Is FDI in natural resources a “curse”?

Theodore H. Moran: Marcus Wallenberg Professor of International Business and Finance Georgetown University; Non-Resident Senior Fellow, Peterson Institute of International Economics


A rich natural resource endowment can indeed be a curse, but need not be such. (1)

In aggregate terms, the finding that natural resource abundance is associated with lower than expected national growth rates is highly sensitive to the time period selected, and shows numerous counter-trend examples. (2) The negative outcomes in Equatorial Guinea, Democratic Republic of Congo, Angola, and Nigeria are countered by positive developmental impacts in Chile, Brazil, Colombia, Argentina, Indonesia, Malaysia, and Botswana. The specific problems associated with “Dutch disease” have proved readily manageable with appropriate macroeconomic policies. (3)

The difference between negative outcomes and positive outcomes from FDI in natural resources centers on the well-established need for transparency in revenue streams, for controls to prevent corruption, and for measures to set and enforce best-practice environmental standards. (4) Dealing with the “resource curse” has become the model for demonstrating that extra-market forces are needed to enable developing countries to optimize the gains from foreign direct investment: multilateral institutions like the World Bank must work with industry groups, environmental NGOS, and others to set common standards for dealing with the environment and rights of indigenous people, and to fund capacity-building for official enforcement and civil society monitoring. The Extractive Industry Transparency Initiative is advancing the norm of publication and verification of investor payments and government revenues from oil, gas, and mining. (5) Additional NGOs (Publish What You Pay, Revenue Watch Institute, Transparency International, Oxfam, and Global Witness, and others) help with capacity building for host officials, host legislators, and local NGOs auditors, and keep watch over outcomes. The EITI + + (Extractive Industry Transparency Initiative Plus Plus ) agenda of the World Bank aims to provide technical assistance, backed by a Trust Fund, for all aspects of resource management. (6) As the upcoming exploitation of new oil discoveries in Ghana illustrates, the need for external support to ensure good governance of FDI in natural resources is not limited to the poorest states — an observation that will be important later in discussing whether the World Bank and regional development banks continue to have a role to play in middle-income developing countries. (7)

But the EITI + + endeavor is still a work in progress, requiring specific country commitments and timetables covering investors of all nationalities (OECD and non-OECD), backed by measures to validate performance by the EITI secretariat. Thirty seven of the largest oil, gas, and mining companies have committed themselves to support the EITI, but many still oppose company-by-company reports of payments to the government. The reality is that company-by-company reports will ultimately benefit the most conscientious investors, by forcing all participants (including those from Russia, China, India, and elsewhere) to subject themselves to equal transparency. The Majority of international resource investors (including those that appose disaggregation) recognize that concerns that individual company disclosure would be commercially disadvantageous are in reality extremely minor or non-existent, and no company involved in disaggregated payment disclosure has later had its contract cancelled or renegotiated as a result. (8) Socially responsible investors should support company-by-company reports in their own self-interest. Extractive industry investors can also play a powerful role in persuading new host authorities to join wholeheartedly in the EITI process.

My research shows, however, that optimizing the contribution of FDI in petroleum and minerals to development requires three somewhat controversial extra additions to the EITI + + agenda. The first is a need for external assistance in negotiating and (perhaps) renegotiating extractive industry FDI contracts. The World Bank Group and regional development bank already provide guarantees, insurance, and dispute settlement processes that help ensure contract stability. It is now becoming clear that the mantra that contract negotiations should be regarded as private undertakings between international corporations and host governments whereas enforcing the contracts is a public good is not sustainable. (9) Multilateral financial institutions, bilateral assistance agencies, and international civil society groups need to provide assistance akin to the support for renegotiating extractive sector contracts — and bringing transfer pricing into line — in Liberia after the election of President Ellen Johnson Sirleaf. (10)

Second, as part of an expanded EITI + + agenda, multilateral training and support programs need to guide host countries to place greater emphasis on progressive taxes (income taxes) rather than regressive taxes (royalties and production sharing agreements) (11). This recommendation may take some in the pro-poor sustainable development policy community by surprise since such an approach generally means lower up-front payments to the host government while the foreign investor recovers the initial investment. But progressive taxes (even with higher tax rates) make the attraction of FDI into the extractive sector easier, and — most importantly — allow host authorities to benefit more fully when oil, natural gas, and mineral prices rise. The top ten foreign-owned mining companies in Chile paid taxes of $2.1 billion from 1991 to 2003, in contrast to payments on $9.7 billion on the part of the two state-owned mining companies, despite greater output and lower costs, principally because they subtracted accelerated depreciation on new properties. (12) When accelerated depreciation finished, one foreign-owned mine alone (Escondida) climbed from almost no tax payments to $423 million in 2004. As a practical matter, most developing countries will simple not want to wait five or more years before receiving any tax revenue, so a mix of a (low) royalty and an income tax (even an excess profits income tax) is perhaps the most favorable outcome.

