Confronting the Resource Curse: Advice for Investors and Partners
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Developing countries which experience major foreign investment and revenue flows from natural resource development have struggled long and mostly unsuccessfully to manage the economic, political and social impacts of this newfound wealth. These problems, often called the “natural resource curse” or “paradox of plenty”, have been extensively researched in recent decades, but avoiding the “curse” remains a challenge. While every nation that anticipates the income from a major discovery of oil, gas or minerals hopes to convert this wealth into sustainable development and long-term prosperity, most often the results are just the opposite. Public accountability declines, authoritarianism rises, currencies are distorted and non-extractive industries atrophy. Borrowing rises in anticipation of income and monies are not spent wisely. Expectations of newly-invested private companies fluctuate from cautious optimism for taking on the initial investment risk, to excitement when discoveries are made, to resentment at the length of time it takes for projects to mature and repay costs. Indeed, within governments (and the new investors themselves) divisions emerge over whether these companies should be the new providers of major social services or simply be law abiding and silent guests. These internal debates are heightened when expectations meet reality, and promises of the benefits from resource development disappoint an eager public. The reasons for these failures in macroeconomic management and political accountability are several, but they result from largely from weak governance. Disappointed expectations are also aggravated by the deep misalignment between political cycles and investment cycles.
The questions of whether countries can avoid the resource curse, and what role investing companies should play, are highly salient today. The world will continue to use significant quantities of oil and gas and minerals for decades to come, even in low carbon and decarbonizing outlook scenarios. Moreover, we see major discoveries and resource development underway in emerging and less diversified economies that are unfamiliar with significant, high-value resource wealth such as Guyana, Senegal, Mauritania, Mozambique and potentially the Gambia, Suriname, and Tanzania.
In recent decades we have seen the growth of numerous national, multi-stakeholder and multilateral efforts to help new resource producing countries manage revenues wisely and improve standards of conduct for foreign investors. Many countries have worked hard at drafting new laws to prioritize transparency in granting exploration rights and monitoring financial flows. Bottom up efforts like the Extractive Industries Transparency Initiative (EITI) have promoted citizen empowerment and transparency in revenues, contractual terms, and beneficial ownership. International Financial Institutions (IFIs) have leveraged their assistance for policy reform while nations like the United States, United Kingdom and Norway have ramped up capacity building efforts. Companies have agreed to higher standards for investment and conduct by joining the United Nations (UN) Global Compact, promoting the UN Sustainable Development Goals (SDGs), implementing the Equator Principles, and by joining multi-stakeholder efforts such as EITI and the Voluntary Principles on Security and Human Rights. Major funds and even private equity firms have insisted on Environmental, Social and Governance (ESG) standards to facilitate responsible investment. At the grassroots level, social media now shines a global and immediate spotlight on corporate conduct everywhere.
Yet, for all these efforts, we have seen little progress in governance or human development in many resource dependent economies. Alarmingly, we already see warning signs in the new slate of countries embarking on new resource development. While responsibility for national development lies first with host governments, who have the sovereign rights and responsibility to determine how extraction will be conducted and how revenues will be managed, investing companies need to know how to comport themselves both to secure their investments and maintain their social license to operate (SLO) but also to be at least helpful to government efforts to avoid the resource curse rather than aggravate them.
In this chapter we briefly review the nature of the so-called resource curse, examine the motivations of companies and governments and where they do and do not align, and assess what we have learned from these recent decades of experimentation. We conclude by offering some modest suggestions specific to each of these stakeholders to help avert the resource curse in the future. Enlightened leadership can go a very long way toward avoiding the mistakes of others who mismanaged their resource inheritance. We are optimistic that foreign investors, as well as international institutions and external governments, can better tailor their efforts to support new resource producers and ensure that resource wealth is indeed a blessing, not a curse.