between a rock and a hard place. If it tightens standards, it could easily push currently compliant and aspiring countries away. The steps Ethiopia will take following the rejection is yet to be seen.

The EITI also suspended the DRC with unclear results. If it eases standards, it could easily loss creditability.

However, the EITI is trying to use diplomatic pressure from major political and economic powers to give itself some leverage. Despite rent income, most mineral-rich countries are still aid and loan dependent. Many argue the possibility of losing that privilege could persuade them to be EITI compliant.

The Frank-Dodd act, passed by the US, is a clear example. The act demands US-listed companies to declare payments made to other governments.

This aids the EITI in confirming government declared figures. France has sponsored a similar act in the European Union (EU).

However, most developed nations, including the United States, are not EITI compliant. This prompts some to argue that the EITI is another ‘Northern’ plot to control the ‘South’.

South Africa, the biggest economy on the continent, thinks that the EITI adds little value. Rather, they argue that a country’s budgeting practices, laws and policies are more efficient in mitigating mismanagements.

Compliance with the EITI standards, although important, is a mere start. Presenting it as the complete solution to the resource curse is ill-advised and dangerous.

The problem demands a comprehensive solution, which the EITI can form a part of. Strong economic and government institutions, better educated society and healthier democracy are equally important.  Further, a well-diversified economy with a vibrant private sector and aspiring middle-class should make it into the solution mix.

Kaberuka might be right in pointing out that the chance to prosper from mineral income is a one-time opportunity. Failing to take advantage condemns many into misery and despair. But Africa needs an African solution to the resource curse.

By Binyam Mesfin
Binyam Mesfin - - an independent investment advisor.

Published on November 3, 2013 [ Vol 14 ,No 705]



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