Trade in loot

Thorvaldur Gylfason, Per Wijkman

13 November 2010

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When you buy a watch in an established jewellery store, you will be pretty confident that the watch is genuine and the purchase legitimate. But if you buy a watch from a street vendor whose pockets are bulging with watches, you ought to know that you are buying a fake, loot, or both. If your house is burgled and your new watch stolen, your insurance policy covers your loss in the first case. It will most likely not cover your loss in the second. Our laws, rules, and regulations do not permit domestic trade in loot. But what about international trade in loot?

Poverty amid luxury

Consider the oil trade. Oil accounts for over half of world trade in commodities, and oil companies account for five of the ten largest corporations in the world, measured by earnings. Huge quantities of oil are bought from countries where the powers that be have appropriated the oil resources of their countries. Take Equatorial Guinea, where oil was discovered after 1990. There, GDP per person multiplied due to booming oil exports, to the US in particular. Equatorial Guinea’s national income per capita is now higher than Russia’s and three times as high as China’s. Yet the vast majority of the people, half a million of them, are no better off now than they were before the oil discoveries. Life expectancy at birth is 50 years compared with 68 years in Russia and 73 years in China. Every seventh child in Equatorial Guinea dies before its fifth birthday. Why has the oil wealth not “trickled down” to the common man?

President Teodoro Obiang Nguema Mbasogo has governed Equatorial Guinea since 1979, having been re-elected a few times with 98% of the vote. The constitution authorises him to rule by decree. In July 2003, state-operated radio declared President Obiang to be Equatorial Guinea’s god who is “in permanent contact with the Almighty” and “can decide to kill without anyone calling him to account and without going to hell” (BBC 2003). Meanwhile, over a half of the country’s population must get by on less than one dollar a day even if oil exports now amount to about a barrel per person per day, or $80 at the current price.

Whatever the reason for this misdistribution of the country’s oil wealth – illegal transfers of resource ownership, political corruption, or gross inefficiency of public or private resource exploiters – few dare protest against an authoritarian regime. Equatorial Guinea is not an exceptional case. The list of oil-rich countries plagued by resource-related corruption, oppression, and associated political unrest is a long one, and includes Chad, Guinea, Iran, Iraq, Libya, Nigeria, Saudi Arabia, Sudan, Turkmenistan, Uzbekistan, and Venezuela. To varying degrees their natural resources have been usurped by private or public persons. In these cases, their exports can be said to constitute trade in loot.

Can international action help stop international trade in loot?

The International Covenant on Civil and Political Rights (ICCPR), adopted in 1966 and in force from 1976, could be a start. It begins as follows: “All peoples have the right of self-determination. By virtue of that right they freely determine their political status and freely pursue their economic, social and cultural development. All people may, for their own ends, freely dispose of their natural wealth and resources without prejudice to any obligations arising out of international economic co-operation, based upon the principle of mutual benefit, and international law. In no case may a people be deprived of its own means of subsistence.” The first article of the International Covenant on Economic, Social and Cultural Rights (ICESCR) is identical.

In effect, the ICCPR defines the natural resources of a state as a property owned in common by its people to be freely disposed of by them in a democratic process or at least without their right to democratic participation having been violated.

This description also applies to the US where the people, as the original owners of the natural resources, have decided legally to transfer some of this property to private individuals (at auctions for drilling rights, etc.). In other countries (e.g., Angola), the constitution proclaims that it is the state that owns the resources – on the grounds that the people have transferred the resources to the state (or because the state is acting as an agent of the people). This means that the usurpation of oil, such as in Equatorial Guinea, can be viewed as a violation of the ICCPR because, by international law, it belongs to the people. Put differently, the expropriation of natural wealth and its resultant gross misdistribution constitutes a violation of human rights. The ICCPR is binding for its signatories as they have committed to abide by it. Because Equatorial Guinea has signed and ratified the ICCPR, it should in principle be possible to arraign President Obiang and his regime before the UN Committee on Human Rights whose opinions all but a few rogue states endeavour to honour even if the Committee cannot impose legal sanctions on violators. This applies also to the governments of other afore-mentioned countries except Saudi Arabia as well as a few, mostly small, states which have not signed the ICCPR. Importantly for its effectiveness, the US is also a signatory.

