Executive Vice President and Director of Studies, Peterson Institute for International Economics; Author, Confronting the Curse: The Economics and Geopolitics of Natural Resource Governance
Former Executive Director, UNICEF;
Former U.S. Secretary of Agriculture
Visiting Scholar and Lecturer, Columbia University; Author, The Evolution of a Corporate Idealist: When Girl Meets Oil
Executive Director, Natural Resources Defense Council
Christine Bader, visiting scholar and lecturer at Columbia University, Marcus Noland, executive vice president and director of studies at the Peterson Institute for International Economics, and Ann M. Veneman, former U.S. secretary of agriculture, join Peter H. Lehner, executive director of the Natural Resources Defense Council, to discuss their experiences with agriculture and extractive industries in resource-rich developing countries. The panel elaborates on how governmental institutions with capacity to govern and install regulatory systems are critical to effectively managing the sudden influx of wealth from natural resources.
LEHNER: So welcome, everyone. Thank you for joining us for Production, Politics and People: The Mixed Blessings of Natural Resource Endowments. This is a really important topic, and I'm glad we have this panel with today to talk about it.
Viewed perhaps from the largest scale, natural resources clearly are a mixed blessing. Fossil fuels, for example, have powered much of the 20th century, made these lights and everything around us—almost everything around us—possible, but fossil fuels are also driving climate change, which may undo much of that progress.
On a much more micro level, I just came back from Costa Rica, where I helped manage a coffee farm. And it's interesting the comparison with Costa Rica and Nicaragua. Nicaragua has many more natural resources in terms particularly of minerals and arable land, and yet Nicaragua now is the second-poorest country in Latin America and Costa Rica is often held up as a paradigm, almost a Switzerland of Latin America.
So we really see at both the micro and the macro level that natural resources can, indeed, be a bit of a—a mixed blessing. So we're going to talk today about what we can do about that to try to make it more of a blessing perhaps and less of a curse.
And with me to discuss this are three absolutely wonderful people that you are all very lucky to be with. Christine Bader is a visiting scholar and lecturer at Columbia and the author of this book, "The Evolution of a Corporate Idealist: When Girl Meets Oil." And having just read it, it's terrific.
Marcus Noland is the executive vice president and director of studies at the Peterson Institute for International Economics, and he wrote this book, "Confronting the Curse: The Economics and Geopolitics of Natural Resource Governance."
And Ann Veneman—the Honorable Ann Veneman—did not write a book, but she was the executive director of UNICEF and the U.S. secretary of agriculture, among many other positions, so was too busy doing other things besides—to write a book. But we are very glad to have you all here. Welcome.
VENEMAN: Thank you.
LEHNER: So let me start with some questions for the panel, and then we will open it up to the—to you, our members. Christine, can you give one example—perhaps the one you talked about in your book—of where a country had this natural resource blessing and what was done to try to make it more of a blessing than a curse?
BADER: Yeah, sure, sure, that's a good place to start. Good afternoon, everybody. I'll start by sharing a story of what happened when I first joined BP and moved out to Indonesia in the year 2000. I was supposed to be a commercial analyst helping analyze the assets BP had just acquired with its takeover of ARCO, so I was crunching data, and one of those assets proved particularly interesting. And from a technical economic perspective, not that interesting, totally straightforward, fantastic project. It was a gas field that ARCO had discovered, over 14 trillion cubic feet of gas in a bay a couple miles offshore; a nice, big field close the surface, so very easy to develop, and BP would exploit that field and build an onshore liquefied natural gas processing plant, again, technically very straightforward.
But the more that we looked at this project, the more that it was clear that it would be—what we euphemistically refer to as the non-technical or above-ground risks that could actually make or break this project. For example, there was a village of 127 families that would have to move to make way for this project. We would have to work with the Indonesian military, which is not known for their good community relations. In particular, the commander that was assigned to our region had just been named by the East Timor Truth and Reconciliation Commission as having overseen atrocities there. This was our business partner. And we were going to be working in this province, Papua, which had very little in the way of government capacity. Corruption is endemic there.
So the citizens of Papua were looking forward to the jobs, the infrastructure, the revenue, but definitely a mixed blessing, to be sure. I can talk about what we did about it in the next round, but just to set the stage.
LEHNER: We'll do that. Marcus, in your book, you note that the curse part of it is often more political than economic. Can you describe that a bit more?
NOLAND: Sure, let me start with the economics, because that's how we get to the politics. Economists have been concerned about these issues for decades, and there are basically four ways that having natural resources—or in my case, I'm really concerned more about point source resources, like minerals or oil, less about agriculture—can mess up your economy.
First of all, there is—and most of the audience here is closer to my age or older, so it won't be surprising to you—but for young people, it's surprising that people used to worry about commodity prices always going down instead of always coming up. Well, we've got 300 years of data, and it looks like for most commodities there's no trend. There are a handful of commodities that have experienced secular declines in their prices, things like aluminum, bananas, tea, sugar. There's only one that we found that the price rises over time, and that's tobacco.
So the secular decline argument for most countries is not really important. Then there's an argument that commodity prices are more volatile than the prices of industrial goods and services. And that's true. But it hasn't increased over 300 years. They've always been more volatile. There is an argument that having resources can impede the development of other sectors. If you're sitting on a gold mine, you mine gold. You don't develop a computer industry or a computer services industry, and it appears that this resource pulls argument has some validity. Some of the fastest-growing economies in the last half-century have been places like Japan or South Korea that have very little natural resources.
