Transparency and accountability

Policy considerations addressed by the previous sections relate to the classic models and provide textbook-like solutions for the macroeconomic problems of resource abundance. Although these recommendations are well- founded and efficient in theory, their practical implementation seems to be a hard case: Figure 40 shows that in most countries the general quality of resource governance²⁹⁴ does not meet the expectations²⁹⁵. While Chapter 4 discussed how political economy explains the policy failures by the quality of institutions, now I will turn towards the practical aspects of this question…

Figure 40: Countries by the Resource Governance Index in 2017²⁹⁶

The related academic literature often emphasizes that “transparency and accountability within government are potentially among the key determinants of the economic, political, and social consequences of natural resource

294 “The term Natural-Resource Governance […] is used for the set of strategies for improving transparency and accountability in the management of natural resources. The range of initiatives covered includes licensing, exploration, contracting, extraction, as well as revenue generation and allocation of natural-resource revenues, and the relevant actors involved include governments, private companies, non- governmental organisations, the media and civil society in general” (Mejía Acosta, 2013, p. 89).

295 Please note that resource governance tends to be worse in the most dependent countries (see Figure 1 for comparison).

296 Data source: Natural Resource Governance Institute, available at: https://www.resourcegovernance.org. As a composite index, the RGI aims to assess different policies and practices that authorities employ to govern their countries’ extractive industries. The three main components are (i) value realization which covers the licensing of exploration and production, revenue collection, environmental protection, and the efficiency of state-owned enterprises, (ii) revenue management which evaluates national budgeting, the distribution of the revenues, as well as the sovereign wealth funds, and (iii) enabling environment which addresses a broader institutional context of governance. The composite index ranges from 0 to 100 with the following categories: good (100–75), satisfactory (74–60), weak (59–45), poor (44–30), and failing (29–0). Please see the RGI Report for further details.

abundance” (Corrigan, 2014, p. 17). Unfortunately, this link works both ways: On one hand, as described by Mohtadi et al., (2019), the interest of the political elites in resource-rich countries is to diminish transparency, while on the other hand, citizens lack the incentives to pressure for more control because of (i) the low levels of taxation, (ii) the dependency on centralized income redistribution, and (iii) the threat of repression (see Section 4.2.1). Hence, natural wealth tends to erode both transparency and accountability, which highlights again that the resource curse resembles the problem of the Gordian knot. While proper governance would require strong civil control, natural abundance provides ample opportunities for the elite to avoid that and use the rents for their own good (see the figure below).

Figure 41: Accountability vs. Corruption²⁹⁷

Transparency, defined as open public access to reliable and up-to-date economic, social, and political information, is a key factor in terms of controlling corruption. The lack of it provides an information advantage which affects the decisions of potentially corrupt agents by lowering the political risk of abusing a public office for private gains²⁹⁸. Apart from inducing policy failures, a less transparent environment undermines social norms, reduces the level of trust, and makes economic cooperation more difficult to sustain (Kolstad & Wiig, 2009a, see Section 2.2.3).

Under such circumstances, internal reform attempts are likely to fail as the elite has both the motivation and the opportunity to withstand the weakening social demand for transparency and accountability. However, with some international pressure, there is still hope to turn the tables around…

“The Extractive Industries Transparency Initiative [EITI] was launched in September 2002 as a voluntary tool to increase transparency and curb corruption in mineral rich states” (Papyrakis et al., 2017, p. 2). This supranational

297 OLS estimation by the author with n = 200 and R² = 0,601. The coefficient is significant at the 1% level, t-statistic for β1 is 17,36. Data source: Worldwide Governance Indicators (2019), available at: https://info.worldbank.org/governance/wgi/

298 The relation of a potentially corrupt officer to its government resembles a principal-agent problem. “The principal is aware that the agent can behave corruptly but cannot directly observe whether the agent takes bribes. He would therefore like to offer the agent a contract that gives him incentives to behave honestly. As he can only observe an imperfect signal or outcome of the agent’s action, he can only influence the choice of the agent by giving a payment conditioned on the observable outcome. […] A lack of transparency increases the bias and variance of the signal […and] therefore make[s] it more difficult for the principal to induce non-corrupt behavior through incentives” (Kolstad & Wiig, 2009a, p. 523).

United Arab Emirates

Bhutan

Guinea-Bissau

Marshall Islands Palau

Papua New Guinea Quatar

Singapore

-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5

-2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0

Control of Corruption

Voice & Accountability

initiative requires the governments to disclose all their revenues from the resource sector, as well as the extractive companies to report all their payments. After full implementation, a simple verification exercise would highlight any gap between the statements and reveal the sources of leakages. In order to assure proper reporting, member states must “adhere to an internationally recognised transparency standard that demonstrates commitment to reform and anticorruption” (Papyrakis et al., 2017, p. 3). Furthermore, the EITI aims to guarantee that the civil society receives information about the revenue flows in the extractive sector through a “multi-stakeholder” platform. With 56 member states²⁹⁹, out of which 10 have already achieved a satisfactory progress, the initiative at glance appears to be successful³⁰⁰ (see Figure 42). But does it really curb corruption?

Figure 42: EITI member states and their implementation status as of 2021³⁰¹

A relatively early academic assessment by Corrigan (2014) investigated the impact of the EITI membership up until 2009 in the framework of a panel study covering nearly 200 countries. While the paper reported evidence on elevated growth rates, higher government capacities in policy making, and some institutional improvements as measured by the rule of law index, it failed to verify the expected positive effects on political stability, democracy, and most importantly, corruption. While declaring a partial success in terms of transparency, Corrigan also argues that the overall evaluation is “at best inconclusive” as the initiative did not have enough time to produce solid results.

In a similar empirical attempt, instead of analyzing the level of corruption, Papyrakis et al. (2017) focus on its change, which they assume to be “more meaningful” due to the relatively slow pace of institutional progress. With this methodology they found significant evidence suggesting that the EITI scheme largely “crowds-out the corruption- enhancing effect” of natural abundance. However, this means that the achievement is relative compared to non- participating resource rich countries, but there is still no evidence of absolute improvements³⁰². Both studies emphasize that better results would follow if the EITI scheme was integrated further along the resource value chain

299 Three member states, the Central African Republic, Myanmar, as well as São Tomé and Príncipe are currently suspended (2021).

300 However, please note that “the initiative is not a panacea for all institutional failures of mineral-rich states” (Papyrakis et al., 2017, p. 3).

301 Data source: EITI, available at: https://eiti.org/countries.

302 Moreover, the positive effects only become significant if countries reach at least the second stage (defined as meaningful implementation, see Figure 42). For more details, please see the original paper.

(see Figure 43). “Currently, the […] initiative focuses on transparency in revenue collection without addressing issues related to the expenditure side” (Papyrakis et al., 2017, p. 1). However, corruption may arise both up- and downstream from the present impact zone, which calls for a substantial extension of the EITI framework.

Figure 43: EITI coverage in the resource value chain³⁰³

Notwithstanding the crucial role of transparency and accountability, it seems that corruption is rooted deeper down in the institutional system. In fact, Kolstad & Wiig,(2009a) argue that a transparent political framework is just a minimum requirement to eliminate not only corruption but policy failures in general. Apart from accessing it, actors must have the ability to process the relevant information, as well as the incentives and capabilities to act upon it.

Hence, the mitigation of the rentier effects would require investments into human and social capital, factors that are likely to be crowded-out by the combination of natural wealth, path dependency, and poor institutions. Once again, we are (almost) back at square zero.