Why are so many nations rich with highly concentrated resources so frequently undemocratic? The long-debated “resource curse” gets new evidence from Dr. Gilbert Maoundonodji, a Reagan-Fascell Democracy Fellow. He argues that in Chad resources actively hinder a nation’s ability to foster democratic development.

In this post, we’ll take a look at Dr. Maoundonodji’s arguement, then look to the Global Integrity Report data for insights.

This week, the National Endowment for Democracy (NED) held a presentation entitled “Building Democracy in Resource-Rich Countries: The Case of Chad’s Oil Exploitation” led by Dr. Gilbert Maoundonodji. He pointed out that of all oil dependent states (defined as a country whose oil exports exceed 25% of total fiscal revenue), only one is a fully functioning democracy: Norway. A few other countries were described as ‘flawed democracies’ – these included Trinidad & Tobago, Mexico, and Indonesia (all three will be included in the Global Integrity Report: 2009).

Testing for the “curse”…

This presentation made us curious about our own data; is this inverse relationship between amount of resources and level of democracy reflected in GI Country Report Data? We decided to take a look.

Over the past two years, the Global Integrity Report has covered half of the member-countries of the Organization of the Petroleum Exporting Countries (OPEC). Between the Global Integrity Reports 2007 and 2008, our team of local experts has assessed the accountability frameworks and the levels of citizen access in Algeria (’07), Angola, Ecuador, Iraq, Kuwait and Nigeria. Our results show that as a group, the OPEC member-states are below the Global Integrity average scores in the monitoring state-owned enterprises and the conflict of interest regulations in both the privatization process and in the government at large.

While the Global Integrity Report does not directly evaluate the extractive industries framework or the national business climate, our research on each country’s broader governance structure does touch upon issues relevant to the oil sector, mainly, government accountability and the monitoring of state-owned enterprises and the privatization processes.

OPEC Nations Covered in the Global Integrity Report

The Global Integrity Report: 2007 shows very weak levels of government accountability across all branches of the Algerian government. The lack of conflict of interest safeguards leads to highly politicized appointments and government officials who often have personal business interests while in government positions. Considering this consolidation of public and private power, it is not surprising that the privatization process happens behind closed doors. In addition, there is little oversight of state owned enterprises and no public access to the financial records of these companies.

The lack of citizen access to financial records of state-owned enterprises is a recurring theme in all the countries included in our OPEC sub-sect. In fact, one of the key findings of the Global Integrity Report: 2008 shows that the Middle-East and North African region shows a significant lag in freedom of information when compared to the rest of the nations included in the Report.

Angola’s government accountability scores are some of the lowest seen in the Global Integrity Report. Conflicts of interest go largely unchecked for members of all the branches of government, including the civil servants who facilitate the privatization process. The regulation body overseeing state owned enterprises is no longer functional making the financial reports of these companies largely unattainable to the public.

The Global Integrity Report: Ecuador shows that state-owned enterprises are well monitored and companies are required to submit financial reports. However, there is little public access to these reports. There has not been significant privatization development in Ecuador in the past decade, which, according to a peer reviewer, has contributed to stunting the nation’s economic growth.

There is a network of commissions to oversee state-owned enterprises in Iraq, however these commissions do not have the mandate to impose penalties and the heads of the commissions are often times appointed due to their political connections. In addition, companies rarely submit updated financial records to their corresponding monitoring commission. Privatization officials are not subject to any conflict of interest regulations and the privatization process is not well advertised.

The best news comes out of Kuwait, where a strong regulatory framework for the privatization process developed out of an initiative in the mid-1990s to increase private shareholders of companies. Ministries are assigned to oversee state-owned enterprises whose interests fall under their mandate. The trouble with this system is that long-term investigations are nearly impossible considering that each minister’s term is only 2 years. According to the Global Integrity Report: Kuwait, “[in 2007], the minister of oil asked for the Audit Commission to investigate the building of the 4th oil refinery, as members of the parliament have accused him of favoritism in tendering to certain companies.”

Although Nigeria fares slightly better than other nations in the OPEC sub-group when it comes to government accountability, the country still faces several challenges. Conflict of interest regulations are rarely enforced in the privatization process and citizens’ participation is restricted because they have to physically visit the Bureau for Public Enterprises in order to view the regulations for participation. Public access to state-owned enterprises’ financial records is severely limited and, according to the Report, the oversight of these companies is “episodic” at best.

Is there or is there not a causal relationship between resource wealth and autocratic governments?

The Global Integrity Report cannot definitively answer this question. But, in evaluating the implementation of regulations surrounding industry in resource-rich nations, the Global Integrity Report does provide a look into a nation’s demand for accountability and the effectiveness of governance structures.

In his presentation, Dr. Maoundonodji suggests that oil dependency and a wealth of resources do not automatically create autocratic governments, but they do provide a basis for consolidation of power. The autocratic tendencies of these governments were strengthened by a dependence on oil, not created by it. Oil wealth also makes it more difficult for the formation of civil society in that most wealth is pocketed by a few elites. Governments rely on oil money for revenue, less so on taxes, and thus may feel less obligated to their citizens. Therefore once a pattern of dependence on resource wealth is established, it is difficult to enact democratic reforms.

The common thread running through all these country reports is the lack of transparency in the financial records of state-owned enterprises. This is particularly troubling in the OPEC nations where partially state-owned energy companies can leverage their economic importance for political gain. The lack of conflict of interest regulations across branches of government only furthers the entanglement of competing public and private sector demands by allowing officials to keep their business interests while making policy decisions. In addition, the Global Integrity Report shows that citizens are unable to serve as watchdogs due to lack of access to information. Although monitoring agencies exist in all of the OPEC nations Global Integrity has covered so far (except for Angola), these agencies must be de-politicized to encourage a more vigilant watch of energy companies’ financial records.

However, if Dr. Maoundonodji is correct, enacting these reforms will be challenging at best.

If you’re interested in this topic and want to know more, check out the Extractive Industries Transparency Initiative website.

–Jessica Mahoney and Norah Mallaney