Energy 28 June 2010 Why natural resources should help end poverty The BP crisis in the Gulf of Mexico has laid bare the harm caused by the plunder of natural resource By Paul Collier Natural assets can be hugely valuable for the poorest countries. In Afghanistan, the Americans have used new aerial prospecting technology to scour the country for natural resources. So far they have found $1trn's worth. Properly used, this would be enough money to transform Afghanistan into a land of prosperity. It could finance the security, schools and infrastructure that are the foundations from which ordinary people can earn a decent living. But natural resources can also generate huge liabilities. The distinctive feature of BP's catastrophe in the Gulf of Mexico is not its physical scale - over the years, the Niger Delta has been similarly wrecked - but that, for the first time, the environmental costs of extraction have occurred within a jurisdiction where the perpetrator has legal liability for them. And environmental costs are a pinprick compared to the social costs that the struggle for control of natural assets can run up if it turns violent. Instead of attaining prosperity, Afghanistan could find itself repeating the history of Sierra Leone. Its $1trn of natural assets could merely morph the violence, turning it from being driven by a warped ideology into the probably more secure motivation of raw greed. In the coming decade, the poorest societies in the world - home to the bottom billion - will need to manage the huge opportunities and risks posed by natural resources. Central Asia and Africa are the last frontiers for resource extraction, and with high global commodity prices and new prospecting technologies, the natural assets hidden beneath their territories will be discovered. Whether this leads to environmental degradation and violent plunder or a meteoric ascent out of poverty depends on the choices that these societies make. Not only are the stakes high, but the choices involved are complex. Harnessing natural assets for environmentally responsible prosperity is not just a matter of "good governance": the decision-makers need to know the underlying economics along a whole chain of decisions. The chain starts with how resource extraction rights are sold. Past and present practices of secretly negotiated deals expose societies to the acute technical problems of agency, information asymmetry and time inconsistency. The agency problem is the simplest: ordinary citizens cannot readily control what their representatives, politicians and officials get up to. Information asymmetry is about the huge advantages that companies have in knowing the true value of prospecting rights and the many ways in which they can conceal true profits. Time inconsistency is the most complex: it is about the difficulty that governments have in making credible commitments, and the consequences from companies not trusting the deals that governments offer. Or, as an industry insider recently put it to me, given the reputation of the government of the Democratic Republic of Congo, the Chinese offer $6bn of infrastructure in return for $60bn of resource extraction rights was "quite reasonable". Share and share alike The next link in the chain is avoiding disasters such as that of the Niger Delta, in which neglect has generated a violent response. Risks must be kept to a minimum by a combination of regulation and legal liability - whichever is the more effective and credible option in practice. Unavoidable environmental damage, which will often be extensive, should be compensated for generously. Extraction companies are tempted to give local communities a share in ownership of natural assets. This can be dangerous; a fairer use of natural assets should be for the benefit of an entire society, not just lucky local people. A commitment by a local population to participate fully in national sharing of the benefits is essential, but privileged local ownership can be a slippery slope. For all citizens to benefit from resource extraction, a government must be able to collect rents through taxation. At present, national tax systems are often so poorly designed that this does not happen. Zambia is exporting some $3bn of copper, yet tax revenues from these exports are a mere $100m. The global copper boom has benefited the Chinese who own the copper company far more than it has benefited ordinary Zambians. Effective taxation is difficult, more often than not because the extraction companies hire first-rate accountants, part of whose job is to conceal true profits. Such information asymmetry can be countered either by governments hiring the accountancy expertise they lack, or by redesigning the tax system to target things that are more easily possible to observe than profits - such as gross revenues. Once a government succeeds in taxing resource rents, its next decision is what to do with the income. Because revenues are unsustainable, generated by depleting a natural asset over which the current generation has only limited rights, the ethical imperative is that they should not all be used up in the present day. This is the legitimate ethical insight from environmentalism - future generations have rights over natural assets that the present generation must not infringe. The plunder of nature takes two distinct forms: the few expropriating what should belong to the many, and the present expropriating what should belong to the future. Both matter. But where romantic environmentalism goes awry is in insisting that respecting the rights of the future must take the form of preserving nature as it is. We are not, ultimately, curators of natural artefacts. Defining ethical behaviour in that way would be to put environmentalism in conflict with the struggle to end global poverty. Natural assets are special, but that is because the future has rights over their value. When a poor society can rise out of poverty by using some of its natural assets, it is ethical to do so. The important political struggle is not to preserve nature, but to harness it for the benefit of future generations in the poorest societies. That takes us back to the decision chain. The final link in the chain is what to do with revenues that are not used up. They should be invested in the domestic economy, not used to build up foreign exchange in a future generations fund - but the issue is how to do it. Too often in the past, attempts to have a big investment push have foundered on corruption and inefficiency in public projects. During the oil boom of 1974-85 the Nigerian government spent heavily on infrastructure, but it did not get much infrastructure for its money. The capacity to invest large amounts of money productively has to be built, within both the public and the private sector. I call this "investing in investing". Although it is the final link in the decision chain, it needs to be done early, because without it revenues cannot be spent sustainably. So, how is this complex decision chain to hold fast, not just once, but repeatedly for two or three decades (the minimum time needed for a poor society to achieve modest prosperity)? There is no substitute for the hard task of building a critical mass of informed citizens, society by society.By that, I mean a group sufficient in size to get these decisions right. Sometimes it may require a voting majority, but more usually in poor societies it will involve the few thousand people who directly or indirectly influence how senior officials and politicians think. Taking on the tiger Modern communication technology has vastly lowered the costs of knowledge and also enhanced the ability of citizens, once informed, to organise themselves collectively into pressure groups. The Extractive Industries Transparency Initiative (EITI) shows what is possible. Less than a decade old, it has already shifted practice on transparency and is sure to achieve much more: for example, the new finance minister of Afghanistan was previously the EITI representative for the country. I realised the scope for reaching people when my 2007 book, The Bottom Billion, was translated into 15 languages and a related talk was posted on a website that had 35 million hits. That is why I have written The Plundered Planet. The EITI, which focused on transparency of revenues, was the right place to start - without such transparency, there is little hope that decisions will be got right. But it would be the wrong place to stop: citizens need to understand the entire decision chain, not just scrutinise revenues. The Natural Resource Charter, described in the book, is a civil society initiative that builds on the EITI and complements it. It is a website being built by a wide group of stakeholders, designed for citizens and governments of resource-rich countries. In trying to break out of the history of plunder, initiatives that create specialist international organisations, books and websites may be peashooters aimed at a tiger. Or they may prove to be the stone that slew Goliath. Rather than mock our efforts, help to strengthen them. “The Plundered Planet: How to Reconcile Prosperity with Nature" by Paul Collier is published by Allen Lane (£20) Paul Collier is professor of economics and public policy at the Blavatnik School of Government Subscribe For daily analysis & more political coverage from Westminster and beyond subscribe for just £1 per month!