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Crafting a Strategic Response to the Commodity-Development Conundrum

A response to “Commodities and Switzerland: Development Policy Challenges and Policy Options” by Werner Thut.
Alexandra Gillies
p. 153-193

Index terms

Thematic keywords :

commodities, policy coherence, trade

Geographic keywords :

Switzerland
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1The risks that accompany natural resource wealth are well-known. Developing countries with large stores of oil, gas and mineral resources often fall victim to what is commonly known as the “resource curse.” Its symptoms vary from place to place, but frequently include persistent poverty, stagnant non-resource sector growth, fiscal instability, unsustainable levels of spending, high levels of corruption and public institutions that are unaccountable to their citizens.

2Global efforts to respond to these problems have gathered pace since the late 1990s. At varying speeds, and to varying levels of success, governments, companies and civil society groups have developed approaches to the set of challenges associated with resource wealth and development. Given the highly globalized and interconnected nature of the commodity sector (and the financial system into which commodity profits enter), diverse players share responsibility for the hardships that often accompany resource wealth, as well as for finding a solution.

3The 2013 paper ‘Commodities and Switzerland: Development Policy Challenges and Policy Options’, by Werner Thut of the Swiss Agency for Development and Cooperation, represents part of the Swiss awakening to their own role in addressing these challenges. Thut calls for a policy response that features three parts: supporting good governance in poor resource-exporting countries; participating in international initiatives; and, improving the Swiss regulatory framework. These areas make sense as  a general framework, but more urgency and more critical thinking are needed for Swiss efforts to be more than just “window dressing”.

4In the comments below, I further defend that a targeted and strategic response by the Swiss government is needed now, and suggest two specific areas where they could make a tangible contribution, given the particular political economy that characterizes many resource-rich developing countries. These ideas build upon the foundational work of Dr. Thut, but aspire to challenge policymakers further to take the kind of action that can have an impact.

The urgent need for Swiss action

5Commodities can drive development if governments receive a fair share of revenues and utilize it well.  Getting this right is a massive and time-sensitive challenge. Three hundred million citizens of resource- rich countries live in dire poverty, surviving on less than $2 per day. Eighty-five percent of these people live in poorly governed countries (Kaufmann, 2012). Non-renewable resources, valued at over one trillion dollars per year, are being extracted at quickening rates from these countries. The longer it takes to improve governance, the fewer resources will be left to benefit citizens.

6Switzerland plays a major role in the global commodities market, as noted by Werner Thut. Swiss companies, such as Glencore, Vitol and Trafigura, handle around 35 percent of the global physical oil trade and 60 percent of metals and minerals (Bosley C. and M. Kolesnikova, 2013) – business that amounts to more than $3 trillion.1 And business is booming. In the past decade, the top 20 commodity traders netted $243 billion in total profits (up from just $2 billion in 2000), and individual company profits outsized those of Wall Street’s largest banks (Blas, 2013). As Swiss companies cash in on resource wealth, the government must ensure that their business is not conducted at the expense of the developing countries where the raw materials are sourced.

  • 2  Aid estimate from the OECD; Nigerian oil revenue figure from Nigerian Extractive Industries Transp (...)

7The Swiss government has explicitly stated that it faces increasing reputational risks due to its large commodity trading sector.  In their response, the government should not just carry out superficial steps to assuage their critics. These kind of symbolic measures feature heavily among the recommendations contained in the much-anticipated March 2013 Federal Council report on commodities (Federal Department of Federal Affairs, 2013), which, in particular, calls for Switzerland to support voluntary codes of conduct for trading companies and various international standards. Issuing benign corporate guidelines or supporting a UN resolution do not constitute action. Nor is a bit more aid sufficient, given the scale of the challenge around natural resources and development: in 2011, Nigeria’s oil revenues were 60% larger than all foreign aid to the continent of Africa (NEITI, 2013).2  

8In his paper, Thut offers the beginning of an answer to the ‘what to do?’ question by recognizing the need for policy coherence. Commodity markets (and the financial markets where commodity revenues end up) are highly globalized, so Swiss policy must contain both domestic and externally-facing elements. Below I describe two areas where timely and assertive action has a good chance at making a difference in the specific political economy realities that define resource-rich developing countries.

Power, profits and plunder

  • 3  See the selected readings on the political economy of resource rich states in the references list (...)

9The academic literature around the so-called “resource curse” describes the kind of citizen-state relations which commonly emerge in environments with large oil, gas or mining revenues and weak institutions.3 The term “rentier state” is used to describe the political environment in which large resource rents accumulate in the state, usually in the hands of a few powerful individuals. The government does not rely on domestically generated revenues and therefore has limited material interest in the prosperity of its people. The exercise of power involves allocating valuable industry assets (upstream licenses, service contracts, export permits, top industry positions, etc.) and resource revenues.

