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Reversing 'the curse': Diversifying a resource-based economy

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George Soros, international financier and founder of the Open Society Institute.

Mark Moody-Stuart, chairman of Anglo-American plc.

Much of the EBRD region is rich in mineral and petroleum resources which should, in theory, help them build strong, diverse market economies. But it takes a lot more than just money, according to members of the Sunday Annual Meeting panel on 'Fuelling progress towards diversification: can natural resources build strong economies?'

The panellists said strong, diversified economies are built on transparency in government's use of resource-based and other income; rule of law; judicial independence; competition policy and action against monopolies; and an investment climate that nurtures and protects small businesses.

They said these are the antidotes to the natural resource 'curse' under which government officials in some countries around the world have siphoned off resource wealth for corrupt uses and to repress the population.

George Soros, international financier and founder of the Open Society Institute, said there was no turning back the clock in terms of past corruption, particularly in the sell-off of natural resources to private interests. "There was an original sin in resource exploitation, a free-for-all where resources were captured, quite a bit of corruption."

"I don't believe there is much to be gained by going back and trying to remedy all the old injustices and illegalities of the past," said Mr Soros. "However, going forward, if these countries are transparent and accountable for how they spend money and I think they have a good future…with higher standards."

Simon Taylor of the non-governmental organisation Global Witness, said his group's work in promoting transparent reporting of government and corporate revenues from natural resources, particularly from diamonds and oil, has caught on in some parts of the world. "But I can’t see certain countries ever coming to the table and they're the countries of the greatest concern."

"Transparency is only step one," said Mark Moody-Stuart, chairman of the mining company Anglo-American plc. "In Africa, it's well known where newspapers have published exactly what (resource royalties and taxes the government) was paid, the International Monetary Fund is asking questions about where it went, and the president just sits there with a seraphic grin and doesn’t tell anyone."

The key challenge "is how to make reasonable use of the petro-dollars and petro-roubles," said Alexei Mordashov, Board Chairman of Severstal, the Russian steel company. That resource income should be "split them between 'stormy weather' funds for the future and, on the other hand, on education, on building small businesses," said Mr Mordashov. However, he noted that Russia's economy is dominated by two dozen gigantic business concerns and the small business sector is underdeveloped.

As for international financial institutions such as the EBRD investing in natural resource extraction, the panellists said those projects need money from the EBRD and other taxpayer-backed international financial institutions (IFIs) much less than they need the IFIs' advice and influence.

"There's enough liquidity, capital to go around," said moderator José Ángel Gurría, Mexico's former Finance Minister. But, he added, by being part of these projects the IFIs act as "the most enriching, enlightening sources of policy development in these countries."

He and other speakers said the various IFIs often work with the same borrowers but impose differing sets of conditions. "Those conditions often conflict," said Mr Gurría. As the IFIs have the same governments as shareholders, he said, they should improve their cooperation and set similar, if not identical conditions for each project and country.

18 April 2004