Managing Natural Resource Wealth

Published: 
August 1, 2006
By: 
Jill Shankleman

Natural resource-rich countries demonstrate a higher than average risk both of experiencing conflict and of returning to conflict. Jill Shankleman provides lessons from Iraq, Sudan, Angola, Liberia, and Afghanistan.

Summary and Recommendations

  • This report analyzes the particular challenges of stabilization and reconstruction missions in countries rich in hydrocarbons and minerals and provides lessons learned from the recent experience of such countries as Iraq, Sudan, Angola, Liberia, and Afghanistan. It offers recommendations for the U.S. government and others involved in natural resource-rich countries emerging from conflict and also to the extractive industry companies and banking sectors-- that play a critical role in these states.
  • War-torn countries rich in hydrocarbons and minerals face particular problems in the stabilization and reconstruction of their states despite the apparent promise that natural resource wealth holds. Unless deliberate efforts are made to avoid the "resource curses"--corruption, economic instability, conflict over the distribution of resource wealth and control of resource-rich areas--these curses will undermine peace building.
  • Elite groups who receive royalties and taxes paid by extractive industry companies have shown themselves consistently resistant to democratization.
  • Control over natural resources is fundamental to sovereignty. Ultimately, it is the governments and people of resource-rich countries who must put in place the systems that enable resource wealth to support stability and development However, through early and consistent action, the international community can play an important role in helping resource-rich states emerging from conflict manage the wealth that accrues from these resources, and can make proper wealth management a condition for donor assistance.
  • It is essential that international missions and indigenous transitional governments immediately secure effective control of natural resource wealth (physical and monetary) and establish the laws, institutions, and capacity to manage that wealth transparently, accountably, and in ways that support reconstruction.
  • Achieving these goals requires prior planning by relevant U.S. agencies, a willingness to confront vested interests, a consistent approach from the international community and donors, the involvement of civil society, and the deployment of human resources, such as forensic accountants able to "follow the money," as part of the mission staff.
  • To be successful, the extractive industries and their bankers, the international financial institutions, and non-governmental organizations (NGOs) must be brought into this process.
  • The key recommendations for U.S. departments and agencies involved in stabilization and reconstruction missions in countries dependent on hydrocarbons and/or minerals are as follows:
     
    • Make an immediate assessment of the extent to which transitional governments (including subnational entities with resource wealth, such as South Sudan) have
       
      • effective control of natural resource-rich areas' wealth and the associated facilities (pipelines, oilfields, mines, airstrips used to export minerals, etc.);
      • transparent and accountable systems for allocating new resource concessions;
      • transparent and accountable systems for receiving and using government income from the production of hydrocarbons and minerals; and
      • macroeconomic plans and programs that take into account the challenges of a resource-based economy, particularly the unpredictability of government revenues.
    • If no indigenous government exists or if the mission has a power-sharing arrangement with a government that is in place, develop country-specific natural resource wealth management plans in collaboration with other international agencies and bilateral donors to achieve
       
      • effective control over resource-rich areas and related facilities;
      • a legal and institutional framework for transparent and accountable management of resource wealth; and
      • institutions and capacity for effective macroeconomic management, taking account of the specific issues of resource wealth.
    • The international mission should
       
      • work closely with the international organizations that have expertise and a focus on reforming management of natural resource wealth;
      • develop a corps of on-call specialists in hydrocarbon and mineral law, economics, and accounting to take the lead in conducting assessments and providing expertise and technical assistance;
      • identify other stakeholders who have an interest in the natural resource sector and whose engagement should be planned for--industry, NGOs, and local political leaders; and
      • establish one or more centers of excellence in natural resource wealth management to build capacity in government, industry, the media, and NGOs in the United States and in resource-rich countries.