And then there's this thing called the Dutch disease. If you discover oil or you discover gold, your exchange rate appreciates and that prices your traditional industries out of the market. And there seems some impact of that, as well.
For all those things, there's kind of textbook economics responses that one can do. The problem is this, is it requires government capacity to do the textbook economic responses. And when we look at these countries, we find the ones that are most heavily reliant on natural resources tend to have poorly-functioning institutions. They tend to be authoritarian.
There's a slogan we have in the Middle East—no representation without taxation. If you don't have to tax people, they don't demand accountability. And if you have lots of revenues, you can spend that on co-opting your political opposition. Or you can spend it on repressing your opposition. So they tend to be authoritarian.
So contestation of political power tends to be violent. And it is even worse if it turns out that the natural resources are located in an area that's heavily inhabited by some sort of ethnic minority population. So in the worst case, you can actually get natural resources generating civil wars. Probably the one that you're most familiar are sort of the blood diamond civil wars in West Africa.
So we have a problem that there are things that you can do from an economic standpoint, but the real impact seems to be through these political channels.
LEHNER: Thank you. And, Ann, we were talking earlier, and you, of course, were secretary of agriculture. These natural resources are not only mineral or oil resources, but also agricultural natural resources. Can you talk a bit about that and how you've seen companies and others responding to that?
VENEMAN: Well, I think obviously a lot of agriculture product, food product, is sourced and grown around the world, whether it's coffee or cocoa, or you mentioned sugar, tea, bananas, I mean, things that we don't grow a lot of in the Western world so much. And these—this sourcing of product around the world has to some extent created difficulties at times. We have the issues over sustainability, environmental issues, sustainable palm oil, child labor in the cocoa sector. So the issues go on and on in a slightly different way than you have in oil, but still significant. I think that there are things that have been done around some of the agriculture commodities that really have helped to create more awareness of how to produce everything from fair trade products, fair trade coffee, cocoa. Now that whole movement is actually extending into—they're looking at how do we extend it into manufactured products.
There's forest certification. There's the rain forest alliance certifications. And, of course, you know, they're now actually looking at applying fair trade and whether or not we should put it to product produced here in the U.S., as well.
You have areas of, you know, agriculture. The rubber plantations in Liberia, for example, became quite an issue in the civil war there with Charles Taylor. And, in fact, I remember when I first went to Liberia after Ellen Johnson-Sirleaf was elected. One of the things I learned about while there was that one of the first things she did as president was renegotiate all of the contracts with Firestone and the rubber plantations to make them more favorable for the country that she was going to be now taking over.
In Madagascar, I visited there I think in 2008 or so, before the coup. One of the things that was going on there were—was there was a lot of Korean investment in the rice sector there. And this was apparently one of the things that led to the coup of the former president.
The issue that's now coming up with regard to agriculture is the so-called land grabs or the issue of large swaths of land in countries like Ethiopia, Sudan, Zambia, and other places in South America, as well, are being bought by companies or countries—the Chinese have had a significant amount of investment—and there is concern about local communities, how people are being treated, and there are some that are now addressing these issues through things like the behind-the-brands initiatives by Oxfam and so forth.
But I think one of the reasons that the land issues are so important is it's not just land for production agriculture that is causing this land rush, so to speak. It is also to get the water rights, because we know water is becoming more and more scarce around the world and people are trying to solidify water rights.
LEHNER: Thank you. Now, you mentioned corporate efforts that are nongovernmental, because perhaps in part many of the governmental efforts aren't succeeding. Christine, going back to your time at BP, where as you pointed out the government wasn't necessarily doing all it should, what did BP do to try to convert this project into a positive experience?
BADER: Yeah, sure. This is great, because some of the points that I'll make I think speak to already what Marcus and Ann have brought up. I mean, the project that I worked on was so extraordinary in terms of the amount of effort that the company was willing to put into it, and this—it was my first job out of business school. I didn't realize how extraordinary it was at the time. And we can reflect on why, if that's of interest.
But it was, first of all, being open and acknowledging what we didn't know and what we needed help in. So on the resettlement, for example, we found the guy who literally wrote the book on resettlement standards for the World Bank and hired him to advise us on how to make sure we did that to international standards.
We were already in the middle of the government-required environmental and social impact assessment, but we realized that we needed a few more experts to come in and advise us on different aspects of this project, so we brought in two former U.S. State Department officials to do a human rights impact assessment for that project, which we think was the first one ever done for a private-sector project. We commissioned a macroeconomic impact assessment.
All of those assessments, though, spoke to the point about companies being open to partner with other organizations on their challenges which companies are not traditionally very good at doing about being humble and open and, in fact, my company then became not very well-known for—well-known for being the opposite.
But it was extraordinary. I think it was that engagement and willingness to be open about the challenges, find partners to help address them, and then also being willing to embrace some of these international standards that arose, namely the voluntary principles on security and human rights. That's one—again, a multi-stakeholder effort that BP committed to implementing on the ground there. So those are a few examples. I think external engagement and committing to multistakeholder efforts.
