Oil and the public interest

Susan Ariel Aaronson

12 July 2008



The world’s oil addiction is not solely our affliction. Our oil cravings fund and perpetuate undemocratic regimes in many energy-exporting countries. In many such petro-states, governance is inadequate. Policymakers in these countries rarely use energy revenues to alleviate poverty, diversify their economies, and enhance access to opportunity. Instead, governments often act in an authoritarian manner and hoard their mineral resource bounty. This poses a dilemma for foreign investors as well as citizens.
Yet in such countries, the business interest in transparent accountable government is aligned with the public interest in equitable accountable governance. A new initiative proposed by the British government in 2003, the Extractive Industries Transparency Initiative (EITI), provides a process to enable more transparent, effective, and accountable governance in resource-rich countries. Today the EITI is supported by many governments, housed in the Norwegian government, and has the support of some 38 extractive industry firms and associations.

The resource curse

Policymakers in resource-rich countries often become addicted to oil industry revenues. These men and women rarely use these funds to diversify their economy or to invest in other productive sectors such as agriculture, education, and manufacturing. Instead, these officials frequently pad their personal bank accounts and ignore the needs of producers from other sectors and their constituents. Moreover, government officials rarely disclose the royalties that oil companies pay to extract oil resources, increasing the potential for revenue misappropriation. For example, Human Rights Watch has alleged that Angolan leaders lost more than $4 billion of state revenue between 1997-2002.

Over time, reliance on energy to fuel growth can in fact undermine growth and effective governance. Without productive investment in the economy as a whole, government officials both depend upon and favour oil for growth. Entrenched policymakers may funnel petrodollars to their allies and families to stay in power. Corruption can become endemic. Eventually, many such countries are at increased risk for conflict and even state failure.

This unfortunate scenario has played out in countries as diverse as Equatorial Guinea, Sudan, Nigeria, Bolivia, and Chad. Until recently, policymakers had few tools short of intervention to help change conditions in developing country energy exporters. Economists term this phenomenon the resource curse.

The Extractive Industry Transparency Initiative

However, in 2003, the British government put forth a process, the Extractive Industry Transparency Initiative (EITI) that aligns the interest of oil industry firms and citizens of petro-states. The EITI is a voluntary initiative to which extractive industry (such as oil and mineral rich) governments agree to adhere. Under EITI procedures, firms are required to “publish what they pay” policymakers for the right to explore and extract energy or miners. Energy officials, in turn, must record the revenues they receive and entrust an independent administer to compare extractive sales and revenues. And citizens can use these reports to monitor and influence government spending.

The EITI can change the behaviour of oil exporters without conditionality or force. It empowers reformist interests in resource-rich countries and effectively acts as an incentive for oil company executives and petro-state policymakers to change their behaviour.
Moreover, the EITI is a holistic approach to governance. Extractive industry governments choose to participate in EITI, but participating governments insist upon certain behaviour from energy firms, policymakers, and their citizens. As of October 2007, some 15 countries (including major oil exporters Azerbaijan, Gabon, Kazakhstan and Nigeria) had taken significant steps to implement EITI and nine countries (such as Chad, Congo and Timor Leste) are beginning this process. Thus some 24 countries, or almost half of the world’s developing country extractive industry exporters, have chosen to implement EITI.

Does it work?

The EITI is less than four years old, but already it seems to have helped many participants improve their governance and gradually avoid or reduce the resource curse. In recent work, I performed a preliminary review of governance and human rights statistics for EITI-implementing countries in 2007 and compared their performance to 25 other developing county extractive exporters. Eleven countries were able to improve the business climate (economic growth regulations), and on average they performed better than their non-EITI peers (Figure 1). I also found the voice and accountability scores (the ability of citizens to influence government and hold it accountable) improved significantly more for EITI than non-EITI countries on average (Figure 2).

Figure 1 EITI and “Doing Business” improvements

Figure 2 EITI’s influence on voice and accountability

Even in authoritarian regimes such as Azerbaijan, the EITI seems to facilitate creation of a feedback loop between business, citizens, and their government, which can gradually spill over into the polity as a whole. As citizens learn to influence governance in one sphere, they may demand similar transparency and accountability in other aspects of governance. However, while some of the EITI countries such as Azerbaijan, Liberia, Cameroon, Kazahzhstan and Mali have reduced corruption, many others have not yet been able to effectively change their countries’ culture of opacity. The only statistics available to assess this dilemma are Transparency International Corruption Perception Index. It is likely that the process of changing a culture of corruption (and perceptions of that change) may take considerably more than four years. (Figure 3).

Figure 3 Trends in corruption

What does this tell us about EITI? In a sellers’ market for oil (when countries such as China are perfectly willing to invest in countries such as Sudan despite political risk, corruption, and a lack of democratic accountable governance), why have these countries (1/2 of the extractives exporters) adopted EITI? They may be 

  • trying to signal to markets that they are really determined to change; or
  • so messed up they need outside forces and the EITI feedback loop to force change.

Whatever the reason: policymakers and citizens want to change perceptions of their country and want to change aspects of their governance behaviour. The key lies in how effectively they will implement EITI and empower NGOs to monitor their efforts.

It is rare when the business interest and the public interest are aligned, but the EITI presents both an opportunity and a process to allow these often adversarial interests to collaborate. Trade is supposed to be about mutual benefit; the EITI provides a means to ensure that the citizens of petro-states reap the benefits of trade in oil.



Topics:  Energy

Tags:  oil, Extractive Industry Transparency Initiative, resource curse

Research Professor and Cross-Disciplinary Fellow, Elliott School of International Affairs, George Washington University