There are two forms of plunder. One is where assets, which should belong to the many, are expropriated by the few. The other is where the present generation expropriates what should be benefiting the future.
(pages 5-9 of printed journal)
The subject of my latest book, The Plundered Planet, is the management and mismanagement of natural assets. The broad argument is that natural assets do not have any natural owners – they are just ‘there’. And that makes them vulnerable to ‘plunder’ in one form or another. One form of plunder is where assets which should belong to the many are expropriated by the few. This form has been very common in Africa. The other form – very much the concern of environmentalists – is where the present generation expropriates what should be benefiting the future.
Governance of natural assets is central to avoiding both forms of plunder. The biggest problems of the mismanagement of nature will occur where governance is weak. The two great holes where mismanagement of natural assets is greatest are in countries that are very weakly governed – fragile or failed states. One applies to quite a few African countries where weak governance cannot cope with the mismanagement of very valuable natural assets. The other is where natural assets do not have the good sense to stay within their national boundary – transnational natural assets – for example, the carbon of the skies and the fish of the oceans. There is no effective governance of the oceans. So, just as there is plunder of natural assets in the failed states, there is plundering of transnational assets where no effective regulation leads to the depletion of these assets.
My address is about these two holes in governance. I will deal mainly with the first – the misgovernance of natural assets in the poorest countries, then address a few remarks on the second hole, and finally consider what could be done about them.
It is estimated that the value of the ‘known’ sub-soil natural assets in the African countries is only about one-fifth of that of the OECD countries. However, whereas rich countries have been digging up their resources for 200 years, there is much unexplored wealth in the African countries. Current high commodity prices provide the incentive for further exploration in these countries – the last frontier – which is expected to add well above current estimates to the potential wealth of these countries.
The history of resource extraction in these poor countries has not been kind, and the challenge is to try to avoid history repeating itself. To understand why things usually go wrong in harnessing natural assets for prosperity, it is necessary to look at the long and complex chain of decisions involved in this process. If any link in that chain breaks, plundering in one form or another occurs. It is a ‘weakest link’ problem.
The first link in that chain is the discovery of the natural asset. By hook or crook – probably by crook – new resources will be discovered in the poorest countries over the next decade. A good way of trying to improve the terms that developing countries obtain for these discoveries is first to get public geological information – something that governments in these poor countries have not done.
The second link in the chain is capturing value for society. Natural resources have rents, and those rents should accrue to the society concerned. The device by which they accrue to society is through the tax system. In many of the low-income resource countries, the tax system is just woefully inadequate. A spectacular example is the Democratic Republic of the Congo (DRC). According to Financial Times figures, exports of gold from the Eastern DRC amount to a billion dollars. But the revenue accruing to the treasury from that export is only $37,000. In addition, the DRC has signed a deal with China giving it a 25-year tax-holiday on resource extraction. However, the problem is not just the tax system. The DRC does not even control its territory. In Zambia, on the other hand, while the government does fully control the territory, it has failed to design a sensible tax system. The mining companies concerned – Indian and Chinese – have a very powerful lobby and have got away lightly with tax – $30m a year instead of $800m if Zambia had the tax regime of Chile.
We move to the third link – tax has been collected, what do we do with the money? The key decision here is between consumption and savings. Here there are two opposite practices, neither of which makes good sense. The IMF position until recently was that all revenues should be saved. This does not make sense in a low-income country. While its people will be better off in the future, it has acute poverty now. Therefore, it is sensible to use some of the revenue to raise current consumption levels. Moreover, the IMF’s strategy was not sustainable politically. The political pressure was to spend all revenues on consumption. In Nigeria, for example, all the oil revenue is spent on recurrent public expenditure – a case of high oil prices, depleting oil reserves and zero savings.
Why should countries save? The simplest way of understanding it is sustainability. Consumption is not sustainable if, with the depletion of natural assets, there is no offsetting accumulation of other assets. It does not have to be dollar for dollar. If 50 cents of one dollar in revenue is consumed and the rest is saved and invested efficiently and productively, that investment will gradually pay for the consumption.
The saving decision related to unsustainable revenues needs to be different to that for sustainable revenues. At present, most governments do not even know what their saving rate is out of their unsustainable revenues because their budget data do not distinguish these different sources of revenue clearly to enable an appropriate saving policy decision to be made between them.
