Making budgets more transparent in oil rich states

May 14, 2012

In the OBI working paper series that we have been posting about recently, Michael Ross of UCLA returns to the question of the resource curse (click here for his paper). He looks specifically at how a country’s mineral wealth affects the transparency of the government’s budget. He finds that the budget transparency of countries with oil and those with other mineral riches is not impacted on in the same way. Just like Wehner and de Renzio, his research suggests that the solution to the puzzle of what drives budget transparency in resource rich countries, lies in domestic factors.

The difference between oil and non-oil states

Much like Wehner and de Renzio, Ross finds that among democracies, a country’s mineral wealth does not have much effect on the transparency of the government budget. Among autocracies though, greater oil wealth correlates with less fiscal transparency. So oil wealth makes the budgets of undemocratic countries less transparent. But contrary to what one might have expected, Ross finds that non-fuel mineral wealth makes government budgets more transparent.

The paper also demonstrates that oil has an effect on budget transparency that goes above and beyond its more general effect on democratic accountability. So there appears to be a version of the resource curse aimed at budget transparency specifically.

Why, you might ask?

Its not EITI

Based on the available data, Ross does not find convincing evidence that the different levels of budget transparency in countries dependent on oil and those dependent on other kinds of mineral wealth, can be explained by membership in the Extractive Industries Transparency Initiative (EITI). He argues that if EITI pressures were responsible for the exceptional transparency of some mineral-producing autocracies, one would expect that most highly transparent mineral autocracies would be EITI members. However in Ross’s analysis, of the five authoritarian mineral producers that are relatively transparent (South Africa, Russia, Botswana, Namibia and Zambia) – only one (Zambia) is a member of EITI. In fact, the mineral-producing autocracies that are EITI members (Zambia and Kazakhstan) have lower OBI scores than the mineral-producing autocracies than are not members, although the differences are not statistically significant.

It’s not foreign investment either

Ross also doesn’t find evidence that the transparency anomaly can be explained by dependency on foreign investment. Oil rich countries derive much more revenue from their extractive industries than countries rich in other minerals derive from theirs. The argument would go that non-oil countries would be more transparent because they are more dependent on foreign investment. But Ross doesn’t find any link between foreign investment inflows and budget transparency.

The clue lies in who extracts

Unsurprisingly Ross concludes that learning more about the different levels of budget transparency in oil and mineral dependent countries should be a priority for future research. He finds a promising clue to this puzzle in the fact that in most autocracies the state manages oil extraction itself through national oil companies, making it easier to cloak revenue. The extraction of other minerals is more often managed by the private sector. This still doesn’t explain why the regular budgets of oil states would also be less transparent. But the lower revenue derived by non-oil states may make them more dependent on domestic revenue such as taxes and service charges. The research of Mick Moore on taxation and democracy suggests that dependence on the consent of citizens to pay tax may compel governments to be more transparent with the management of public resources.

What does all this mean?

One of the important implications of Ross’s findings for the policy and advocacy community is that domestic politics, and therefore national level advocacy, matter a great deal. Like Wehner and de Renzio, Ross finds that the way in which extractives are managed at country level is the key variable for their impact on budget transparency. In fact, it may matter more than the need to attract foreign investment, and more than international advocacy campaigns. Of course this does not make international advocacy for transparency irrelevant. It just means that international advocacy efforts should be based on a better understanding of domestic contexts, and have a complementary focus on country level advocacy.

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