As Wenar (2008) points out, the ICCPR makes it possible in principle to stem ongoing international trade in loot. He argues that those who purchase oil from Equatorial Guinea are buying loot. Wenar‘s point is as simple as it is basic. A people‘s right to its natural resources is a human right, and the inviolability of human rights is protected by international law, notably the ICCPR and the ICESCR, and likewise firmly enshrined in many national constitutions. To help stop trade in loot at the local level, Wenar proposes a Clean Trade policy framework for importing states to strengthen public accountability in exporting countries. This could pull the carpet from under rulers such as President Obiang and his ilk and help prevent their violations of human rights.

Privatisation presupposes democracy

The ICCPR entails that an authoritarian government is not free to transfer natural resources to private ownership. This is because people under authoritarian rule are not in a position to “freely determine their political status and freely pursue their economic, social and cultural development.” President Obiang’s regime in Equatorial Guinea has deprived the people of “its own means of subsistence,“ thus violating the ICCPR. There is no doubt, however, about a democratic government’s authority by law to transfer natural resources from public ownership to private hands as the US government has done with its country’s oil wealth. This is because there can be no doubt that the American people “freely determine their political status and freely pursue their economic, social and cultural development.”

By Icelandic law, Thingvellir, the site of Iceland’s ancient Parliament (est. 930), must forever belong to the people. The law was passed long ago to make sure that Thingvellir could not in future be passed into private hands. The ICCPR does not go that far. It does not declare explicitly that natural resources must forever belong to the people. Rather, the proclamation of the people’s right to “freely dispose of their natural wealth and resources” subtly limits the right of an authoritarian government to transfer national resources from public to private ownership. Because the ICCPR is binding on signatories, local laws on the ownership of natural resources ought to accord with the ICCPR. Such clauses are embedded in the constitutions and laws of many countries. For example, Iraq’s constitution from 2005 proclaims that “Oil and gas are the property of the Iraqi people in all the regions and provinces.“ Norway’s law of the sea from 2008 contains the following clause: “Wild marine resources belong to the Norwegian people.” Article 1 of Iceland’s fisheries management law from 1991 makes a similar proclamation. In 2007, the UN Committee on Human Rights declared that the Icelandic fisheries management system by which annual catch quotas are allocated free of charge to vessel owners who can either fill their quotas at sea or sell them constitutes a violation of human rights. The Committee instructed the Icelandic government to rectify the situation by removing the discriminatory element from the system.

Externalities can preclude privatisation

Common property resources whose exploitation involves externalities call for special regulatory institutions and ownership arrangements. For example, individual ownership by several parties is inefficient when the separately owned oil wells drill into the same oil pool. The same applies when separately owned fishing vessels in a country (or countries) exploit a migratory fish stock common to the vessels (countries). In such cases, economic efficiency requires creating national (international) institutions to regulate exploitation while ensuring that the proper owners of the resource receive the economic rents generated by exploiting the common resource (Wijkman 1982). These owners can be defined as, for example, the people living in a local community, region, country, or group of countries affected by the externalities of exploitation of the common property resource. This requires institutions to ensure that the users pay the owners for its use. This is the operational implication of the fairness argument firmly embedded, as Wenar (2008) points out in primary documents of international law such as the ICCPR and the ICESCR. This legal argument has all too often been overlooked by economists and politicians due to the consequent institutional complexities. In these cases, simple privatisation is likely to be both inefficient and unfair.

The Icelandic fisheries management system is a case in point. In Iceland, it has been suggested, among other proposals to allow the resource rent to accrue to its rightful owner, that an “Open Market Fisheries Committee” be set up and vested with a broad mandate and broad powers to set market-based fishing fees to maximise the long-run profitability of fisheries for the benefit of the sole national owner (Gylfason and Weitzman 2003 and Gylfason 2008). The idea is that, like central banking, the setting of fisheries management instrument values, including fees, is too important to be left in the hands of politicians. The fisheries authorities should be above even the hint of suspicion of manipulation. There needs to be clear and specific management and accountability structures, formalised in the national interest by reform legislation. This is the idea behind independent yet accountable central banks as well as independent judiciaries and supervisory authorities and, yes, a free press. The idea is applicable across a broad range of natural resources, including oil. The risk that such an independent authority might be prone to capture is not negligible, but it does not constitute an insurmountable obstacle. After all, we do have independent judiciaries. Outsourcing would be another possibility. The 16 members of the Eurozone outsource their monetary policy to the European Central Bank as a matter of course.