The standard answer to this question is to copy the model of Norway: unsustainable revenues are invested in foreign financial assets. This makes a lot of sense for Norway because it has already more invested capital per member of the labour force within Norway than any other society in the world. Moreover, if it adds to its capital stock within Norway, the returns on that extra capital will be lower than if it invests anywhere else in the world.
Fifty developing countries have asked the Norwegian government for advice on how to invest its revenue. Take countries like Sierra Leone, one of the poorest countries in the world, which has just discovered iron ore and other resources. There has been practically no investment in Sierra Leone for the last 40 years. There is an acute shortage of all forms of investment and it is obscene for such countries to be acquiring capital in Brazil or Australia, when they should be applying capital within their own societies. The Australian Treasury has advised Papua New Guinea ‘to do a Norway’ rather than invest in its own society. However, here is the rub! There is a good reason why countries like PNG and Sierra Leone are short of internal capital investment: they have not acquired the capacity to invest productively. Therefore, the key step in the whole decision chain is using resources to build the capacity to invest productively – ‘investing in investing’.
There are three components to ‘investing in investing’. Savings is a macroeconomic phenomenon – you just save a certain proportion of revenues. Investment is a microeconomic phenomenon – you have to invest in something specific, and it is either a good investment or a bad investment. Consider the matter as a tripod – what happens in the public sector; what happens in the private sector; and what happens across the two.
In the public sector, the ‘investing in investing’ agenda is about the selection and implementation of projects. Economists know that this should be done through cost-benefit analysis, but often the best is the enemy of the good. The problem is that in societies like Sierra Leone, there are no economists within the public sector able to do such analysis. There is a skill constraint. But even if some young Sierra Leoneans are trained in such techniques, there is the much bigger political problem to contend with: how to dissuade by cost-benefit analysis a minister’s pet project to build an unwarranted highway to his village.
Thus, cost-benefit analysis is often not a realistic option. A more politically realistic approach is for politicians in less-developed countries seeking models of productive public investment, to visit countries that have made a transition from poverty to middle income and to examine both successful and failed public investments and the lessons to be learnt from these examples. Such an approach provides a better vision of how their countries could look in 30 years time through good project selection and implementation. My experience is that concretising the possibilities of transformation is quite a good way of pulling the politicians in.
There is a corresponding agenda in the private sector – the second leg of the tripod – because the returns on public investment depend on inducing complementary private investment – the government builds the road, but the return on roads is very low unless the private sector invests in trucks. While the government does not control private investment, it can create a climate that is more or less conducive to private investment. The World Bank has constructed a useful index called the Doing Business index1. It features the private investment climate as a benchmark index that can create quite a strong pressure to improve the investment climate of a country. For example, Rwanda has moved up in that index and has overtaken several European countries.
The third leg of the tripod is what is common to both public and private investment. Both are buying capital goods. Capital goods come in two forms: equipment and structures. Poor countries can buy equipment in the world market. But structures are not internationally tradable. They have to be built within the country by the construction sector. This is a strategic part of the economy in these countries. It is potentially a bottleneck sector supplying the non-tradable capital goods that are complementary to equipment. If the costs of structures are very high, that is a disincentive to invest in equipment.
The construction sector in poor countries is massively inefficient and costs are typically very high. One reason is that during a long period of stagnation, the construction sector withers away and its skills are lost to the other sectors of the economy. Moreover, being effectively a cartel, the construction sector tends to build structures at a high cost for a public sector that is insensitive to cost. In Mozambique, for example, the construction sector imports very heavy and low value breezeblocks and even sand, despite the 300 kilometres of Mozambique coastline. Trying to build low-cost housing in these circumstances results in high-cost housing thus pricing it out of the affordable range for low-income groups. As these same construction companies operate in Dubai, they set the benchmark for construction costs in that country. The richest man in Nigeria made his money not from oil but from cement. Why is he worth $10 billion? Because the local price of cement in Nigeria is three times the world price.
Furthermore, there is the question of access to land, another bottleneck. The land rights in Mozambique, for example, are adjudicated through a court system that has a backlog of cases, which, at present clearing rate, will take 500 years to clear.
These then, are elements in the construction sector that need to be fixed in order to lower the unit cost of capital goods.
I have set out the tripod of ‘investing in investing’, the three links in the decision-chain. The decisions in this chain have not only to be right all the way, but they have to be right time and again. The passage from poverty to prosperity takes at least a generation. There are no quick fixes in this economic problem.