LEHNER: And, indeed, one of those efforts, the transparency and payments to foreign governments, has become a broader international effort. And there's a recent—there was an SEC rule to try to require U.S. companies to make disclosures about such payments. The rule was struck down by the D.C. District Court in, I think, 2013. And the SEC just announced that they would try to repromulgate it in October of 2015.
Marcus, you talk about that in your book, will that rule do any good?
NOLAND: Again, let me step back and get to that specific question
So what we have is, we have these problems, we have some voluntary action on the part of companies, but you also have a collective action problem, because companies are competitive institutions, right? And why should I be taking on additional costs and responsibility if my competitor is not?
So the first place where this came up was with respect to blood diamonds and something called the Kimberley Process, which worked pretty well. Diamonds were a brandable thing, largely at the time consumed by Western, largely American consumers. De Beers was effectively a monopolist, and so it internalized all the industry's reputational costs. The United States and Western Europe had no producers, so we were pure consumers and we were happy to regulate production activities abroad, and the governments of South Africa and Botswana were behind it. Kimberley Process worked pretty well at the start. It's really got some problems now, if people are interested in question-and-answer.
The next one was this Extractive Industries Transparency Initiative, aimed initially at the oil sector, but it's been broadened to other minerals, timber, even fishing. EITI was a little more difficult, because you had gasoline, which is branded, and you've got some big multinational companies that have reputations. But it wasn't quite as tight as the issue of diamonds. And then most recently, there's been something called conflict minerals, which I think this audience would appreciate, both EITI and the Conflict Minerals Trade Act were stuffed into Dodd-Frank as sections 1502 and 1504. People say Dodd-Frank is 2,000 pages long. It's like, yeah, I mean, we stuffed a lot of stuff into it.
And that's trying to regulate for minerals produced in the Eastern Congo that are produced by hundreds of companies that go into all sorts of consumer electronics. So the relationship—the industry is more diffuse and the relationship to consumer brands is less tight, and it doesn't seem to be working as well.
So the issue with EITI was not only were companies going to have to publish what they were paying—this was basically working off an anti-corruption thing—they were not only going to be publishing what they were paying, but publishing what they were paying to individual countries. And the firms—some of the major oil companies objected, I think because they would either violate confidentiality agreements in places like Angola and Qatar, or it would give advantage to their rivals, particularly rivals for China.
And for all of these—these three initiatives, the key issue moving forward is, these all were based on naming and shaming tactics of consumer goods consumed largely by Western consumers. As demand shifts east, as Chinese consumers become more important, as Indian consumers become more important, as Arab consumers become more important, as producers in China and so on become more important, are they going to buy into these systems? Because if they don't, then the basic collective action problem won't be solved and these things will fade away.
BADER: May I respond to that? I mean, I think what we were discussing before is that I—the consumer pressure works for some brands and some industries, but I think particularly for extractives, it's just not relevant, right? And so one thing that I find now as I work with companies across industries, it's much more about risk mitigation, right? So EITI to some extent and the Voluntary Principles on Security and Human Rights were much more about, how can these companies mitigate risk on the ground? Never mind our reputation. We have to worry about, you know, keeping our people and our assets safe.
LEHNER: It's interesting, just as a bit of an aside to that, at one point when I was in the government as an environmental prosecutor, we were suing Exxon for an oil spill, but also a British tanker company, which has no public face at all. And Exxon was very concerned about building back its reputation, so it was very quick to offer wetland rebuilding efforts and all the rest. The tanker company just fought everything, so consumer pressure has a lot to do at many different stages.
But, Ann, going back to what you were saying and building off of what Marcus said, to make these endowments more likely to be a blessing, we need some government capacity. A lot of governments don't have that capacity. They're very poor. And so somehow that capacity has to be built up, either perhaps by the U.S., by international organizations like the U.N., by the companies themselves.
What's been your experience about how we can—those outside the company—the country—can help build up the capacity of the countries with these endowments?
VENEMAN: Well, I think this is a very important question. And, you know, when you really look at so many of these countries around the world that are struggling, either resource-rich ones or those who don't have as much, a lot of the issue is government capacity. And I think that in development policy overall, we haven't focused enough as a global community in how to build capacity in countries.
I mean, you know, real capacity to govern, to actually implement regulatory systems, you know, these are the kinds of things that we simply haven't focused on enough, in my view. I think the U.N. should be doing much more of this. It does some of it. UNICEF, for example, does a lot in building capacity around juvenile justice systems, which has been quite effective.
But these are piecemeal. I mean, governments need to be built. And I think that in the area of land rights, for example, one of the things that some have focused on is the fact that many people around the world don't have title to land. And so there's been some focus on building government systems to give people the right to own land so that they can buy and sell it, so that they can get loans against it and operate businesses.
This has been a focus of the Millennium Challenge Corporation that was developed in—about ten years ago to have another way to look at development. It's been a focus in a number of areas. There was a great example that has been going on in Ghana, funded by AID and the World Bank, bringing in an NGO that focuses on land rights called Landesa, and out of this building a model lease that has been developed with the government, with the communities, and really looking at, what is the situation in the communities? How do you build principles around this? How do you then build model leases that you can use? And hopefully this will help as people come in and want to lease land or have access to bigger swaths of land to grow, the agricultural commodities, that people in the communities will have their rights respected, they will have get fair value for what they're giving, and that there will be opportunities for these people going forward.
