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By Paul Collier and Michael Spence
Wednesday Apr 9 2008 13:05
Many low-income countries are in the midst of commodity export booms. The sums dwarf aid flows and are their biggest opportunity for transformation. Yet the booms of the 1970s turned into a curse. It is vital that history should not be repeated and so Robert Zoellick, president of the World Bank, has rightly made it a priority. What, in practice, can the bank and the International Monetary Fund do?
Forget conditionality: governments now have sufficient revenues to breathe the air of freedom and China is offering unconditional money in abundance. So any international standards for resource extraction must be voluntary. Fortunately, in this area voluntary standards have a good record. The Extractive Industries Transparency Initiative, launched in 2002 as a standard for revenue reporting, has a wide take-up. Standards provide rallying points for reformers and a benchmark for performance and promote competition between governments.
The EITI was the right place to start but it would be the wrong place to stop. There are five main decision points in determining whether assets removed from under the ground are replaced by assets above the ground. Step one is how the rights to resource extraction are sold. Currently, there is both an agency problem - ministerial corruption - and an information asymmetry: companies know better than governments what rights are worth. The consequences are often grotesque. The simple way round these problems is to auction the rights, the conduct of the auction being internationally verified. Step two is to tax the revenues.