Public accountability and clean governance

Nigeria is another country that does not have much to show for its huge oil earnings. Nigeria’s per capita GDP grew more than twice as fast in the 1960s as it did subsequently despite the colossal export revenue boom of the 1970s onward. Per capita growth in Nigeria has averaged 1.1% per year since 1960. Life expectancy at birth has increased from 38 years to 48 years, two years behind Equatorial Guinea. Gross mismanagement of the oil rent appears to be at the root of Nigeria’s problems.

To get Nigeria growing again Sala-i-Martin and Subramanian (2003) have proposed that oil revenues be transferred from public hands to the private sector. But the private sector, like the public sector, is far from infallible as events since 2007 have demonstrated once again. If judges prove corrupt, the solution is not to privatise the judicial system. Rather, the solution must be to replace the crooked judges and reform the system by legal or constitutional means aimed at securing the integrity of the courts. As recent developments in Russia and elsewhere have illustrated, privatisation, if not well managed, is prone to political capture and corruption. Thus, privatisation is not a solution if corruption is already rife in the public sector. Strong institutions for clean governance are essential for development.

When a country is ready to take the privatisation route it matters to whom in the private sector the oil rent is transferred. If the rent is divided evenly among the adult population as in Alaska, the allocation can be deemed fair and the beneficiaries have an interest in ensuring that oil production is efficient. If, on the other hand, the resource rent is granted to select interested parties as in Iceland (fishing boat owners), the allocation is neither fair nor do fishermen have an interest in efficiency. The Norwegian national oil trust fund is a model that deserves to be applied by other oil producing countries.

Conclusion

Weak institutional structures in many oil exporting countries entice those who believe that “anything goes” to appropriate other people’s money. The result is both inefficient and unfair. International organisations can play an important role in helping local governments to withstand the pressures of interest groups determined to capture natural resource rents at the expense of the common man. Wenar (2008) has pointed to important international initiatives to encourage increased transparency in the use of natural resource revenues, such as the ICCPR and ICESCR. Further, the Extractive Industries Transparency Initiative aims to set a global standard for transparency in oil, gas, and mining. The Natural Resource Charter lays out “a set of principles for governments and societies on how to best manage the opportunities created by natural resources for development.” The Revenue Watch Institute promotes the responsible management of oil, gas, and mineral resources for the public good. Together these initiatives can add some bite to the bark of the UN Committee on Human Rights by working directly with those involved in international trade in what may be loot. As a result, resource-rich developing countries will, we hope, be able to invest more in public health, education, and legal institutions – important sources of economic growth.

References

BBC (2003), “Equatorial Guinea’s ‘God’”, 26 July.

Gylfason, Thorvaldur, and Martin Weitzman (2003), “Icelandic Fisheries Management: Fees vs. Quotas”, CEPR Discussion Paper 3849, March.

Gylfason, Thorvaldur (2008), “Dwindling fish: What’s the catch?”, VoxEU.org, 16 January.

Sala-i-Martin, Xavier and Arvind Subramanian (2003), “Addressing the Natural Resource Curse: An Illustration from Nigeria”, IMF Working Paper 03/139, July.

United Nations (2007), International covenant on civil and political rights, CCPR/C/91/D/1306/2004, 14 December.

Wenar, Leif (2008), “Property rights and the resource curse”, Philosophy and Public Affairs, 36(1):1-32. For more, see wenar.info/CleanTrade.html.

Wijkman, Per Magnus (1982), “Managing the Global Commons,” International Organization, 36:511-536.

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Topics:  Development International trade Politics and economics

Tags:  Africa, oil, natural resources, loot

Thorvaldur Gylfason

Professor of Economics, University of Iceland; Research Fellow, CESifo and CEPR Research Fellow

Former Director of Economic Affairs at EFTA and adjunct professor of international economic policy at University of Göteborg

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