I think also we've seen—I mentioned the behind the brands, and we just talked about the name and shame. This is kind of going in a different direction. Where NGOs have really focused on naming and shaming in the past, this kind of initiative is more a race to the top than a name and shame. So it takes the top ten food companies and it really judges them on things like how they treat farmers, how they—how they deal with women, their worker rights, how transparent they are, how they're dealing with climate change, and they've rated seven factors. And now they've put in land policy and land grab policy in there, as well.
So the ten companies are now rated, and now they're watching those various issues and taking policy changes within their own companies to try to improve to get further up on the list and get more number—the highest numbers, and it's actually a race to the top, rather than a name and shame, and I think these are going to be much more effective processes than our traditional way of naming and shaming.
LEHNER: Thank you. And, of course, this is not—we've been speaking in other countries, but arguably this is happening in the U.S., as well. There were front-page articles on the—in the New York Times yesterday and today about the Bakken oil field and how that is bringing a whole suite of challenges to North Dakota, which hasn't really had the capacity just in terms of numbers of people, among other things, to deal with this influx of workers, of wealth, and of so much else, and how to make sure—and that while there—many are viewing it as a blessing, there are still a lot of environmental impacts and others that are making—and people talking about that—making clear it's not an unmitigated blessing. So it does happen in the U.S., as well as abroad.
BADER: But can I...
BADER: Just on that point, I mean, I'm watching this with such fascination, because it's some of the same companies that have been operating in Equatorial Guinea and in really difficult places, but they just don't seem to be learning the lessons about proactive community engagement and about the importance of establishing good relationships with local stakeholders. And they seem to be doing it all...
LEHNER: So why is that?
BADER: Well, this is actually what drove me to wrote the book, because, again, I had this extraordinary experience in Indonesia, and then, wait a second, what's that other company that emerged after the 2010 Deepwater Horizon disaster?
And so I don't have great answers, but part of the reflection is looking at, well, is there rule of law? Is there strong civil society to try to help hold the companies accountable when the state won't?
LEHNER: Marcus, you want to respond to that?
NOLAND: Yeah, I was struck—Ann mentioned Ghana, and my wife's from Ghana. And indeed, the book opens up with a little vignette in our kitchen. We had just sat down to dinner one night in December 2007, and I had BBC on the satellite radio, and they announced that oil had been discovered off the coast of Ghana. And the book at the dinner table that night was closer to "Oh, no" rather than "We're in the money."
And if you look at Ghana today—and it's really—it's really quite sad. The current government has completely blown macroeconomic stability. They are undertaking activities in the financial system that are effectively draining the banking system of deposits. They are now negotiating with the IMF on a bailout. And this is a country that actually had done pretty well for twenty years, hadn't been under IMF programs and things like that.
And the key differences between Ghana and South Dakota is South Dakota discovered oil after it had strong, highly-articulated political institutions and legal institutions. So, yeah, there's all sorts of stuff going on in South Dakota, but we have laws and courts and police agencies. And if the state government isn't up to it, then somebody can call in the feds.
That's the conventional wisdom about these—at least the extractive sector. If you've got strong institutions before you discover the oil or some other equivalent commodity, like Norway for example, you do OK. If you—in a country like Ghana, it's a race against time. Could they build the institutions in time? And it looks like they're failing. And then there are some countries around the world which you know: slam dunk, they're not going to make it. If they discover some valuable commodity at this point, their institutions are simply so weak, there's no way they will successfully manage that rapid influx of wealth.
LEHNER: So a question for all three of you. And you've all dealt with this at different ways. Different levels of government--we have the corporate role, we have the NGO role, but at the government level, you can have the national government, but you can also have provincial or local governments. And can the other levels of government make up for a weak national government? You take that first, Christine.
BADER: Oh, gosh. I mean, when I got out to Indonesia, the country had just passed a special autonomy law which was meant to send a greater share of the revenue back out to the provinces, Papua and Aceh, but the implementing regs hadn't been written yet. They would take years to write. And there was not the capacity to simply manage the revenues, but just the whole infrastructure, right? Which is exactly what Marcus is talking about.
So I don't know. I'd be interested to know if Marcus has any examples of where there's a really weak national government, but a strong local or provincial government. I guess one thing that could take the place, again, is a strong civil society, but part of what makes that happen is perhaps connections to international NGOs. Papua was a province, is a province, that has so much international attention because of the biodiversity, because of the human rights abuses that have happened there, and—and so I guess in some ways, that's part of what held the company accountable, but it was not going to be the local government.
NOLAND: So one country that has recently discovered lots of resources is Myanmar. And under the current president, Myanmar has become a participant in EITI. And indeed, the United States government is attempting to build capacity in Myanmar. As an American living in Washington, I'm not—we're from the government and we're here to help. But, you know, OK, we're trying to do it.
Now, one of the issues that Myanmar confronts—and this, as I mentioned at the outset, can be a source of—end up in violent political contestation, is if the resources are located in ethnic minority areas. So one of the things that Myanmar is doing—and I'm unaware of it anywhere else in the world—I'm sure it probably exists, but I'm just not aware of it—they're trying to push down as a pilot project, they're trying to push down EITI to three state governments. And so you're not only supposed to have all this transparency and anti-corruption and dissemination of information at the national level, but three of the specific state governments have been identified to try this out.
