Global Policy Forum

By Thomas I. Palley *

Many of the world's poorest countries possess significant reserves of oil and other natural resources. Yet numerous academic studies show that, controlling for income level, countries that are highly dependent on revenues from oil and other minerals score lower on the U.N. Human Development Index, exhibit greater corruption, have a greater probability of conflict in any five-year period, have larger shares of their population in poverty, devote a greater share of government spending to military spending, and are more authoritarian than those with more diverse sources of wealth.

This occurs because the income from these resources is often misappropriated by corrupt leaders and officials instead of being used to support growth and development. Moreover, such wealth often fuels internal grievances that cause conflict and civil war. This pattern is widely referred to as the "natural resource curse" -- natural resource wealth creates stagnation and conflict, rather than economic growth and development.

The natural resource curse is vividly illustrated in Angola, where an International Monetary Fund fiscal audit has been unable to account for hundreds of millions of dollars of oil revenues. In Nigeria, Cameroon and the Republic of the Congo, oil wealth has failed to generate development, and has instead generated deep-seated corruption that retards growth. Sudan is marked by strife over oil. And in Aceh, Indonesia, regional separatism has been fanned by secrecy about oil payments and public misunderstanding about their scale.

The problem of natural resource-related corruption also afflicts the Western Hemisphere. Ecuador is rich in oil but ranks as one of the most corrupt countries in Latin America. And accumulated resentments over the way Venezuela's oil wealth has been distributed have contributed to the political divisions in that country.

Finally, Saddam Hussein's Iraq is another tragic example of the natural resource curse. Iraq is abundantly rich in oil, having proven reserves of 112 billion barrels, which represent 10.8 percent of the world's total proven resources. Moreover, many believe that Iraq's potential may be far greater, as the country is relatively unexplored due to years of war and sanctions. But like many other countries rich in natural resources, Iraq has failed to benefit from its oil wealth. Instead, Saddam Hussein's regime used petroleum revenues to finance domestic political repression, military aggression and state looting – exemplified by wasteful spending on presidential palaces and transfers of funds to personal foreign bank accounts. These revenues also bankrolled the war with Iran and Saddam's invasion of Kuwait.

The natural resource curse represents the pre-eminent obstacle to democracy and development in much of the developing world. Moreover, the problem has the potential to worsen in the coming decade. In the Caspian Basin, the completion of the Baku-Tiblisi-Ceyhan pipeline will increase oil revenues in Azerbaijan; the now completed Chad-Cameroon pipeline will have oil revenues ramping up in Chad; and off the coast of West Africa, the Gulf of Guinea has some of the most promising oil exploration prospects anywhere in the world. None of these areas have histories of strong democratic governance, and all therefore risk being afflicted by the natural resource curse.

There is no "silver bullet" to remedy the problem, but there are a range of measures that the U.S. and other developed nations, multilateral institutions, and developing countries themselves can all take to increase accountability and transparency. In a world lacking strong institutions of global governance, the U.S. has a special responsibility to back international cooperation and collective action. For without coordinated interventions, corruption will just move between jurisdictions – like squeezing air in a balloon. In addition, putting a stop to the national resource curse would serve U.S. national security interests, both by reducing strife around the globe and by addressing the poverty and political instability caused by this tragic pattern.

Publish What You Pay

Corruption is the enemy of both free markets and democracy. Corrupt government promotes corrupt business, and corrupt business promotes corrupt government. This inexorable logic means that citizens and investors everywhere have a public and private interest in combating corruption by increasing transparency and accountability.

When oil and mining companies fail to disclose payments to governments, for example, it is easier for government officials to steal and more difficult for citizens to hold officials accountable. Recognizing this, philanthropist George Soros and his Open Society Institute have been working for the last 18 months to address the problem of corruption connected with natural resource extraction through an international "Publish What You Pay" campaign.

This initiative proposes legislation requiring publicly-listed oil and mining companies to disclose information about payments to government, as a condition of stock exchange listing. Relevant payments that would have to be disclosed include tax payments, royalty and license fees, revenue sharing and payments-in-kind, forward sales of future revenues, and commercial transactions with