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The Development Challenge of the Decade: Natural Resource Governance

Reflections and Peering ahead, Evidence-based

Daniel Kaufmann, Revenue Watch Institute http://www.revenuewatch.org/

Presentation at Extractive Industry Roundtable

sponsored by EITI & Norway,

Oslo, February 25th, 2013 .

Reflecting on 4 ‘Powers’

1. Power of Data, Research & of Evidence-Based Policy-Making

2. Power of Smart Transparency

3. Power of Incentives

4. Implications for Debate, including: Power of Partnerships

1. Power of Data & Research

Power of Data, Research & of Evidence-Based Policy-Making:

• Better outreach of existing data/evidence and analysis on governance in natural resource governance

• Building a major Databank; making sense of the existing & upcoming data; enabling multitude of users around the world (in-country) to use it effectively

• Guarding against: i) ‘Zombie Data’; ii) Confusing the Macro with the Micro in charting data work ahead; iii) viewing Data & technical analysis as substitute to civil society advocacy (not so); iv) misalignment with international statistical norms (thus IMF needs to be further involved, etc)

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

WG

I C

on

tro

l o

f C

orr

up

tio

n, 2

011

ExtractiveCountries withsatisfactoryGovernance

Non-ExtractiveIntensive Countries

Extractive-Intensive Countries(All)

Control of

Basic Data, 2: Trends in Control of Corruption, Extractive

vs. Non-Extractive Intensive Countries, 2002-2011

Source: Worldwide Governance Indicators, 2012. The extractive countries with satisfactory control of corruption

trend line (atop) includes a dozen countries.

Basic Data, 1: What are the Poverty figures since 1990?...

2. Power of Smart Transparency

• Transparency Matters

• But guarding against:

1. “Zombie” Transparency (de jure, opaque

transparency, overly aggregate);

2. Partial Transparency: only on monetized

revenues, but not on: contracts; in-kind;

expenditures; sovereign funds; in-kind,

NOCs; commodity traders; ownership, etc.

3. Lonely Transparency (without key

complementary measures)

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Governance & Transparency Matters:

Some Empirics in brief

• Governance Matters for Development:

Empirical Analysis shows that.

• The ‘payoff’ or development dividend of good

governance is at least as large (if not larger)

for resource-rich countries

• Controlling corruption is key to development

outcomes, and transparency is associated

with controlling corruption

• But ‘lonely transparancy’ has less impact:

transparency with sanction has more power 12

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The 300% Development Dividend From Improving Governance & Controlling Corruption

High Corruption Medium Corruption Low Corruption

$300

$3,000

$30,000

Data Source for calculations: KK 2004. Y-axis measures predicted GDP per capita on the basis of Instrumental Variable (IV) results for each of the 3 categories. Estimations based on various authors’ studies, including Kaufmann and Kraay.

GDP per Capita in Extractive-Intensive & Other Countries,

by Control of Corruption Tercile Groups, WGI 2011

Sources: Corruption Control data from Worldwide Governance Indicators (WGI), 2012. IMF 2010 Report on Resource-Intensive

Countries. GDP p.c. from World Bank World Development Indicators, 2012. Countries were grouped into terciles based on the WGI

control of corruption score for the sample of all countries in the world.

Poor Corruption Control Average Corruption Control Good Corruption Control

GD

P p

er

ca

pit

a (

PP

P),

20

11

EXTRACTIVE OTHER

33.3% 11.1%

5,000

0

10,000

55.6% 25.6% 33.5% 40.5%

6,851

3,941

12,712

10,272

45,222

30,820

Note: The percentages inserted in each dark blue column represent the % of all extractives that belong to each control of corruption

tercile (poor, average, good). Similarly, for light blue columns, the % of all other countries in each control of corruption category.

Control of Corruption and WEF GCR

Competitiveness, 2010

Source: EOS firm survey, WEF Global Competitiveness Survey 2011 & '“Worldwide Governance Indicators,” by D. Kaufmann, A.Kraay and M. Mastruzzi, October 2011 – www.govindicators.org

BRA

CHL

CRI

DOM

SLV

JAM

0

20

40

60

80

100

0 20 40 60 80 100

Glo

bal C

om

peti

tiven

ess I

nd

ex, 2011

Control of Corruption, 2010

r = 0.79

High

High Low

Low

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-1.5

-1

-0.5

0

0.5

1

No Transparency Limited Transparency Satisfactory Transparency

Extent of Transparency

Co

ntr

ol

of

Co

rru

pti

on

Good

Improved Transparency is Associated with Corruption Control (Emerging Economy sample-- 135 countries)

Source for Control of Corruption: : 'Governance Matters IV: Governance Indicators for 1996-2004’, Kaufmann, D., A. Kraay and M. Mastruzzi,

(http://www.worldbank.org/wbi/governance/govdata/); Source for Press Freedom: Freedom House. Source for Gender Equality: CPIA 2004. Source for Transparency:

Transparenting Transparency”, A. Bellver and D. Kaufmann. Satisfactory Freedom/Rights reflect higher ratings from Press Freedom, women’s rights, gender equality and

transparency ratings.

