Originally published on February 7, 2012
The World Bank extractives governance web site (GOXI) asked me and others to set up a discussion on the new transparency initiatives and whether or not they are supportive of development. I focused on Dodd Frank and EITI. I think they are a good start, but only a start. Comments much appreciated.
It is too early to assess the impact of EITI and Dodd-Frank transparency initiatives on development. Nonetheless, enquiring minds such as GOXI readers understandably wonder if these initiatives have had unintended consequences for their supposed beneficiaries. While we have case study evidence about EITI, we have limited data on its impact on development, quality of governance or other factors. Meanwhile, the SEC has yet to issue Dodd-Frank regulations.
Instead, herein I critique both initiatives for their strategy and indirect effects. I argue that both strategies focus on the supply side of governance—they do not empower individuals to demand their rights; nor do they help these societies achieve accountability or trust between the government and the governed.
Let’s begin with EITI. EITI is a limited partnership-with a confused purpose and strategy. EITI doesn’t say this explicitly, but it is aimed at prodding resource rich developing countries to create a feedback loop between the government and the governed. The people should monitor government and act as a counterweight to corrupt policymakers who may pocket or misuse the revenues from resources. But EITI is incomplete because it does not require a public debate on the use of extractive industry revenues which belong to the people. It calls for adopting states to develop a multistakeholder group to monitor the government’s reportage of royalties. But that group is not required to educate legislators or to hold public hearings. Moreover, more recently, the EITI Secretariat now promotes EITI as a “standard” for resource revenue management. Supposedly, some policymakers want to get Chinese, Indian and other state run firms to act responsibly regarding governance of extractives. Hence Norway, the US and several other industrialized countries have announced they are adopting EITI, but it is unclear how that will influence other countries such as China or Indonesia.
EITI seems to work best in countries like Liberia and Ghana where policymakers want to achieve better governance and where civil society, a free press, and democratic debate are respected. Nonetheless, in countries like Azerbaijan, policymakers have used EITI to signal better governance and perhaps to attract more diversified investment.
In a study of EITI partner views (out of date now); it was clear that EITI supporters have widely divergent views as to what EITI should do, what it should ask adopting states to do, and how it should be monitored and assessed.[1] Developing country policymakers like EITI-because it is voluntary, relatively cheap and supported by WB/EITI+. Many industrialized country policymakers like EITI because it can help them change conditions in some countries without direct conditionality. EI executives generally like EITI because it is not a mandate. And finally, many developing country NGOs like EITI because it stimulates governance learning and training and best practices information. However, some implementing governments have not allowed civil society to fully participate in EITI or provided civil society with the information to hold governments to account. In many implementing countries, the public and legislators may not be aware of EITI. Hence, the public is a silent partner in EITI. Without an empowered public, citizens cannot act as a counterweight to resource corruption. I believe EITI is too focused on NGOs rather than educating and empowering the broad citizenry, and it is not helpful in nations where civil and political rights are not respected.
Let me now move to Dodd-Frank’s conflict mineral provisions. These provisions requires firm where “conflict minerals are necessary to the function of the product” to disclose steps they and their suppliers are taking to ensure that revenues from trade in conflict minerals don’t finance conflict in the Manu Basin. We may look back on this strategy in ten years and wonder why US (and perhaps soon European policymakers) used corporate governance rules to deal with the problem of ethnic tension, inequality, and inadequate governance in the Manu Basin. Certainly, how, where and what firms source matters and such information should be disclosed to investors. Such information is material, and so the idea behind this provision makes sense. But it is not the best way to address this problem. U.S. policymakers and activists failed to weigh the trade spillovers of this strategy. Congolese activists, diplomats, and UN experts have reported that many tech firms are sourcing outside of DRC and nearby countries. So far, the strategy has resulted in less trade for people of the region and less access to opportunities. The UN Group of Experts admitted Dodd Frank has already had mixed results. While a “higher proportion of conflict minerals are not funding conflict,” the Group also admitted the people of the Manu Basin are experiencing more economic hardship, smuggling, criminalization of minerals trade and less government revenue.[2] Meanwhile, US security lawyers are laughing all the way to the bank as they debate what “necessary to the functioning of the product” means.
Like EITI, Dodd-Frank conflict minerals does little to empower people of the Manu Basin to demand and monitor good governance. But there are ways to supplement this initiative. Why not provide funding to the public to monitor on the ground activity? As example, AID donors could provide cell phones with apps or platforms such as Ushahidi or community that allow users to anonymously report corruption or illicit trade.
In sum, although these 2 initiatives have brought some rays of light to inadequate governance of extractives, they have done little to empower the public and to build trust between the government and the governed. Such trust is an essential component of the feedback loop necessary to achieve better governance. Hence the designers of EITI and Dodd-Frank should think a little more about how to work with more of the people they hope to help.
[1] Aaronson 2011, at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1739912
[2] Letter Fred Robarts, Coordinator, Group of Experts on the DRC, to SEC/ Ref S/AC.43/2011/GE/OC.86, at http://www.sec.gov/comments/s7-40-10/s74010-346.pdf
