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«ENVIRONMENT AND DEVELOPMENT The Changing Wealth of Nations ENVIRONMENT AND DEVELOPMENT A fundamental element of sustainable development is ...»

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The political economy in each country plays an important role, and the best action in one country may not be appropriate in another (see Brahmbhatt, Canuto, and Vostroknutova 2010).

Governance, Accountability, and Transparency along the Extractives Value Chain Governance and accountability are central elements in achieving these policies and overcoming the resource curse (Eifert, Gelb, and Tallroth 2002; Bannon and Collier 2003). However, ways of building accountability and good governance in resource-rich countries are not well understood. Transparency is widely recognized as an important element in this effort (see, for example, Le Billon 2001; Collier and Venables 2009; Collier 2008). Transparency alone does not guarantee accountability and good governance, but it is the first step, reflecting the adage, “What you do not measure, you cannot manage.”3 Information and evidence have been referred to as the “currency of accountability” (Dye and Stapenhurst 1998), implying that transparency is the minting process in this analogy.4 Transparency allows the generation of information, which can then be communicated and used to place pressure on decision makers or hold them to account. However, the process by which information goes from minting into circulation is not straightforward. Strong institutions are of fundamental importance: on the whole, countries with strong institutions and good policies do better than those with weak institutions and weak policies. And those that start off with weak institutions may find that the process of resource exploitation weakens them further. Parliaments, political parties, civil society organizations, think tanks, universities, and the media—which collectively we can term the “public sphere”—can use information to build accountability, while institutional context, such as free speech laws and courts, provides the framework in which this takes place.5 In simple terms, accountability can be built through transparency and equitable participation in the governance process.

By quantifying natural resources as a dwindling and depreciable source of income, wealth accounting provides the basis for an important conceptual shift in how people think of natural resources. In this way, wealth accounting can help people hold policy makers to account, leading to better policy making. This in turn can improve governance and help build stronger institutions.

Accountability and transparency are needed along the entire extractives “value chain,” that is, the full range of extractives-related activities and processes.6 Figure

7.1 depicts the extractive industries value chain, encompassing the key decision points from the award of licenses and contracts through regulation and monitoring of operations, collection of taxes and royalties, distribution of revenues, and use of those revenues to support sustainable development policies and projects.

122 THE CHANGING WEALTH OF NATIONS

FIGURE 7.1 The Extractive Industries Value Chain

–  –  –

Source: Adapted from Alba 2009.

Given the complexity of the extractive industries sector, it is helpful to consider any one intervention in the context of the whole system. Wealth accounting provides critical information at different points along the value chain and links management of extractives to the macro economy. This provides an added dimension of transparency to the management of extractives, revealing the extent to which nonrenewable resources are being used to build wealth and sustainable development.

The concept of a value chain for the sector promotes understanding of the individual links in the extractive industries development and management process and the need for a systemwide approach. Hence, a well-functioning revenue distribution system is of limited value if the contract is not balanced and does not allow the government to capture sufficient taxes and royalties, or if the revenue collection system is weak. Alternatively, a country might skillfully negotiate a petroleum or mining deal but then lack capacity at other points along the chain to turn that deal into concrete investments for current and future prosperity.

A number of local and international initiatives to improve accountability have been introduced. Prominent among them is an international multi-stakeholder initiative known as the Extractive Industries Transparency Initiative (EITI), launched in 2002 at the World Summit on Sustainable Development in Johannesburg. This international exercise promotes accountability by requiring transparency of revenue flows and validation of both data and process by civil society organizations. The EITI represents a novel use of multi-stakeholder partnerships between governments, the private sector, and civil society organizations.

But ensuring the transparency and validation of these revenues is just the first step in making sure that wealth is harnessed for sustainable development. The World Bank Group has developed an approach called the EITI++, which is an internal guiding framework for improved, structured engagement with client countries receiving significant resource revenues.7 EITI and EITI emphasize monitoring processes in the value chain that are expected to promote sustainable development in resource-rich economies.

The EITI approach describes the processes along the value chain needed to generate, capture, and invest rents, going as far as “implementation of projects

LINKING GOVERNANCE TO ECONOMIC CONSEQUENCES IN RESOURCE-RICH ECONOMIES 123





and policies.” But EITI is not designed to monitor long-term wealth creation and the transformation of extractive wealth into other forms of wealth, a condition necessary for sustainable development.

Long-term accountability can only be monitored using the comprehensive wealth approach that reveals whether a government is using nonrenewable natural capital to build long-term, sustainable development. Comprehensive wealth accounts extend the principle of transparency and accountability beyond EITI to monitor whether the loss of natural capital through depletion is being offset by investments in manufactured capital and human capital. Together, EITI and wealth accounting provide a way to monitor whether the extractive sector does, in fact, contribute to long-term development. EITI and EITI introduce transparency and foster accountability for extractives-related processes, and wealth accounts provide a tool to monitor the economic consequences, that is, wealth creation and the transformation of natural capital into other forms of wealth.

The rest of this chapter describes the EITI and EITI approaches and suggests ways in which wealth accounting can be linked to them to strengthen monitoring and accountability in resource-rich economies.

EITI and Transparency As already noted, for many countries natural resources offer the most immediate path to development, but for countries that rely on exports of nonrenewables, the revenue stream represents a one-time opportunity. The challenge is to develop effective, contextualized governance processes and increase informed decision making along the value chain.

