Helen Clark: "Avoiding the resource curse: Managing extractive industries for Human Development”

20 Oct 2011

Keynote Speech by Helen Clark, UNDP Administrator
At the International Conference on “Avoiding the Resource Curse: Managing Extractive Industries for Human Development” in Ulaanbaatar, Mongolia

This conference has been convened by the Government of Mongolia and UNDP to discuss the different ways in which countries have handled their extractive industries’ sectors, and how the wealth those sectors generate can best be used to support sustainable human development. 

While exports of fuels and minerals are very significant for some developed countries such as Australia, Canada, and Norway, the vast majority of natural resource exporters are in the developing world.

Improvement in exploration technology and robust global demand for these resources suggest that mineral resources are likely to constitute an even bigger share of many countries’ exports and national income in the future, especially if commodity prices remain high. More and more countries are becoming oil, gas, and minerals exporters, especially in Africa.

The exploitation of mineral resources can bring great benefits. Norway, Canada, Australia, Botswana, and Chile are among those who can demonstrate that. They have improved their human development by using their large mineral wealth effectively.

On the other hand, extraction of mineral resources has been a curse for a number of resource-rich countries. Some have grown at a slower pace than those without substantial natural resources. Indeed, the exploitation of natural resources has often been associated with economic mismanagement, growing inequality, corruption, political instability, and conflict.

The question is: Why have some countries been able to manage their natural resources successfully, while others have failed to reap the potential benefits ?  The answers can be identified by examining specific cases.

For example, Botswana is a small, land-locked southern African country. It is the world’s largest producer of diamonds by value. It has been able to translate its resource wealth into growth and development. Botswana set up mechanisms to ensure that a significant part of its mineral resource revenue is allocated for investment in health and education. It also invests a portion of its resource wealth in its Pula Fund, which serves as a buffer against price volatility and preserves a share of the rents from diamond exports for future generations.

In another case, Norway has drawn on its oil wealth to move from being one of the poorest countries in Europe during the early 1900s to lead UNDP’s global Human Development Index frequently in recent years.

Both Botswana and Norway have a consistent record of good management of natural resources. Other countries have had trouble in the past, but have made significant improvements in recent years.

For example, Nigeria’s first oil boom from 1973 to 1983 is seen to have been largely wasted, but that of the second boom from 2003 to 2008 is viewed as having been more successful. Economic reforms in Nigeria have been establishing a foundation for better application of the proceeds of the country’s natural resources to lift economic growth and human development. Nigerian GDP per capita at purchasing power parity increased by 45 per cent from $1,496 in 2000 to $2,135 in 2010, compared to less than a four per cent increase the decade before.

Natural resource wealth has presented particular challenges in countries where conflict has erupted over the control and exploitation of natural resources. The “resource curse” has triggered, escalated, and sustained violent conflicts in such cases.

Even without the curse of protracted conflict, the dividend from resource exploitation can be short lived if not applied strategically. Nauru, a small island nation in the South Pacific, was endowed with significant phosphate deposits. Their highly profitable export gave the country the second highest per capita income in the world in the late 1960s and the 1970s. Today, the accessible phosphate on the island is exhausted; the revenues have gone; and local people are left with a narrow, environmentally precarious rim of land circling a wasteland where the open-pit phosphate mine operated.

In each region of the developing world, there are examples both of countries which have translated their resource wealth into human development and those which have not been able to do so.

Through good governance and sound long-term development planning, countries can avoid the effects of the resource curse, and provide quality services, such as education and healthcare, to their citizens. Effective anti-corruption laws and high civil society engagement also encourage governments to be more transparent about how they are spending and distributing the country’s natural resource wealth.

Another key to avoiding the resource curse is economic diversification, as demonstrated by the development of agriculture and the industrialization of oil exporters like Indonesia and Malaysia. Where these sectors can become competitive, they help create economies better able to withstand shocks, including those of volatile prices.

Although a number of countries in the Asia-Pacific have escaped the resource curse so far, a number of its resource-rich, least developed countries could be vulnerable to it if they do not have strong governance, broadly based economic strategies, and mitigation measures in place.

Extraction of resources is expected to increase sharply in the Asia-Pacific, Africa, and elsewhere in the developing world in the coming years. A significant amount of investment is now going into the oil and natural gas sectors, driving economic growth, diversifying supplies beyond the Middle East, and satisfying the demand from growing economies for imported fuel.

The capital-intensive nature of large-scale infrastructure projects does make them susceptible to corrupt practice. That, and the way in which rapid resource extraction can alter the political, economic, and social structures of exporting countries, make it essential that the resource curse threat is taken seriously.

In Mongolia high global mineral prices from 2004 to 2008 translated into large government revenues. Revenue windfalls were quickly converted into across-the-board cash transfers and increased civil service salaries, with consequences for inflation and exchange rate appreciation. Most foreign direct investment in Mongolia has come to the mining sector.

