Thursday, July 24, 2014
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The Resource Hope

WASHINGTON, DC – When a country quadruples its tax revenues in a single year, it is time to take notice. That is the scale of the revenue increase that Ghana achieved from 2010 to 2011, owing to receipts from its extractive industries.

Ghana is not alone. Resource-rich developing countries’ rising tax revenues reflect not only higher commodity prices, but also international rules that have improved financial transparency in the oil, gas, and mining industries, reducing opportunities for tax evasion significantly. Such rules also featured high on the agenda of the recent G-8 Summit in Northern Ireland. It is important to appreciate these efforts – and to demand more.

International commodity markets are under stress. Since 2000, prices have been on an upward trajectory, with soaring demand only briefly interrupted by the 2008 financial crisis. One apparent consequence is extreme price volatility. Simultaneously, incentives to enter illegal markets are becoming stronger: roughly 20% of the world market in coltan – a precious metal used in mobile communications – is illegally traded.

More financial transparency is an important step toward better markets and good governance in resource-rich countries, because it means less corruption, fraud, and tax evasion, as well as greater public participation and stronger democratic institutions. Moreover, fair contracts can stabilize income for producer countries. Indeed, a robust extractive industry and investment in sustainable development would boost economic prospects for the 100 or so resource-rich developing countries and their roughly 3.5 billion people.

Early milestones in this effort have been impressive. For example, the Extractive Industries Transparency Initiative recently improved its global standard by requiring disclosure of corporate payments and government revenues. Currently, 23 countries are EITI-compliant, including Azerbaijan, Ghana, Iraq, Nigeria and Norway; non-compliant countries’ memberships have been suspended. The reported payments total around $1 trillion.

Likewise, Section 1504 of the United States’ 2010 Dodd-Frank Act contains rules on transparency in the extractive industry. Companies engaged in the commercial development of oil, natural gas, or minerals must submit annual reports to the US Securities and Exchange Commission (SEC) disclosing payments to governments.

More recently, the European Parliament earlier this month approved ambitious new transparency rules for the extractive industry (including the forestry sector).

With the OECD and the International Monetary Fund, along with many NGOs and voluntary companies, supporting such rules, opponents – such as the American Petroleum Institute, which has filed a lawsuit against the SEC – are unlikely to succeed. In fact, transparency in the resource sector should exceed mere disclosure of payments.

Of course, non-compliance remains a significant challenge. It is encouraging that Russia has signed the G-8’s Lough Erne Declaration on transparency in extractive-industry payments; but major emerging economies’ global market power could continue to hamper international coordination. More important, achieving good governance in emerging economies and developing countries demands a properly functioning fiscal system, legislation that supports a sustainable mining industry, and “inclusive” institutions that promote transparency, participation, and equitable development.

Regarding resource use, the challenges lie primarily in the global resource nexus – that is, the interaction between the various resources required to produce fuel and energy feedstock, industrial inputs, and food. The much-discussed energy-water-food nexus applies to mineral resources and land use as well, forcing extractive industries to address it. According to the G-8 declaration, land transactions should be transparent and respect local communities’ rights, which include water and food security.

For a high-resolution version of this chart, click here.

Stronger coordination and leadership on financial transparency and resource use are required, supported by the prospect of reducing dependence on development aid and increasing revenues in resource-rich developing countries.

In particular, all financial transactions related to upstream activities in the value chain should be disclosed, including those carried out by state-owned companies and sovereign wealth funds. Downstream, the international markets for recycling and disposal should be included. This would also help to increase resource efficiency. The next step would be to extend transparency to related contracts and public budgets, as well as coordinated efforts to reach out to emerging economies.

As for sustainable resource management, the EITI’s stakeholder process could become a powerful tool for promoting national action plans. Similarly, an open, international data portal on resource use should be established to compile core data collected by geological agencies and organizations such as the United Nations Food and Agriculture Organization and the International Energy Agency, as well as data on environmental pressures from resource use and coefficients for resource-intensive areas of production.

Moreover, resource-rich developing countries could introduce extraction taxes and support new fiscal systems that promote high labor standards, poverty reduction, education, research, and innovation. Key flanking initiatives at the international level could include a multi-stakeholder forum for sustainable resource use and an international metal covenant to promote recycling and material-flow management with industry involvement.

Over the longer term, the aim should be to conclude an international agreement on resource management. Notwithstanding resource-rich developing countries’ positive prospects, the sustainable management of natural resources, like efforts to promote financial transparency, requires global coordination.

Read more from our "Visionary Voices" series

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