Transparency in Oil-rich Countries and the Importance of Democracy a report by Ivar Kolstad1 and Arne Wiig2 1. Research Director; 2. Senior Researcher, Chr. Michelsen
How does one make sure that revenues from oil benefit the citizens of oil-rich countries? In a number of countries, rents from oil production have increased corruption and impaired development rather than brought prosperity. To avoid being affected by this so-called resource curse, a country needs good institutions of democratic accountability in order to reduce the possibility of politicians misusing oil rents to secure political power.
Transparency has been suggested as one important means by which to increase the accountability of politicians in oil-rich countries, resulting in international initiatives, such as the Extractive Industries Transparency Initiative (EITI). Despite this it is unclear what effect, if any, transparency has on democratic accountability. This article presents preliminary evidence that democratic accountability leads to transparency rather than the other way around. If this is the case, transparency initiatives are not the place to start in improving conditions in resource-rich countries.
Does Transparency Work?
It is hard to argue against transparency. The idea that people should have access to information about matters that affect them, including information about the actions of politicians and other powerful agents affecting their lives, is an intuitively appealing one. In oil-rich countries, making information public about the revenues flowing from resource extraction and how these revenues are used seems a logical consequence of viewing the resources as the property of a country’s citizens. Transparency, or access to information, can accordingly be said to be valuable in itself. Notably, the right to seek and impart information is enshrined in the Universal Declaration of Human Rights, Article 19.
Most people who champion greater transparency in oil-rich countries do not primarily cite its intrinsic value as the reason. Rather, transparency is seen as instrumental for other desirable ends. In particular, transparency is viewed as a means of making political decision-makers more accountable to the people in order to curb corruption and promote the development of a country. This is, for instance, a basic rationale given in the EITI; an international initiative that focuses on improving transparency in revenues from extractive industries like oil, gas and minerals. But does transparency have the effects commonly attributed to it? Does it increase democratic accountability, reducing corruption and improving the development prospects of countries?
It is a fairly well-known fact that having resources like oil is not necessarily beneficial to a country. The so-called resource curse denotes a phenomenon whereby a number of resource-rich countries experience reduced economic growth rates, increased poverty and lower human development in terms of schooling and health. Oil-rich Nigeria has, for instance, seen a substantial increase in poverty rates over its four decades of oil extraction and oil- and diamond-rich Angola has one of the highest infant mortality rates in the world.
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One important reason for the resource curse phenomenon is that large resource rents create incentives for patronage. This is a form of corruption where political decision-makers use public resources to shore up political power rather than for economically beneficial projects. To reduce this form of corruption, better institutions of democratic accountability (i.e. an increase in the ability of citizens to hold their political leaders to account) are needed. This is where increased transparency is supposed to help. But does it actually improve democratic accountability? Does knowing more help citizens hold their leaders to account for their decisions or punish them for their misdeeds? What is known about the effect of natural resources on development and the parts that institutions, corruption, and transparency play in relation to this is reviewed in more detail below. Some simple econometric tests are then performed to see whether transparency has a significant effect on democratic accountability. If transparency has an effect, it is a suitable place to start in reforming the institutions of oil-rich countries; if it does not, then reform needs to start elsewhere.
Oil, Institutions and Development
Nigeria and Angola are not special cases in experiencing the detrimental impacts of oil on development. The resource curse, often also termed the paradox of plenty, affects a number of oil-rich countries, in particular developing countries.1,2
A negative effect of natural resources is not
inevitable, however, as the cases of oil-rich Norway and diamond-rich Botswana illustrate. A lot of research has therefore been conducted to understand what distinguishes the successful countries from the unsuccessful ones in terms of using oil revenues for the good of the country. Early research tended to focus on Dutch disease explanations of the resource curse, whereby resource rents led to currency appreciation, reducing competitiveness in manufacturing and hence productivity. Recent work has instead emphasised political economy explanations of the resource curse.
According to political economy models, oil rents generate two types of negative effects that may hurt a country’s economy: patronage and rent-seeking. In both models, resource rents misalign incentives for agents with what is good for society. Patronage models focus on how resource rents provide incentives for politicians to use rents to secure political power in order to access future rents. Rent-seeking models centre on how talented individuals may find it more profitable to attempt to acquire a share of the resource rents rather than start productive enterprises. In both cases, resources (public funds and talent) are misallocated, impairing development.
Patronage and rent-seeking can be seen as forms of corruption and empirical evidence suggests that both are important reasons why oil wealth may have undesirable consequences.3–5
Countries with bad
institutions of democratic accountability have more scope for patronage and less development than countries with good institutions. Similarly, bad institutions in terms of the rule of law produce more rent-seeking
© TOUCH BRIEFINGS 2010
Industry Outlook
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