Now, the problem with Myanmar: the state governments are extraordinarily weak, so I'm not saying I think this is necessarily going to work. But you can imagine a situation in a country like Nigeria where if this had been pushed down to a local level because the local political dynamics are so—have been so important in this violence that they have experienced in the development of their oil sector, maybe that could have helped.
VENEMAN: You know, I think it—I think you—sometimes can work with different political subdivisions. It depends on the country and what kind of system they have. I mean, India for example tends to have very strong states. Nigeria, reasonably strong states. And so I think a lot does get done at the state level, and I think, you know, communities. One of the things that's being talked about more and more is the rise of the mega-city, and how important mayors are going to be for the future of governing and setting rules and dealing with businesses coming in. And I think we can begin to look at that whole sector of urbanization, the rise of the mega-city, where is government actually going to be most effective? And many are now saying that the mayors are the ones that are going to have more and more potential for effective ability to bring together good governance.
LEHNER: And that's certainly true. When I work for the city of New York, we often referred to ourselves as the other state of New York. Anyhow, now is an opportunity to open the conversation up to our members. I want to remind you that this is on-the-record. And there are some folks around with microphones, so please get—wait until you have a microphone and then stand up and tell us your name and affiliation. And because I already see a number of hands, let's try to keep it to a concise question.
So, let's start there.
QUESTION: I'm Lucy Komisar. I'm a journalist. I think that in listening to what you're saying, I feel I'm hearing only half the story. In the Halliburton bribery of officials in Nigeria, to build a gas plant, and they did it with three other companies, French, Italian, and Japanese, the bribes were all moved through offshore bank accounts located in the West. When the money from oligarchs is stolen because of the payments that they get don't go into the country Treasury, the money is moved out to the offshore system run by the West.
It seems to me that it's very nice and easy to say to some other country, "You have to get your act together." What about us getting our act together because the international Western banks and the offshore system are driving the getaway car for these thefts? And I don't hear anybody talking about that.
LEHNER: Marcus, isn't the EITI—the SEC rule, an attempt at trying—by the U.S. government to force some accountability?
NOLAND: Sure. You know, I actually think I cite you in my book. Pleased to meet you. What you identify is a real problem. And it's kind of a spectrum. We start out with the Foreign Corrupt Practices Act, and then we—which we can apply—the way we've written our laws, we can apply that extraterritorially, and then we have these obligations now under Dodd-Frank. And they apply to a class of firms that, for example, list on the New York Stock Exchange, although it doesn't apply to ADRs, and it applies to firms who are engaged in joint ventures with American-registered firms.
The Europeans have an even stricter law, and the Canadians have a law sitting in front of their parliament right now they're likely to pass. And that's going to end up covering a very large share of resource-extractive companies. And through joint ventures, you're going to, you know, basically entangle the Sinopecs of the world in that regime. And I think ultimately that's the way that you get at that, that essentially to—the price of participating with Western producers or the price of entering European or American capital markets is going to be subjecting yourself to these regulations. And you may be disappointed in the enthusiasm in which we've applied our anti-corruption laws.
But I can also say that in a case like Ghana, where there—the production of oil was literally embroiled in corruption allegations before a single drop had actually been pumped—the Ghanaian Ministry of Justice actually came to our Department of Justice for cooperation. And one of the things I've been urging, for example, in Myanmar is tilt your—tilt your joint ventures towards companies that are—they're covered under these laws and you can use European or American justice departments as a way of levering up your own internal capacity while you're building that capacity.
BADER: I can share my personal experience in Indonesia, which is that when I was there, the U.K. passed its law outlawing facilitation payments, which, of course, are legal under the Foreign Corrupt Practices Act, right? And so I was there trying to work with our Indonesian colleagues who were responsible for, you know, the same relationships that they'd always had with government officials, and so we had so many stories of our colleagues going into their counterparts' office and they would just sit there...
LEHNER: And, of course...
BADER: ... go into the room and they'd just sit there, because they were waiting for the envelope. They would just sit there. And then, at the end of the hour, they would say, I'm sorry, you know, I can't do this, and walk out. And we had some projects slow down a lot, but that was what the experience was like. It's down to these one-on-one interactions.
LEHNER: And all of you in different ways have mentioned that one of the main drivers that the U.S. has, of course, with the—any consuming country is by its demand. I think you talk about if we were to reduce demand for, say, foreign oil, the political power, whether it be a Venezuela or other countries, would be lessened, as that affects the price and their amount—the money they have to—and their foreign policy. So a lot of different angles of the U.S. implications abroad, as well, of course—and, Marcus, you talk about this, as well—the military implications.
But other questions in reminder to that gentleman there, to state your name and affiliation, please?
QUESTION: Yes, Eddie Goldberg, NYU Center for Global Affairs. First, before the questions, you all sounded like a case study in Francis Fukuyama's new book about institutions and governing. But, question. No one talked about the largest customer who actually seems to think that gold has no politics, and as the U.S. is buying less especially oil around the world, the larger customer, China, I mean, they necessarily don't see these rules as applying to them or to their culture, so some comments?