The familiar example is the carbon of the skies. Less talked about is the story of fish which I will discuss. Until recently, the technology for catching fish was relatively primitive and fish were plentiful. It is good that efficiency – through new technology – improved enormously. However, it is obvious that as the property-rights of fish are ill-defined, if catching fish is unregulated, fish will be plundered to extinction. Once regulations are imposed limiting the fish catch, the value of fish caught will be greater than the cost of catching fish, and rents are created on fish. This is analogous to the rents on oil – a barrel of oil sells for $85, costs on average $7 to get it out of the ground, and the rest is rents.
So, to whom should the rents on fish accrue? The fishermen would say ‘It’s ours’ and justify it by saying ‘We’ve always caught fish, we’ve got the rights to catch fish’. That is a fundamental misunderstanding of the ethics of rents. Rents do not belong to the fishermen. The rents on oil do not belong to the oil companies; they belong to the societies in which the oil is located. The return that the oil companies and the fishermen have a right to is the return on their capital, their labour, their risk, but not the rents. They should be paying society for the rights to get the fish out of the sea.
New Zealand does that. However, the more common system is that the fishermen not only get the quotas free, they are subsidised. The value of rents on fish is approximately $20 billion a year and therefore the fishermen should pay the global society that amount. Instead, they receive about $30 billion a year in fishing subsidies. So global society pays $50 billion dollars a year out of pocket; and by providing the subsidy on catching fish, they accentuate the problem of plunder. Our grandchildren will have no fish because we are actually providing an incentive for fishing instead of restricting it. The final irony is that the $30 billion of subsidies is not even producing billionaire fishermen. They over-invest in fishing fleets.
The most grotesque example of this is fishing regulations within territorial waters in America, which takes the ludicrous form of restricting the number of days in which fishermen can fish. This is down to only two days a year. So we have a fishing fleet which is idle for all but two days a year, during which time they catch as many fish as possible. including the ‘by-catch’ – all the little fish which should be left in the ocean to become bigger fish next year. It is an astounding story of incompetence. If we cannot deal with the plunder of fish, what hope have we got in getting carbon right?
We have two problems, with the same answer. One is how does a poor country like Sierra Leone or PNG get the whole decision chain right to harness its natural assets instead of being plundered. The other is how can transnational assets such as fish be regulated so to avoid plunder.
The answer is common to both cases: there is no substitute for building a critical mass of informed citizens. Yet, the key group of informed citizens and what they have to be informed about differ between the two problems. For the resource-rich societies like PNG, something between 1,000 to 10,000 people are needed who actually understand that full decision chain and what is at stake. It cannot be done by three smart people in the ministry of finance. It is a long chain of decisions, which no single person can be expected to operate for an entire generation.
Problems such as over-fishing do not depend on the fishing countries. They depend on us because we are eating most of the fish. A critical mass of informed citizens within our own societies, within the high-income societies that are emitting the carbon and are eating the fish, will have to deal with problems. The good news is that for the first time we have the technology that makes it possible to build that critical mass of informed opinion.
Let me close with the story of China. Following the earthquakes in China a few years ago, schools collapsed because they were jerry-built, and children were killed. Within 48 hours of that happening, ordinary Chinese citizens managed to do three things. One, they used the internet to find out why the schools were collapsing. Two, they discovered who – including government officials who took bribes – were responsible for sub-standard building. Three, they organised street protests against those officials. If that was possible two years ago in one of the most repressive societies, it is possible elsewhere to build that critical mass of informed opinion.
In the resource-rich societies, as a private citizen, I did my bit by proposing in The Bottom Billion the idea that the world needed an international natural-resource charter with the decision-chain as its basis. Enough people read The Bottom Billion and a group of people came together and said, ‘That’s do-able, let’s do it’. So now there is a Natural Resource Charter which all can see on the website – naturalresourcecharter.org. It is headed by Ernesto Zedillo, a great economist and former president of Mexico, who said, ‘I saw oil ruin Mexico, I don’t want it to ruin other countries’. There is a board with two Africans, a Chinese and an Egyptian managing this resource charter, with the aim of lowering the cost of information and building a more informed society. There is a film crew of young people making films for YouTube about the Natural Resource Charter. So, to the younger people in this audience, who know about this technology, please use it and help spread this information.
1 See Doing Business Report
A lecture delivered at the University of Melbourne on 26 November 2010.