The EITI process is built around a multi-stakeholder model that brings together governments, extractive companies, and civil society in each country. It is voluntary: countries must apply for candidate status and meet certain preconditions. To retain membership there is a process of validation, which reviews EITI implementation with domestic stakeholders to ensure that EITI standards

are upheld. Three countries have been formally validated as EITI-compliant:

Azerbaijan, Liberia, and Timor-Leste. Another 29 have candidacy status and are working toward validation.8 EITI : Extending Good Governance along the Value Chain Disclosure of revenues does not in itself reveal whether a country is receiving a fair share of rents, nor does it indicate whether government is investing the revenues for development outcomes. Every step in managing extractive industry resources is important. Committed governments should receive support to help them implement good policy and practice along the entire value chain through greater transparency and accountability.

124 THE CHANGING WEALTH OF NATIONS

EITI extends the EITI principle of transparency along the length of the chain. These emphasize the need for appropriate policy frameworks, institutional capacity to implement policies effectively, and accountability mechanisms. The EITI initiative focuses on resource-rich countries in Sub-Saharan Africa that account for about 70 percent of Africa’s gross domestic product (GDP). It seeks to develop national capability to handle natural resource management and channel the growing revenue streams into fighting poverty, hunger, malnutrition, illiteracy, and disease.

Wealth Accounts: Extending Transparency to Macroeconomic Performance Accountability depends in part on the availability of transparent, easy-to-understand information. Wealth accounts were developed to address the three policy issues raised at the beginning of this chapter: maximizing resource rents, recovering a fair share of rents, and investing rents in productive assets. The accounts provide indicators that can be used to monitor the economic performance of resource-rich economies. In particular, wealth accounting implemented at the country level provides indicators for tracking recovery of resource rent through taxes and royalties, as well as management of those revenues, and extends the monitoring of the value chain to include the impact on national wealth. Wealth accounts show whether natural capital is being used to build and transform the wealth of a nation, and they provide information about various steps in the process where management success or failure may be occurring. The use of wealth accounting in Botswana is a case in point.

Botswana is well known for sound management of its mineral wealth, as well as for transparency and good governance. Botswana does not participate in EITI, as it already has appropriate institutions in place and carries out the recommended processes. The government reports mineral revenues annually in publicly available documents, and there is open discussion of how to make best use of these revenues. In the 1990s the Ministry of Finance and Development Planning introduced the Sustainable Budget Index to monitor the extent to which mineral revenues were used for investment in the government budget.

The Department of Environmental Affairs piloted wealth accounting, extending the principle of wealth building for sustainable development to the macroeconomy (Botswana 2007). Wealth accounts were constructed for produced capital, natural capital, and net foreign financial assets; data were insufficient to construct human capital accounts. The wealth accounts were used to monitor recovery of resource rent and investment of rents, the second and third areas of policy necessary for transforming mineral wealth into other forms of capital. The wealth accounts show that the government of Botswana

LINKING GOVERNANCE TO ECONOMIC CONSEQUENCES IN RESOURCE-RICH ECONOMIES 125

FIGURE 7.2 Recovery of Resource Rent from Mining in Botswana, 1980–2005 20,000 18,000

–  –  –

12,000 10,000 8,000 6,000 4,000 2,000

–  –  –

Source: Botswana 2007; Lange 2004. Estimates for 1998 to 2005 are from unpublished updates of the Botswana wealth accounts by Lange.

has consistently recovered a large share of the rents generated by mining (figure 7.2). Analysis of government’s capital and development budget in the 1980s and 1990s showed that all mining revenues were invested until the late 1990s; since then, some of the revenues have been used for government consumption, but most is still invested (Lange and Wright 2004).

As a result of its sound management of mineral revenues, Botswana has seen rapid growth in its real wealth and GDP per capita (figure 7.3; wealth does not include human capital). By contrast, the results of a similar analysis for neighboring Namibia show less success in using mineral assets to build national wealth.

Summing Up Many countries have made a commitment to sustainable development but lag behind in implementing the necessary policies to achieve this goal. The key long-term development challenge for resource-rich economies is to transform natural capital, particularly nonrenewable capital, into other forms of wealth. For these countries, avoiding pitfalls associated with extractive wealth is a pressing challenge that should be at the forefront of country development planning and

126 THE CHANGING WEALTH OF NATIONS

FIGURE 7.3 Growth of Real Per Capita Wealth and GDP in Botswana and Namibia, 1980–2005 4.0

–  –  –

3.0 2.5 2.0 1.5 1.0 0.5

–  –  –

Source: Botswana 2007; Lange 2004. Estimates for 1998 to 2005 are from unpublished updates of the Botswana wealth accounts by Lange.

Note: Wealth does not include human capital.

poverty reduction strategies. There are now a number of initiatives that have been launched to improve accountability and governance in resource-rich countries, including local efforts in specific countries, initiatives by bilateral and multilateral agencies, and international efforts such as EITI.

EITI is a more comprehensive initiative to promote accountability and good governance through transparency in national processes to generate, capture, and invest rents. But it does not show whether investment of rents is sufficient to compensate for depletion of natural capital. Comprehensive wealth accounting adds a new and conceptually important dimension to the accountability fostered by EITI and EITI. It provides a simple tool to monitor wealth creation and,

LINKING GOVERNANCE TO ECONOMIC CONSEQUENCES IN RESOURCE-RICH ECONOMIES 127

specifically, to reveal whether natural capital is being transformed into other forms of wealth. This constitutes a fundamental shift in how natural resources are conceived of and thus how public and private actors might be held to account.

Without transparency in wealth transformation and creation—the conditions for long-term sustainable development—accountability in resource-rich countries may not be considered complete.



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