It’s political incentives that result in bad decisions about oil, gas, and mining revenues.

Oxfam calls this blog “Politics of Poverty” for a reason. Poverty is a political construct; people are poor because of decisions made by the politically powerful. This is increasingly the frame of analysis my team taking for our work on extractive industries, and it may lead us into some new and potentially uncomfortable areas.

A lot of ink has been spilt (and money spent) in the last decade trying to find an answer to the “resource curse”, i.e. how poor countries can use their oil and mining wealth to fight poverty and not increase corruption, conflict, human rights violations and other socioeconomic problems. “Transparency” is often put forward as a remedy. More public information means greater governmental accountability for spending resources revenues. I buy into this wholeheartedly. Our team has been at the forefront of global efforts to create mandatory transparency in the extractive industries sector, most notably via the passage of the Dodd-Frank Wall Street Reform Act, which requires oil, gas, and mining companies to disclose their payments to governments.

Still, even as I’ve personally championed transparency, I’ve known that information alone won’t fix the problems of misuse of extractive revenues. More is needed, including respect for free, prior and informed consent and other basic human rights. I’m coming to the conclusion that “more” has to involve entering the political realm, where bad decisions about resource distribution are not made necessarily out of gross incompetence and corruption, but out of entirely rational—and entirely perverse—political incentives.

Let me offer a few concrete examples to explain what I’m talking about here.

The Peruvian government has in recent years received large amounts of mining revenues (although less now than at the height of the mining boom). Poverty in the country has gone down overall during the country’s resource boom, but remains stubbornly high in rural areas where the mining and oil extraction takes place. Outside of the small Andean city of Espinar, you can see people living in mud-brick houses and using rudimentary farming implements. A modern, multinational mining operation operates nearby. Poverty in this region is above 60%. How can this be, amidst all this mining money?

Mining companies, the World Bank, and others will argue, that the answer is that the local government lacks the capacity to come up with effective plans to spend the money. They would argue the local government instead wastes revenues on nonproductive uses like soccer stadiums, plazas and big municipal buildings. Are these kinds of expenditures made out of incompetence, or do local governments make them in response to a legitimate interest in staying in power? Handing out goodies is a political survival strategy in every country in the world. (Think US military weapons procurement policy). Should the people who vote local government officials into power be told not to want these things? How can political incentives be created to encourage expenditure that is less cortoplacista (“short-termist”)? And, if local government truly lacks capacity, why doesn’t the national government invest more in trying to build it?

I was in Guatemala recently and the head of our partner organization, Madre Selva, told me something very interesting. He said, “We win consultas but we lose elections.” He meant that in the overwhelming indigenous areas of highland Guatemala where Madre Selva works with mining-affected populations, communities have been amazingly successful in staging “consultas,” or popular votes, against mining projects. But in some of those same areas, the same communities vote for right-wing, pro-mining candidates because they promise (and in some cases, actually deliver) more tangible things to the communities (stadia, etc.) without necessarily taking their long-term interests into account.

Let me put one more example on the table. In Ghana, rural communities are governed by traditional chiefs who make decisions on behalf of the community, including whether to sell community land to a mining company. The chiefs are widely viewed as corrupt and acting in their own self-interest rather than those of the community. (See an excellent recent paper on elite capture in Ghana co-authored by André Standing and Gavin Hilson.) Mining revenue that is redistributed back by the central government goes through the chiefs who spend how they want to spend with little oversight or accountability. So is the solution then to do away with traditional chieftancies? One might come to that conclusion, but is it politically and culturally feasible? Or politically correct to even suggest this?

I certainly don’t claim to have all the answers on these tricky questions of the political economy of the resource curse. I do firmly believe that strengthening citizen voice and participation in decision-making is a critical step towards creating more accountability and more enlightened governmental decision-making.  At the time, while transparency is an essential enabling condition for this “virtuous cycle” to begin, it alone won’t be enough to get the job done. Political issues will have to be addressed.

To begin examining closely these political issues and proposing actionable steps to take in response, our team at Oxfam is embarking on an ambitious research agenda. This and our internal reflection may take us places we hadn’t anticipated going and lead us to some potentially uncomfortable conclusions. But I’m convinced that it is in this area of inquiry that we’ll find the real breakthroughs.