10The resource-rich state (called the “rentier state” by some scholars) dominates at the expense of an independent private sector, and business tends to form a parasitic relationship with the wealthy state.  Public officials often hold private interests in the extractive industries, generating conflicts of interest. Accountability actors including the media, parliament, opposition parties and civil society tend to be weak or co-opted into the rentier system, as do many checks on executive power like elections or audits.  Even international players, like the World Bank and other donors, have limited influence given the financial and political autonomy enjoyed by the political elites and ample international competition among extractive industries to access their subsoil assets.

11Where such a political system is allowed to persist, the public will not receive maximum benefits of from its resource wealth.  International actors, including Switzerland, can work to increase the capacity of resource-rich government agencies (one of the Federal Council report recommendations) and support voluntary international standards, but unless they tackle the imbalances of power which enable the persistence of the “rentier state”, impacts on the lives of citizens will remain limited. The two interventions mentioned below – transparency regulations and support for accountability actors –reflect areas where Swiss action could make a real difference.

Transparency regulations for commodity traders

12While not solely sufficient as a tool for realizing change, transparency does address one problem at the core of the rentier political economy: informational asymmetries.  The political elite who control countries like Angola, the DRC and Turkmenistan hold onto important information in order to expand the ease and discretion with which they operate. These imbalances in information occur between the state and its citizens, as well as within government itself. In Nigeria, for example, the government’s finance agencies and the national oil company regularly disagree on how much money one party owes to the other, with the former unable to access adequately detailed information about oil revenue generation.  As a result, the public, accountability actors like journalists,  and parliamentarians and even government officials cannot engage in an informed debate about natural resource governance.

13Switzerland itself illustrates this point. As noted by the Berne Declaration (a NGO coalition), the Federal Administration’s own March 2013 report failed to disclose how much commodity trading companies pay in taxes to Switzerland, stating, “There are, at present no figures available on tax revenues deriving from the commodities industry” (Berne Declaration, 2013). If the public is meant to weigh the benefits and costs of hosting these massive companies, and to consider what policy response is appropriate, the amount of tax revenues is a crucial fact to consider.

14Dr. Thut, in his paper, calls for “the design and further refinement of the regulatory framework in Switzerland, in so far as relevant to the nexus between commodity issues and the legitimate interests and needs of developing countries.” The U.S. and the E.U., themselves home to many large oil and mining companies, have responded to this same challenge by introducing regulations that require extractive companies to publish the payments they make to foreign governments on a per project basis. Following this lead, and ensuring that the laws apply to commodity traders, represents a basic first step to ensure coherence between regulation at home and development programs abroad.

15Commodity trading is in particular need of this kind of regulation. The deals between traders and governments, both the purchase of raw materials and the sale of refined products, often have massive financial implications for developing countries.  To give a sense of the scale, for example, Glencore was just awarded the license to buy oil from the government of Chad. In January 2013, the company shipped its first cargo of 950,000 barrels.4 This single sale would net at least $80 million. This may represent a small- or medium-sized deal for Glencore, but for a poor country like Chad, this is a massive transaction: the revenues from this single sale are enough to pay for half of the country’s yearly education budget. In countries including Nigeria, Congo-Brazzaville, Azerbaijan, Yemen, Iraq, Libya, South Sudan and Angola, the sale of oil by the state generates more than half of government revenues. For many others states, these sales generate the single largest revenue stream.

16On the import side, oil trader Trafigura currently supplies all of Angola’s fuel needs, which is  a multi-billion dollar business.  And these sales can be corruption-prone: Nigeria spent $22 billion on fuel subsidies from 2009-2011, with significant fuel being bought from Swiss traders such as Mercuria and Trafigura, and around $7 billion was lost due to a scam of historic proportions.5

17Without the disclosure of basic information around commodity sales, corruption risks increase, and there is little chance for citizens, journalists and parliaments to know how much their country receives for its public resources.  Requiring companies to operate in a transparent and responsible manner does not constitute unfair or uncompetitive treatment. Trading companies are huge global players that buy billions of dollars of oil and minerals from poor countries. Wherever they are headquartered in the world, they should be the subject of robust oversight and scrutiny. Ensuring this is the case is a basic responsibility of the home government, and one which the Switzerland should not avoid.

