HOW NATURAL RESOURCES SHAPE AND ARE SHAPED BY POLITICAL CONTEXT

In order to understand how natural resources are governed, you have to do political analysis at three different levels, the international, the national, and the policy level. We're not going to talk very much about the international level today. If you open a newspaper you can see how important it is. Natural resources have impacted foreign policies, conflicts, the global balance of power for centuries. We will spend most of our time talking about the national level, so this is within a given resource-rich country. I'm going to describe a few of the ways that natural resources affect politics. I'll introduce some of the effects that natural resource wealth has on a particular country. This is drawing on the political science literature about the natural resource curse. Now of course, there's nothing deterministic about these effects. Some countries exhibit them, and some countries don't. They also tend to be more prominent in countries where oil or mining really is the only game in town.

The first effect of natural resource wealth on politics is the centralization of power and wealth. Wealth that often overshadows the entire rest of the economy flows into the central government. You also tend to have decision-making power concentrated in the hands of just a few individuals.

The second effect is the rise of politics of allocations, the politics of allocations. You may have heard of the term rentier state. It was developed to describe Arab countries during the oil boom in the 1970s, and it basically means that power is exercised through allocations. This is really crucial when it comes to policy-making in the oil and mining sector. Whoever is in charge of a resource rich state has a huge number of very valuable things that they get to allocate, from upstream licenses to the revenues themselves. So who gets what becomes the name of the game. Allocations also tend to dominate the political discourse, often to the detriment of other issues. Let me give two examples of the kinds of allocations that I'm talking about. One is quite populist, and the other is more predatory in nature. Mongolia has two main political parties. In the 2008 elections, a mining boom was on the horizon, and expectations around the future revenues were very high. One of the political parties during the campaign made a promise of allocating a $700 share of the country's mining wealth to each citizen. The other party responded by promising to give a $1,000 cash transfer to each citizen. This was a wildly unaffordable promise. The amount would have totaled 60% of the country's entire GDP. The other example is more predatory, and this comes from Congo-Brazzaville. The national oil company in Congo-Brazzaville gets to decide which companies can buy their oil. In 2005, they chose a company that happened to be headed by the head of the national oil company itself. So they sold oil to that shell company at deflated prices, and then the company was able to flip that oil and sell it at market price to another company. The margin was shared by a group of political elites who essentially had received an allocation of public revenues through this fraudulent scheme.

The third effect that I'll mention is that democracy is discouraged. Political scientist Michael Ross found that between 1980 and 2006, oil-rich countries were three times less likely to democratize than non-oil producing counterparts. Oil provides an autocrat with resources he can use to stay in power and that level of wealth can obscure, at least temporarily, incompetence within the state.

The fourth effect that I'll talk about is that the lines between the public and the private sector also often become blurred, causing problems for governance. This occurs in two different ways. One is public officials participate inappropriately in the oil and mining sectors themselves. As an example from Azerbaijan, the government of Azerbaijan allocated a license for a gold mine that was worth around $2.5 billion to a company called AIMROC. A group of journalists started digging into this transaction and they uncovered a number of levels of different shell companies. Several of those companies were managed by the president's daughters. This kind of intrusion by public sector officials into the private sector causes major conflicts of interest and this case is a good example of why beneficial ownership transparency is so important. It works in the other direction as well with private sector elites inappropriately influencing public policy. As an example from here in the U.S., there's an investigation in 2014 that uncovered energy companies making major campaign donations to state level attorney generals, and in one case in Oklahoma the attorney general was found to be writing letters to the federal Environmental Protection Agency that had been literally drafted by an oil company.

The fifth effect I'll talk about is compromised accountability dynamics. This occurs through a number of channels. You have a lot of resource wealth, you often tend to have weak accountability dynamics. I'll mention two of the channels.

One is around taxation. Resource rich governments, because they're getting all these oil revenues or mining revenues often don't bother to tax their citizens. Broad based taxation requires building capable institutions that have the trust of the citizens. It also builds accountability because as a citizen, if I give money to my government, I'm going to really want to know what they're doing with that money. It also creates kind of a virtuous dynamic where the government has a vested interest in the prosperity of the citizens. The richer the citizens are, the more money that comes to the government. All of these positive dynamics are missing in many resource-rich countries.

