Tuesday, December 2, 2008

What Happens after Commodity Prices Go Bust?

A cruel irony: just as the West started to get a little serious about imposing codes of social responsibility on their extractive industries, China usurped the West as Africa's primary foreign investor. Chinese firms have fewer compunctions than their Western counterparts, and are unlikely to be impressed by (Western) public campaigns urging social responsibility. In any case, the sudden, dramatic crash in commodity prices means that investments are more likely to be abandoned than serve as catalysts for development.

This, at any rate, is what I gather from two interesting talks I just listened to. The first is by Ricardo Soares de Oliveira at the Fatal Transactions conference held last month in Bonn. The second is a speech by Paul Collier at TED. Although neither focuses directly on the DRC, combined, their speeches lead me to some fairly pessimistic conclusions about the Congo's future.

In a speech recorded before the commodity price crash, Collier points out that income from extractive industries dwarfs the amounts that developed countries provide in aid. Angola, for example, made $50 billion (!) last year in oil revenue; the developed world's entire aid flows to poor countries totaled just $35 billion. Unfortunately, commodity booms usually provide only short-term (5 year) benefits to poor countries. In the long-run (15 years) countries are worse off from having oil or minerals than they would have been without them. The only exception are countries where the rule of law is well-developed, such as Canada or Norway. (This is the well-known "resource curse.") Thus the key to helping poor countries is to improve their governance so that they can benefit from their own natural resources.

The West, he says, can best help these countries by strengthening the people who are working to hold their governments accountable. For example, no sooner had the Extractive Industries Transparency Initiative (EITI) come into being than Nigerian reformers adopted it as the standard for judging their own leaders. There are, says Collier, a number of mechanisms that the West can insist companies use to help ensure that poor countries benefit from their natural wealth, such as verified auctions. Morally speaking, this has a nice ring to it: instead of focusing on aid, with all its disappointments and latent ambiguities, the West should focus on stopping its own bad-faith actors from colluding with corrupt leaders to prey on impoverished nations.

Oliveira provides a useful counterweight to Collier's optimism. He gives an overview of the effort to get extractive industries operating in poor countries to consider the social and political consequences of their work. In the early Nineties, many companies could get away with saying that the "business of business is business"--and that they had no responsibilities to anyone but their shareholders. By the late Nineties, virtually every major company had "rhetorically embraced" the need for social responsibility, and a few--like BP and some Norwegian firms, actually practiced it. Efforts like the Kimberly Process, the EITI, and the Publish what You Pay (PWYP) campaign had some successes. But it's become clear this decade that the promotion of social responsibility has hit some major obstacles.

For one, these campaigns were often more effective rhetorically than they were in actuality; companies devoted pages of their glossy annual reports to the social benefits they provided the places where they worked, but did little differently on the ground. For another, the campaigns often had no teeth--the UN Panels on the Congo, for example, provided actionable information on Western firms' malfeasance, but not a single company was ever sanctioned. In addition, fly-by-night companies can extract the minerals and inject them into the supply chains. Major manufacturers can claim plausible deniability, and in any case benefit from reduced prices. But most importantly, China has emerged as the major investor in African resources, and is unapologetic about doing precisely what Western firms have done for the past 40 years. A review of China's mining contracts in the DRC (forthcoming in JMAS) shows just how bad a deal the Congolese got.

Of course, all of this may be moot, anyway. With the collapse of commodity prices, companies are bailing out of the DRC as quickly as they once sought to get in. With economic catastrophes crowding in from all sides, we may come to look upon the social responsibility movement as the memento of a older, more luxurious era.

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