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WORLD: A Way for Resource-Rich Countries to Audit Their Way Out of Corruption

by Tyler CowenThe New York Times
July 12th, 2007

It is unfortunate that economists have to debate whether natural resources are a blessing or a curse for a developing nation. Minerals, diamonds or oil may appear to represent automatic wealth but resource-rich countries usually become mired in corruption. High oil revenues, for instance, allow a government to maintain power and reward political supporters without doing much for its people. The government of Nigeria has taken in billions from high oil prices, yet the average person was probably better off 40 years ago. The easy-to-reach wealth of a resource also encourages coups, and thus political stability is problematic.

The solution is to make these governments more accountable in spending their money, but how can that be done? Paul Collier, an economics professor at Oxford University, has a new and potentially powerful idea. In his recently published book, “The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It” (Oxford University Press), Professor Collier favors an international charter — some widely publicized guidelines that countries can voluntarily adopt — to give transparency in spending wealth from natural resources. A country would pledge to have formal audits of its revenues and their disposition. Imagine PricewaterhouseCoopers auditing the copper revenues of Zambia and issuing a public report.

Professor Collier’s proposal at first glance seems toothless; a truly corrupt country probably wouldn’t follow the provisions of the charter, which, after all, is voluntary. Yet citizens could pressure their government to follow such a charter, and the idea of the charter would create a focus for political opposition and signify international support for concrete reform.

Foreign corporations would bring further pressures to heed the charter. Multinational companies that are active in corrupt countries might receive bad domestic publicity. Eventually the companies might push for adherence to the charter, even if the charter limited their ability to bribe. In another context, De Beers has been stung by bad publicity about “blood diamonds,” and the company is now a force for positive change where it operates.

In the optimistic case, a few poor countries start abiding by the charter. Those countries prosper and attract more investment and status in the international community. The pressure to adopt the charter would then spread. Of course, promoting the charter costs relatively little and the potential benefits are significant. International pressures did eventually force a change in South African apartheid. So maybe they can improve other countries as well.

Revenue audits would limit politicians’ ability to rake off funds for personal use or take bribes to give foreign companies a sweetheart deal. As it stands now, citizens of poor countries usually have no idea how much natural resource wealth is being generated or where that money is going.

Accounting for natural resource revenues would also help poor countries plan for the future. Many poor exporting nations ride their fortunes up and down with the price of oil or other resources. Ideally, these countries should be setting funds aside when the price of their resource is high. But, of course, no one will save money that will be stolen by others. Secure and audited funds can enable better planning for hard economic times.

The British government has already made one start toward a natural resources charter with its Extractive Industries Transparency Initiative, begun in 2002. The World Bank has supported this idea and we need only imagine further waves of publicity, more active involvement from the International Monetary Fund and stronger interest from aid organizations and other nongovernmental organizations.

Even more promising is that Nigeria, one of the most corrupt countries, enacted a revenue transparency provision into law, as of May 28. The new Nigerian law relies too heavily on the federal government to monitor revenues, thereby reminding us of the old adage about the fox and the henhouse. Nonetheless, state governors opposed the measure strongly, which is a sign it may prove to have teeth. Furthermore, Nigeria did allow an audit by a private company in 2006, and it allowed the significant discrepancies to be publicized. The country may or may not turn the corner, but there are pressures building for greater rule of law.

In general, transparency can improve governance. A World Bank working paper written in 1999 by Christos Kostopoulos, “Progress in Public Expenditure Management in Africa,” found that many African countries improved their management of public spending in the 1990s. Openness can, in fact, break the links among corruption, secrecy and lack of accountability. Professor Collier notes that in Uganda only 20 percent of the money from one educational program actually reached the schools. One Ugandan bureaucrat publicized the allocations to both the news media and to the schools, and eventually 90 percent of the money flowed to the schools.

Simply sending more foreign aid backfires when leaders are corrupt and governance is bad. And Western governments are not willing to send enough aid to make a big difference. Revenue transparency is not an immediate fix, but it would increase the productivity of both Western aid and Western trade. Workable development ideas are hard to find, but Professor Collier may have identified the next frontier for positive change.



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