LEHNER: Well, I'll let Marcus take that, but I will note the very good news of a week or two ago, the U.S.-China agreement on climate change, that at least in many areas—and certainly climate change and others—the image of China being outside of the cultural norms of the rest of the world is very much changing. The Chinese have stepped up to the plate. They're the largest greenhouse gas emitters. And their agreement with the United States is truly a world-changing moment of them coming in, taking responsibility and leadership that will, I think, have great implications in dealing with climate change.
So—but I'll let you guys talk more specifically about China's a market for foreign food or oil.
BADER: Well, I was going to say something similar around the human rights side, is that China in response to the trouble that some of their assets have gotten into. I mean, in Zambia, right, they've had workers shot in Chinese-owned mines. I mean, the Chinese government has taken the extraordinary measure of bringing in the Swedish and British government aid agencies to do corporate responsibility training for their managers for companies operating abroad, I mean, which is actually incredible foresight. Can you imagine, you know, the U.S. government providing corporate responsibility training to, you know, Chevron managers in Ecuador? I mean, that might be a good idea.
But—but I think actually they're showing incredible foresight and realizing that, again, it's about risk mitigation, right?
LEHNER: And you had some thoughts about China, as it's becoming a larger player on the world food scene and the—the land that they are buying up in different parts of the world.
VENEMAN: Well, yeah, there—I mean, China is I think now one of the biggest investors all around the world. And certainly they're a very big player in Africa today. People don't talk much about it, but everything from, you know, building infrastructure and roads and, you know, really—I mean, textile plants I saw in—in Lesotho, I mean, it's—they're everywhere. And a lot of it is about extractive industries, but they are truly in a very big way.
One of the complaints over the years, although I'm hearing it's getting somewhat better, is that China has gone into these African countries, brought all their own workers, not trained anybody up in capacity. I think they're doing a little better now. I'm glad to hear about the corporate social responsibility training.
But I think one of the things that's been going on in China—now, I was just there about a month ago, but they've—they are doing a tremendous amount of anti-corruption in their own country now. I mean, people are saying that the restaurants and the hotels, the income is down because you can't take any government official to lunch or dinner anymore. They're really cracking down on corruption. And, you know, maybe we can hope that as they do that in their own country, they can be a force and an example for some of the other countries, some of the developing countries in which they're working.
LEHNER: Some other questions? Well, I'll ask a question, then. Going back to some of your discussions, the product substitution, is that—we talked a little bit about reducing demand for oil and maybe that will have an impact. But as we look at whether it be agricultural products, some of which can be very harmful, for example, grazing cattle as opposed to growing row crops, oil versus other products. Do you see—do any of you see a significant awareness of the global implications of the product that we are buying and then a desire—not so much to change how the product is created, but the product itself, moving to something different?
BADER: Well, I guess it's interesting to look at the—again, going back to the conflict minerals debate, I don't know that companies are actually looking for alternatives, but what has been going on is a sort of unintended consequence, right, of now companies are saying, well, you know what, we're just not going to source from the Congo at all, which is actually, you know, having the opposite effect of what was intended, which was saying that it's actually cutting off legitimate sources of income to that country.
But I don't know—I mean, it would be interesting to hear if some electronics companies are actually looking to use different materials, but I don't know if that's happening.
NOLAND: Well, the classic case is fur.
VENEMAN: Is what?
NOLAND: Fur. You know, consumers decided they didn't want to wear fur, at least some consumers did. I was walking up Madison Avenue. I'm not sure what the scene here is like. And frankly, there is a—I mean, there is a direct quote from the then-CEO of De Beers about why they got out in front of blood diamonds. They did not want to see diamonds go the way of fur, because the biggest margins on diamonds are for jewelry. And there is nothing intrinsic about a diamond, right? It is a purely created demand with some sort of cultural, you know, baggage.
Well, you can unload that baggage pretty quick and decide that when you want to get married, you know, you give your fiancee something else, right? I mean, I don't know what it would be, but you don't give them a diamond. So at some level, sure, there are products in which, you know, people decide we don't like the ethics of how these products are being produced and we're just going to stop using them.
LEHNER: Sticking to you, Marcus, for a second, in your book, you talk about the implications of the curse, not only domestically in a country, but in a country's foreign policy. The good example, of course, are oil countries that spread their political vision of what you call the revisionist vision around. Can you talk about that a bit?
NOLAND: Sure. So statistically speaking, big resource countries have a greater propensity to be involved in cross-border conflicts with their neighbors. And given the last fifteen years of history, it probably isn't much of a surprise. There's also some correlation between prices and bellicosity, so when the price of oil is high, you know, Vladimir Putin seems to, you know, feel even a little more pumped up than he normally does. And so there is—there is this foreign policy aspect of it, as well.
There's also the foreign policy aspect of it that the—that the bad parts of the curse, which can ultimately lead to state failure, like we saw in Liberia, can draw us in, as we got drawn in, in a minor way, in the Liberian situation. So apart from the sort of more economics and domestic political institutions aspect that we've been discussing, there is the kind of geopolitical aspect of the behavior of the major exporters, there's the empowerment of the major exporters when prices are high, there's getting pulled into failed states when our resource production isn't managed very well, and then there is potential—this whole thing—the previous question on China, that seems to me to be the absolute key issue going forward.