The second channel is that accountability is often damaged through co-optation. Resource-rich

governments have a huge amount of money that they can use to quiet the media, pay off the opposition, or otherwise kind of get rid of critical voices. The next effective resource wealth is a weakening of institutions. Often institutions in resource-rich countries become better at delivering patronage than at delivering public goods. It's an interesting example playing out in Nigeria and Iraq right now. The militaries in those countries became part of a system of corruption and patronage, and now they're proving unable to provide one of the most basic public goods, which is security.

The final effect I'll mention is how resource wealth affects domestic conflict, and here the direction of travel is a little bit more uneven. In some countries, resource wealth seems to exacerbate conflict. In other cases, it seems to bring about more stability. In terms of you know, exacerbating conflicting, rebel movements can use resources to fund their operations, especially if those resources are what's known as lootable, meaning you can easily take them from one place to another and exchange them for cash. Or, resources can motivate some kind of government takeover like a coup or lead groups to try to extort the government, you know threaten them to say 'unless we receive a bigger share of the pie, we're going to cause instability'. But for a number of authoritarian regimes natural resources seem to have contributed to their stability as well. So that impact is a little bit less clear. So these are some of the ways that natural resources impact political systems. There is another body of research that looks at what political attributes determine a country's vulnerability to the resource curse. Some of these ex-ante characteristics include a strong independent private sector, strong accountability institutions, a broad political base, et cetera. The problem is that these are the exact same attributes that struggle to emerge in resource-rich contexts. So you end up with kind of a vicious cycle, particularly for long-standing producers. They go through a resource boom, the kinds of governance that emerges is exactly the kind that will make it difficult for them to successfully manage the next resource boom. These national-level dynamics are crucial to understanding individual policy decisions along the decision chain, from allocating licenses to spending resource revenues, I'll give two examples of how these national-level dynamics impact individual policy choices. The first comes from Nigeria. There's a chronic problem of confusion and debate around how much money should the national oil company transfer to the treasury. This has been a problem for years. And it's gone unfixed for years, so you wonder, you know, what's going on here? What's the reason why this very expensive and kind of persistent problem has been allowed to remain in place? And the answer is in the political environment of Nigeria. The leaders' horizons are very short, and for those in power they have to devote a lot of resource and energy to managing what is a large, competitive and kind of rapacious elite. So for them having a national oil company over which they have discretionary control, which can be used for patronage purposes, is quite valuable and outweighs the objective of having you know a high-functioning national oil company that would produce greater returns for the nation in the long term. Another example comes from Russia. The Sochi Olympics in 2014 were among the most expensive Olympics in history, and much of the money that went to fund them was of course oil revenues. One of the reasons they were so expensive was bloated contracts. For instance, the Olympic stadium was supposed to cost $49 million. It ended up costing fourteen times that amount. So why was the government so relaxed about procurement? Why didn't it keep kind of a tighter control on things? Again, the reason is political and relatively obvious. For the people in charge, allocating these lucrative contracts to powerful businessmen was a very easy way to kind of keep up the political allies they needed. For those of us who want to understand resource-rich countries and particularly if we want to promote good governance, you have to understand these kinds of political dynamics. You can have the most beautifully designed contract or savings fund, but if it runs counter to the political incentives of the day, it's very unlikely to be successful. However, more optimistically, there are some ways that governance reform can alter political incentives. If you take transparency for example, transparency makes it a little bit more risky for an official to abuse their power. Even if they don't get caught today, they'll be slightly nervous that because everyone knows what happens, someone may come after them in the future for what they've done. Similarly, legally-grounded rules around how resource revenues should be spent can help to constrain the discretion that politicians enjoy and you know may tip the scales in favor to spending that benefits the nation rather than narrow political or private interests. These kinds of governance fixes, transparency, better oversight, stronger rules, are far from all-powerful. But they can help if they're deployed in a manner that is cognizant of the political context. Thank you.