Introduction

This report analyzes the particular challenges of stabilization and reconstruction missions in countries rich in hydrocarbons and minerals (International Monetary Fund, 2004) and provides lessons from the recent experience of countries such as Iraq, Sudan, Angola, Liberia, and Afghanistan. It offers recommendations for the U.S. government and others involved in natural resource-rich countries emerging from conflict and also to the extractive industry companies and banking sector that play a critical role in these states.

Specific Issues for Societies Emerging from Conflict

In addition to the generic challenges of dependency on natural resource wealth discussed later in this report, a postwar environment where hydrocarbon and mineral extraction has been maintained throughout the conflict period presents its own problems and opportunities. Natural resource-rich countries demonstrate a higher than average risk both of experiencing conflict and of returning to conflict in the decade following a peace agreement.

The following problems are often found in these countries:

  • Powerful and corrupt vested interests, for example in oil ministries, state-owned companies, the army, and the highest levels of government
  • Heavy government debt burdens as a result of bilateral and commercial loans taken out on "war terms" and offset against future resource income
  • Disputes about subregional control and distribution of resource wealth feeding into fundamental questions of the type of state (for example, Iraq--the degree of federalism); the existence of a state (for example, southern Sudan--the promised referendum on independence); or the extent of regional autonomy (for example, Aceh, Indonesia)
  • Militias/insurgents controlling or influencing resource-rich areas or pipeline routes
  • Damaged oil fields, pipelines, and mines
  • Grievances and human rights issues relating to forced expulsion of people from resource-rich areas by military or rebel forces
  • Long-term concessions sold on terms that reflect the risk of a war economy but are unfavorable to the country in times of peace
  • An unattractive market for international private sector investment
Successes, Failures, and Future Challenges

Few developing or transitional countries have successfully managed both the political and economic challenges of natural resource dependency. But there are some cases of successful natural resource wealth management that offer lessons for reconstruction and stabilization missions. Botswana has leveraged its diamond wealth to bring most of its population out of poverty--although this achievement is now jeopardized by the country's HIV/AIDS epidemic. Chile has been relatively successful on the economic aspects, as has Azerbaijan to date, by establishing an oil fund in the period running up to the majjor expansion now underway in its oil industry. East Timor, with assistance from the World Bank, is setting up a fully transparent and audited oil fund to spread the benefits of resource wealth over a longer period and is an active participant in the Extractive Industries Transparency Initiative (EITI) (a voluntary program launched in 2002 among governments, resource companies, and NGOs) (Center for Strategic and International Studies, 2004).

Natural resource wealth continues to be a destabilizing factor in Liberia, the Democratic Republic of the Congo, and Iraq. There are early signs that this might also be the case in Sudan, as officials from South Sudan are negotiating concessions apparently outside the arrangements provided for in the Comprehensive Peace Agreement and demarkation of the north/south border is delayed because of the oil that lies beneath the border zone.

Control and management of natural resource wealth is a factor in ongoing conflicts such as those in Cabinda (Angola), Mindanao (Philippines), and the Niger Delta (Nigeria), as well as international territorial disputes, for example, between the several countries claiming all or part of the Spratly Islands and Nigeria and Cameroon over the Bokassa Peninsula.

About the Report

This report is based on a series of consultations under the auspices of the Natural Resources Working Group, chaired by J. Robinson West, chairman of the board of the United States Institute of Peace and PFC Energy, and Dr. Jill Shankleman, former Institute senior fellow and oil sector consultant. Harriet Hentges, former executive vice-president of the Institute, served as a special advisor to this working group.

The working group is part of the Institute's Filling the Gaps program, which aims to systematically address the causes of failure in specific areas in reconstruction and stabilization operations and to generate policy options for those in the U.S. government and elsewhere who lead and staff these missions. Filling the Gaps is directed by Daniel Serwer and managed by Beth Cole Degrasse of the Institute. Dr. Jill Shankleman authored the report.

The views expressed in this report do not necessarily reflect views of the United States Institute of Peace, which does not advocate specific policy positions.

August 1, 2006