Effect of Media Freedom/Transparency on

Control of Corruption (when Low Rule of Law)

-2.0

-1.0

0.0

1.0

2.0

Low Press Freedom/Low Rule ofLaw

High Press Freedom/Low Rule ofLaw

Sources: Kaufmann D., A. Kraay, M. Mastruzzi (2010), The Worldwide Governance Indicators: Methodology and Analytical Issues ,

September 2010; Freedom House, Freedom of the Press, 2005-2009 editions

Impact of Transparency/Free Press on Control

of Corruption (for Low vs. High Rule of Law)

-2.0

-1.0

0.0

1.0

2.0

Low PressFreedom/Low Rule of

Law

High PressFreedom/Low Rule of

Law

Low PressFreedom/Hight Rule of

Law

Low RL

High RL

Sources: Kaufmann D., A. Kraay, M. Mastruzzi (2010), The Worldwide Governance Indicators: Methodology and Analytical Issues ,

September 2010; Freedom House, Freedom of the Press, 2005-2009 editions

Effect of Media Freedom and Rule of Law on

Control of Corruption

-2.0

-1.0

0.0

1.0

2.0

Low PressFreedom/LowRule of Law

High PressFreedom/LowRule of Law

Low PressFreedom/Hight

Rule of Law

High PressFreedom/HighRule of Law

Sources: Kaufmann D., A. Kraay, M. Mastruzzi (2010), The Worldwide Governance Indicators: Methodology and Analytical Issues ,

September 2010; Freedom House, Freedom of the Press, 2005-2009 editions

A Broader Transparency Framework

• Beyond Transparency in Revenues: the full

value chain

• Beyond Transparency: Complementary

measures – how context specific?

• New Analytical and Empirical Diagnostic

Tools: Natural Resource Charter (NRC); the

Resource Governance Index (RGI), EITI

information translation into standardized data

and performance indicators?

• Subnational Governance in Natural Resources

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BEYOND REVENUE TRANSPARENCY: WHICH AREAS

SHOULD BE TRANSPARENT?

Transparency across the Value Chain

The basis for any decision to permit exploitation of a mineral deposit

should be set out clearly in

published laws and regulations

Contract terms,

including fiscal terms should be

made public

Financial information on revenues into

the public domain will

facilitate enforcement

and reduce tax avoidance

Disclosure of operations and financial data

of savings, stabilization

and investment funds

The disposition of extractive

revenues should be fully

transparent

Managing Volatile Revenues

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Norway

Government revenue growth(kroners)

Government expendituregrowth (kroners)

-50.0%

0.0%

50.0%

100.0%

150.0%

200.0%

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

Venezuela

Government revenue growth(bolivares)

Government expenditure growth(bolivares)

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

Chile

Government revenue growth(pesos)

Government expendituregrowth (pesos)

Managing Volatile Revenues

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Iran

Government revenue growth (rials)

Government expenditure growth(rials)

3. Power of Incentives

• Belonging to a Global Transparency ‘Club’ is a

powerful incentive

• Balancing: i) Inclusivity [in ‘belonging’ to

‘Club’, so country has incentive to improve],

with ii) MMS: Maintaining Minimum Standards

(vs. damaging the brand by low standards)

• Practically, 3-categories (not 2): In or Out, and

if In: potential vs. real performer

• A key is tough implementing criteria on ‘real’

performance

• Performers can be reverted to non-performers,

but stay ‘In the Club’ (unless dramatic deterioration)

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Some Conclusions & Implications so far, including 4. The Power of Partnerships

1. Power of Data: Investing in Data gathering, management,

rigorous analysis, training/TA of multiple national users

2. Distinguishing between Zombie vs. Real Transparency

3. Complementary to Transparency: Governance in full value chain

4. Taking Incentives seriously: “Tough Love” (Love: ‘In the Club’,

Tough: Real Performance implementation criteria, w/ metrics)

5. Taking Institutional Partnerships seriously and to the next level:

i) Scan & Mapping of activities & organizations, division of labor;

ii) Joint Country Strategies; iii) Strategic Partnerships & Mergers

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Some Perspective on the Power of Transparency & Data…

‘If it cannot be measured, it cannot be controlled’

Lord Kelvin

‘Not everything that counts, can be counted, and,

not everything that can be counted, counts’ Einstein