If you can get the Chinese into the system, recognizing they're going to have their own views and we're all going to have to adjust a bit, you know, it seems reasonable that you can manage these things. If the Chinese remain outside of these systems, they won't work. And Ann mentioned Chinese activities in Africa. There's actually been a lot of concern about that, of one of rivalry. And, again, if you can reach some sort of accommodation so you understand what each other are doing and everybody's relatively comfortable with it, then these things can proceed. If not, then, you know, the scramble for Africa helped set off the First World War. We certainly don't want it to set off the third.
LEHNER: Any questions? Again, one sec. Wait for it, because this is being recorded, so—or streamed.
QUESTION: Scott Swid from SLS Capital. Is the—I'm trying to get a better handle of what the exact problem is. Is it that when these governments get resources, that all of a sudden everyone wants to get rich so that they don't develop the institutions? Or is it that they're trying to develop the institutions, but they're failing at it? And if it's the latter, Secretary, you mentioned the U.N. and organizations like that that are trying to help. Is there any other organizations, universities or anyone else, that can make an impact for those willing to try?
LEHNER: Want to just take a crack at that first, Ann?
VENEMAN: Sure. I think—well, I think—I think it's probably a little of both, I mean, in terms of how you framed the beginning of the question. But in terms of who can help, I mean, obviously, capacity of the country governments is an issue. And how can—I don't believe there has been enough focus on institution building, on building the necessary underlying systems to be able to regulate and to govern and to tax and to have systems that actually are able to handle some of the various kind of problems that come up.
I think there has been a traditional distrust of government in the private sector and civil society. They haven't worked together. I think we're starting to see some things coming together a little better now. I think this Ghana example I gave of, you know, how to come together with the government and the communities and the World Bank and AID around how to deal with these leases for land rights is the kind of thing that we need to be happening in many more areas.
And I think it's a matter of building institutional knowledge that can then be learned in terms of what works and what doesn't. You know, one of the most effective programs I've seen is when, you know, NGOs are—and U.N. organization spends a little money to take a few people from government into another country to see how well their health care system's working or their, you know, some other system is working.
And I have had people tell me that that is one of the most valuable things they can do. We've brought many people through different programs, we have through the U.S. government, whether it's the Cochran Fellowship Programs or a number of others. I would run into people all of the time that said what made a difference in my career was going to the U.S. and seeing how things worked.
I think, you know, there's a lot of things that can be done. Universities clearly have a key role to play. I think the private sector has a role. But the private sector is now actually getting better at finding those NGOs that have expertise, whether it's in labor rights or land rights or—or building the transparency of monitoring systems to see how they're doing with an external evaluation. So I think there are things that are happening. Not enough yet, though.
NOLAND: Can I give two examples? In the case of diamonds, they're—and one of the things we haven't really talked about, in a lot of these cases, technology really matters, so let me start with diamonds and let me then talk about oil. In diamonds, there are two types of diamonds. There are deep-shaft mine diamonds that are basically mined by De Beers and Rio Tinto and other well-known firms. And they're pretty easy to tax, you know, because you've got a big mine, and the government, you know, tax agent comes and he—you know, he looks at your books and you've got to pay the tax. And those—that type of production is not associated with conflict and political instability.
There's another form of diamonds called alluvial diamonds, and these are the diamonds that wash up in riverbeds and they actually, interestingly enough, are more valuable. They have a higher percentage of gemstone-quality diamonds, and the technology there is you just need a bucket and a sieve and a shovel. And that's the one associated with warlordism and the civil wars in Liberia and Sierra Leone and Angola and so forth.
So the Kimberley Process came in, a certification process, that basically was effective of depriving the fire of the oxygen. So it was a certification process that basically got the warlords out of the business. But then you still had the problem that for—for a digger in Sierra Leone or Ghana or Liberia, life is pretty Hobbesian. You're dealing with a middle man, typically of non-African ethnic origin, who is both a monopolist, a purchaser of your stones, and a monopsonist supplier of food, tents, shovels, buckets, sieves, and so on.
So as part of the Kimberley Process, they created a second thing called diamond development initiative, introduced—you know, basically got the middlemen out, introduced systems in which the diggers were credited at a bank account—say, if you're in Ghana, you had a bank account at the minerals commission in Accra, it was credited to your account, so that middleman wasn't actually handling your cash, and so on and so forth, to try to actually create better development outcomes for these diggers in the alluvial diamond sector.
In the area of oil, there is a big difference between—at least thus far, keep our fingers crossed—between Nigeria and Ghana. Ghana's oil is far enough offshore that it's not plausible that some kind of secessionist or crazy group is going to organize a bluewater navy and go out and try to seize oil platforms. The Nigerians have the problem, the oil is close enough in, it's in the—it's in the Niger River Delta, that you can disrupt production, you can seize things with relatively simple forms of naval technology.
In the oil sector, EITI focuses on disclosure of the payments of major producers to the government, not because anybody sat down and thought this is the best system we could have. It's because it was based on a naming and shaming campaign, and that was the point of vulnerability to the major producers.
People quickly figured out that, OK, fine, we've got transparency on the payment side, but we don't have any transparency on the expenditure side. And so they've developed something called EITI Plus, EITI Plus Plus, in which the World Bank is trying to work with these governments to develop better revenue systems.