These factors combined have the potential to provoke the “Dutch Disease” in the medium and long-term, if unattended to. It is fortunate therefore that Mongolia has recognized the threat, and passed the Fiscal Stability Law aimed at supporting macro-economic stability. As well, Mongolia has established a Fiscal Stability Fund to give some protection against the volatility of commodity prices, and a Human Development Fund which over time has the potential to be targeted towards more vulnerable segments of the population.

Timor-Leste has less than one tenth of one per cent of the world’s known oil reserves, but that translates into significant potential development revenue for a small nation. Like Botswana, Kuwait, and Norway, Timor has a Fund designed to preserve its oil wealth for future generations. The Fund has an Estimated Sustainable Income (ESI) threshold, beyond which policy-makers cannot withdraw funds in any given year without parliamentary approval. Given the state of underdevelopment in Timor Leste, however, it is far from unreasonable for the country to allocate a measured portion of its oil wealth for investment in both its economic potential and its social sectors now, while also preserving resources for future generations.  

The choices countries make about the use of their natural resource wealth very directly affect whether that wealth contributes to sustainable economic and social development or not. As I have indicated, there are examples of best practice, but there is no standard formula for technical aspects of policy design. Each country comes to the extraction of their resources with different endowments and characteristics.  Those influence whether they manage their resource wealth in an equitable and sustainable way.

As a matter of principle, I am convinced that natural resources can drive human development if they are managed in transparent, inclusive, and sustainable ways.  Allow me to elaborate further on these three points.

1. For natural resource revenue to benefit a country’s citizens, its management must be transparent throughout the contracting process; through the flow of revenues between companies and the government; and through government expenditure decisions (including at the sub-national level).

2.  Natural resource management regimes should be inclusive at the design and revenue allocation stages. In this context UNDP advocates greater community and civil society engagement from the outset, to support the benefits of extraction being distributed as widely as possible. Particular attention needs to be paid to the people on whom the extractive processes impact directly, some of whom are indigenous people, to ensure that their rights are upheld and their own development aspirations are met.

I note that the UN Special Rapporteur on the Rights of Indigenous Peoples has identified natural resource extraction and other major development projects in or near indigenous territories as one of the most significant sources of abuse of the rights of indigenous people worldwide.  He believes that an initial step to change that is to establish a dialogue and common understanding between indigenous peoples and governments.

UNDP’s Democratic Governance Group is carrying out work on extractive industries, democratic governance, and indigenous peoples.  It aims to build greater understanding between the corporate sector, indigenous peoples, and governments on basic standards and good practices to be promoted and incorporated in extractive industry sectors. That could contribute to the prevention of conflict, to governance processes which are democratic and inclusive, and to the upholding of human rights.   

3. The management of extractive industries needs to balance the country’s short-term priorities with its long-term development goals. Natural resource extraction, for example, often has environmental implications. They need to be acknowledged when projects are designed so that appropriate mitigation can be put in place.

The challenge as I have stressed, is to ensure long term benefits.  As the case of Nauru demonstrates, these kinds of resources are finite.  The introduction of sovereign wealth funds, as in Norway, can provide ongoing benefits far beyond the exhaustion of the resource.  Low-income countries, as I indicated in the case of Timor Leste, can make a strong case for investing larger proportions of their natural resource windfalls in development than a high-income country would. Raising the living standards of the poorest today and investing in health, education, infrastructure, and productive capacity helps developing countries advance human development and prepare for the days when the natural resource has been exhausted.
At UNDP, we view a large endowment of hydrocarbons and minerals as an opportunity to transform development prospects. Extractive industries can create the wealth required to do that if they are managed properly and their proceeds are fairly distributed.

UNDP is actively reviewing its activities and refining its approach to extractive industry management with partners around the world. We see several areas where our strengths and comparative advantage are helpful, including in building the capacity of governments and other stakeholders and improving the governance of resources.  

Countries still in the early stages of extractive industry development have the opportunity to design good management systems before large revenues start flowing. There is a window now for these countries to design policies which will avoid the resource curse.

This is a reason why UNDP is particularly happy to partner with the Government of Mongolia in co-hosting this conference. Mongolia is at the early stages of its mining boom, and has opportunities to put in place policies and mechanisms which ensure equitable distribution of the mineral wealth and avoid the resource curse.

To conclude, I am encouraged by the high-level participation from governments from around the world here today. This conference is an opportunity for us to learn from each another so that better systems of natural resource management can be designed and implemented.

I thank the Government of Mongolia once again for co-hosting this conference, and for its close relationship with the United Nations and UNDP. We have been partners for fifty years, and we look forward to continuing and strengthening our co-operation for many years to come.

Thank you.