18Opacity in payments by traders is not the only practice requiring the attention of the Swiss authorities. Other practices that generate concern include the influence of huge traders on global market and price integrity, the trade in stolen oil, such as from Nigeria, or sanctioned oil, such as from Iran, and taxation and transfer pricing abuses by trading companies. But given the precedent set by the US and EU governments, and the prevalence of high-value deals between trading companies and producer countries with bad governance, robust and mandatory reporting standards are a good place to start tackling some of the challenges associated with such trade.

Recognizing the silent majority

19The second recommendation is hinted at in both Dr. Thut’s paper as well as the Federal Council’s report: development assistance that specifically aims specifically to improve the public accountability of governments in resource-rich, poor countries. Providing technocratic advice to the authorities in these countries can be useful, but not when the prevailing political economy environment enables a small elite to benefit at the expense of the majority. From Kazakhstan to Equatorial Guinea, the voices of citizens, civil society and the media need to be heard so that resources are directed to meeting the long-term needs of the population.

20This idea of supporting civil society and other accountability players is widely supported in development circles, but usually plays second fiddle to engagement with governments. In light of the power imbalances that oil and mineral wealth can help to propagate, these kinds of accountability-focused interventions should rather be in the lead. In such an effort, even a relatively small donor like Switzerland can make a difference. There are examples – activists asking questions about the below market value sale of assets by the Congolese state, a Public Interest and Accountability Commission in Ghana issuing regular reports that identify when government veers from the rules set out in their new oil legislation, courageous activists who speak out in authoritarian contexts like Gabon and Azerbaijan—of how this work can make a difference. And it is not expensive.

21The paper by Werner Thut, together with other discussions within the Swiss government this year (particularly, forthcoming discussions in the parliament), represent a promising discourse. They reflect growing awareness about the need to respond to the global challenges which surround the production, trade and consumption of natural resources. These are daunting. But with collective, serious efforts that extend beyond reputation-driven maneuvers, the most damaging costs from extraction can be minimized and the benefits to developing countries increased.

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Bibliography

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Beblawi, H. (1990) The Rentier State in the Arab World (London: Routledge)

Berne Declaration (2013) More transparency at last?! BD Analysis of the Swiss Federal Council’s “Background Report: Commodities” (Bern: Berne Declaration) http://www.evb.ch/cm_data/130402_Berne_Declaration_-_Analysis_of_Swiss_commodity_report_1.pdf (Accessed on May 13, 2013)

Blas, J. (2013) “Traders reap $250bn harvest from boom in commodities” in The Financial Times. Limited n°38/210

Bosley C. and M. Kolesnikova (2013) “Swiss Reject Tougher Regulation of Commodities Trading”, Bloomberg http://www.bloomberg.com/news/2013-03-27/swiss-reject-tougher-regulation-of-commodities-trading.html (Accessed on May 13, 2013)

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Notes

1  Al-Jazeera “The Giants of Commodity Trading” (2012) http://www.aljazeera.com/programmes/countingthecost/2012/09/2012927123919121653.html (Accessed on May 13, 2013).

2  Aid estimate from the OECD; Nigerian oil revenue figure from Nigerian Extractive Industries Transparency Initiative - NEITI (2013) “Financial Audit: An Independent Report Assessing and Reconciling Financial Flows within Nigeria’s Oil and Gas Industry, 2009-2011.” (Abuja: Nigerian Extractive Industries Transparency Initiative) http://eiti.org/files/NEITI-EITI-Core-Audit-Report-Oil-Gas-2009-2011-310113-New_4.pdf (Accessed on May 13, 2013).

3  See the selected readings on the political economy of resource rich states in the references list below.

4  Reuters (2012) “Glencore signs contract to export oil from Chad in 2013” http://www.reuters.com/article/2012/12/14/glencore-chad-contract-idUSL5E8NECN620121214 (Accessed on May 13, 2013).

5  Reuters (2012). “Nigeria investigates 21 firms for fuel subsidy fraud” http://uk.reuters.com/article/2012/08/17/nigeria-subsidy-fraud-idUKL6E8JH65K20120817 (Accessed on May 13, 2013).

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References

Bibliographical reference

Alexandra Gillies, « Crafting a Strategic Response to the Commodity-Development Conundrum »,International Development Policy | Revue internationale de politique de développement, 4.2 | -1, 153-193.

Electronic reference

Alexandra Gillies, « Crafting a Strategic Response to the Commodity-Development Conundrum », International Development Policy | Revue internationale de politique de développement [Online], 4.2 | 2013, Online since 06 August 2013, connection on 21 September 2017. URL : http://poldev.revues.org/1557 ; DOI : 10.4000/poldev.1557

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About the author

Alexandra Gillies

PhD, Head of Governance, Revenue Watch Institute

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Copyright

Creative Commons Attribution-NonCommercial 3.0 Unported License.

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