Third, recent experience shows that there is a need for eyes-wide-open caution about ear-marking a share of extractive industry payments to be given to local communities. The history of some countries, like Nigeria, shows that local communities where natural resource investments lie are often left with very little to show from whatever revenues are captured from those investments. But contemporary evidence from the allocation of revenues directly to local authorities reveals that the latter have weak planning capability, little experience with tenders and contracts, and a tendency to adopt short-sighted expenditures on football stadiums and other popular undertakings beset by corruption even more pervasive than at the national level. (13) Perhaps a better model can be found in Chile’s centralized budget allocations directed to roads and schools in mining regions that has resulted in measurably superior poverty reduction in Antofagasta. (14)

Within a setting of reasonable transparency and appropriate governance (corporate governance and host governance), a rich natural resource endowment can regain the stature it was assumed to occupy in early development text books, as the base for broad-based and lasting national development.


1. Richard M. Auty, Patterns of Development: Resources, Policy and Economic
Growth (London: Edward Arnold, 1994). Jeffrey D. Sachs and Andrew M. Warner, “Natural resources and economic development: the curse of natural resources,” European Economic Review 45 (2001), pp. 827-838. Back to text

2. Daniel Lederman and William Maloney, “Trade structure and growth,” World Bank Working Paper (Washington, DC: The World Bank, November, 2003). Gavin Wright and Jesse Czelusta, “The Myth of the Resource Curse,” Challenge 47(2) (2004). pp. 6-38. See also Paul Stevens. “Resource impact: Curse or blessing? (A literature survey),” Journal of Energy Literature 9(1) (2003), pp. 3-42. Back to text

3. Graham A. Davis and John E. Tilton, “The Resource Curse”. Natural Resources Forum 29 (2005) 233-242. Graham A. Davis, “Learning to Love the Dutch Disease: Evidence from the Mineral Economies,” World Development Vol. 23, No. 10, (1995), pp. 1765-1779. Back to text

4. World Investment Report 2007: Transnational Corporations, Extractive Industries, and Development, (New York: United Nations Conference on Trade and Development, (UNCTAD), 2007). Back to text

5. EITI (Extractive Industry Transparency Initiative) Back to text

6. EITI Plus (Extractive Industry Transparency Initiative Plus Plus), htpp:// Back to text

7. The Government of Norway, IMF, World Bank, and Oxfam — among others — are advising Ghana on preparations for management of oil income. Back to text

8. Ibid, p. 22, p. 27. Toward Strengthened EITI Reporting — Summary Report and Recommendations, op. cit. pp. 3-4. Back to text

9. Daniel Dumas, Head of Economic and Legal Section, Commonwealth Secretariat. “Extractive Industries Week: Improving Extractive Industries Benefits for the Poor,” (Washington, DC: The World Bank, March 4, 2009). Back to text

10. Global Witness. “Heavy Mittal? A State with a State: The Inequitable Mineral Development Agreement between the Government of Liberal and Mittal Steal Holdings NV” (2006). Global Witness. “Update on the Renegotiation of the Mineral Development Agreement between Mittal Steel and the Government of Liberia,” (August 2007). “Liberian legislature passes the Liberian Extractive Industry Transparency Initiative Act,” Publish What You, (last visited June 11, 2009). Back to text

11. “Taxation of the Mineral Section,” Chapter 2 in James Otto, Craig Andrews, Fred Cawood, Michael Doggett, Pietro Guj, Frank Stermole, John Stermole, and John Tilton, Mining Royalties. A Global Study of Their Impact on Investors, Government, and Civil Society (Washington, DC: The World Bank, 2006). Back to text

12. International Council on Mining & Metals (ICMM), The Challenge of Mineral Wealth: Using Resource Endowments to Foster Sustainable Development. Chile: Country Case Study, (2007). Back to text

13. Author interviews, Peru, (June 2007). Cf. Peru Phase III Spotlight Note. (London: International Council on Mining and Minerals (ICMM), (August 2008). Back to text

14. For evidence from Chile and other countries with mining industries, see International Council on Mining & Metals (ICMM) and Commonwealth Secretariat. “Minerals Taxation Regimes: A review of issues and challenges in their design and application,” (London: ICMM and Commonwealth Secretariat, February 2009), Chapter 4,“Collection and distribution of mining taxes at the sub-national level.” Back to text