The truth behind the ‘resource curse’


The problem

Too many resource-rich poor countries, such as Myanmar and the Democratic Republic of Congo, are suffering from what some call ‘the resource curse’. Multinational companies are exploiting their resources in a non-transparent way, and there is scant legislation in place to stop them. This needs to change. The European Parliament and EU governments are now preparing for upcoming negotiations on the European Commission’s Accounting and Transparency directives, which can put an end to such exploitation. Europe must come up with a strong stance on this matter if it’s serious about allowing resource-rich poor countries to actually develop.

In 2008 Africa’s oil, gas and minerals exports were worth $393 billion – that’s roughly 9 times the value of international aid to the continent. Yet, many African countries are still suffering from widespread poverty. So why have they failed to convert such an abundance of natural resources into lasting wealth and prosperity?

While exports of oil, gas, minerals and wood are potentially a huge source of income for developing countries, tax-dodging extractive industries prevent them from generating the wealth that they so desperately need. Due to the high level of secrecy under which these companies operate, it is impossible to know whether they are paying governments the fair amount of tax for their resources. And if no one knows, then many companies continue to get away with corruption, leaving the rich to get richer, and the poor struggling to survive.

However, this is not the only issue that arises when companies don’t report their payments. Governments might also in some resource rich countries have a problem with corruption. When governments receive these unreported payments – even if the payment is lower than it should be – they cannot be held to account by their citizens on how they spend this ‘secret’ income. When citizens know how much their governments are being paid for the natural resources of the country, they can call their leaders to account, and vote for them to spend wisely on targeting poverty.

The solution

In October last year, the European Commission put forward a proposal to revise the EU Accounting and Transparency directives. If approved by the European Parliament and all EU governments, the directives would oblige resource-extracting companies to report how much they are paying to governments in every country in which they are operating. While welcome, the proposal is not ambitious enough to make sure companies pay their fair amount of tax.

Primarily, this piece of EU legislation must ensure that companies become open not only about what they pay at country level, but also how much they pay for specific local projects. The communities caught up in these extractive activities need project-specific information to ensure that their governments collect the money owed and give it back to them.

In addition, this European proposal for greater transparency needs to be strengthened and extended to include more than just the extractive and logging industries. Tax avoidance is an issue in many more industries than this, and actually costs the EU 2.5% of its GDP per year. Moreover, simply reporting payments is not enough. Additional information should be required to put these payments in context, including production volumes, number of employees and profits, leaving companies with nowhere to hide.

It is undeniable that big companies do have an enormous impact on the well-being of the poor. Something needs to change to ensure that this impact works in favour of the poor. It is now time for Europe to act in order to move ahead with legislation that champions the rights of the resource-rich poor. We hope that the rotating Cyprus EU Presidency drives the debate forward towards a breakthrough deal by the end of the year.

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