Last thing I'm going to say is that this is not textbook public finance, but maybe the political economy makes sense. For some of these revenue streams, you would want it going into the general budget to be allocated in kind of the most optimal manner possible. But from a political economy standpoint and accountability in building the institutions, you may want to dedicate some of those streams to things people can see—health clinics and schools.
And so if they know that the oil is being pumped out of the ground, and they know that BP and ExxonMobil and Shell are paying that money to the government, and they know that that stream or some share of that stream is supposed to be going to build local clinics and local schools, and they know that their village was supposed to get a school, and they don't see one, that's the link to accountability. That's when you start making demands.
And so, you know, I'm very skeptical that we are going to give Ghana or anybody else institutions. Those are all, you know, historically and culturally contingent. But there are things that one can do to at least, you know, give it a nudge so that it's heading in the right direction. And I think some of the revenue expenditure work the World Bank is working on as part of EITI Plus Plus starts to head down that road.
BADER: Marcus, I mean, that's such a big part of the problem, though, is that companies get so caught up in building a thing that they can take a picture of for their corporate responsibility report and sometimes that's exactly the wrong thing that they should be spending their money on. I agree, if the government builds those things, that's fine, but it is all this capacity building and institution building and civil society strengthening that needs investment desperately, both by the company and by government, but that's not the stuff you can take a picture of. And that takes much longer to explain and build relationships around.
But when you get into sort of people looking for stuff, I think that's when we get into sort of a spiral downward of people looking for...
NOLAND: I want to be very clear, I'm making a very primitive argument, which is, I'm talking about government expenditures. I'm not talking about companies. The money has been given to the government. Now, the government can take that money and put it in Switzerland or that money can—or that government can build a clinic.
And if you know that you are owed a clinic, you will demand if that clinic is not built, where is my clinic? That's where you start building in demands of accountability and that's how you start building in political institutions. Otherwise, it's such a black box that you can get away with never building that stuff, spending it on luxury automobiles for government officials, stuffing it into bank accounts in Switzerland.
So I'm making a really primitive argument, trying to build a link between those funds and actual things on the ground that people can hold their local political representatives accountable for delivering. It's not textbook economics, but I think the political economy of such, it's better than the—you know, sort of give it all to the central ministry of finance and let them just allocate it however they want.
LEHNER: We have a question there.
QUESTION: I'm Gerald Pollack. Reading the New York Times yesterday and today about the situation in North Dakota raises questions about institutional structure and government accountability. And I wonder whether the statement which was made rather casually, that if the states can't do, the feds can step in, whether we in the United States have institutions that can really deal with the quasi-corruption that the New York Times has exposed in its investigative reporting?
NOLAND: Well, since I was the one who made the statement, maybe I should go first. And I hate to admit this in front of this audience, but I live in D.C. and I read the Post. So—it has much better coverage of local sports. And I have five-year-old twins, so I don't have time to read two newspapers. So I don't know the specifics of the articles you're referring to.
Look, I grew up in Texas, OK? My father was in the oil industry. It's one of the reasons I ended up writing this book. My father was in the oil industry. It's one of the reasons I end up writing this book, because I see a lot of similarity between Texas—I mean, to me, honestly, I think I had a line in the book, I see a lot of similarity between Austin, Riyadh and Moscow, OK?
And so, yes, you call it quasi-corruption or something. I grew up in Texas. I know this. Yeah, of course. But I think that comparing just the generalized stupidity of the Texas Railroad Commission with what you see in some of less—you know, Equatorial Guinea, I mean, this is—they're not in the same—they're not almost in the same universe. And so, sure, this oil shale production may not be being developed optimally in the Dakotas, but at least you have the U.S. Constitution, at least you have a well-developed set of political institutions, even if they're bent in unpleasant ways. That's different than a place like Equatorial Guinea, where the ruling family makes no, you know, real differentiation between their personal bank accounts and the national treasury.
LEHNER: Ann, do you want to comment on that? Because, of course, many U.S. environmental laws have—expect two levels of federal government oversight, state implementation, and the federal government can overfile, if necessary, and you must have lived that to some extent with that state-federal dynamic at the U.S. Department of Agriculture.
VENEMAN: Oh, yeah. Unfortunately, I've been traveling. I haven't really read these two articles, so I can't comment specifically on what you're talking about. But I think, you know, the whole industry—how quickly it's developed. There have been questions about the environment, about the impacts on the community, and I think the fact that the New York Times is writing about it, exposing it—this is part of the way our system works, expose it, make people aware of what's going on, and we do have—as you say—the institutions that then should be able to address the problems that are coming up, hopefully.
I mean, sometimes, you know, one of the things that I often say now about our political system here in the U.S., as you watch how dysfunctional Congress has been over the last few years, is that we're around the world talking about doing—building democracies, and yet are we setting a very good example in our own country for what a democracy should look like?
But, I mean, as to—as to what's going on in North Dakota, I mean, I think there are a number of issues. We've seen a number of them written about. The environmental issues, I think, have to be addressed by the regulators and—I mean, but we do have a press that exposes this kind of thing, as well, which a lot of countries don't.
LEHNER: Thank you. Well, I think one thing is clear, that in order to make these natural resource endowments a blessing rather than a curse will almost always take significant involvement by the government, all levels of the government, the corporations, and a strong NGO sector together. And then maybe that can happen.
Well, let us thank our terrific panel, Ann Veneman, Marcus Noland, and Christine Bader.