What is the role of global trade in natural resource governance?

This article is published in collaboration with The E15 Initiative. Publication does not imply endorsement of views by the World Economic Forum.

As the 10th Ministerial Conference of the World Trade Organization (WTO) in Nairobi fast approaches, Sub-Saharan Africa and other natural resource-dependent developing regions are at a pivotal time when it comes to managing their natural resources.

The commodities downturn has shifted many once hopeful stories of rapid development into budget deficits, rising unemployment, and uncertainty for the future. Fears that the resource curse is back are ever present in the media, and McKinsey Global Institute’s December 2013 study provided extensive data to show resource-dependent countries still underperform economically.

On the other hand, through initiatives like the Extractive Industries Transparency Initiative (EITI), the African Mining Vision, and other global programs, promising efforts are being undertaken to improve the impacts of natural resource extraction. In fact one could actually see this current slowdown as an opportunity to reform natural resource extraction to get it right.

However, in order for natural resources to help developing countries achieve economic and social development, we need a global trade system that encourages effective natural resource governance from host-country governments.

Arguably the most important component of this is to keep more of the economic benefits of operations close to where extraction take place. This means maximising purchasing of locally produced goods and services, hiring of local workers, and the transfer of skills and technologies.

The potential economic benefit through increased local participation in extractive industry activity is massive. Recently there has been a prolonged and well deserved focus on natural resource tax revenue in terms of setting fair taxes, making them transparent, and avoiding tax evasion. However, in many cases the potential for local procurement is actually the larger potential leverage point in keeping more income in host countries. The World Gold Council’s recent study found that amongst its members, in most countries spending on procurement accounted for more than taxes, wages, and community investment combined.

This means that governments should implement policies that increase local procurement, as well as incentivise the transfer of technology from investing companies.

The challenge here is that under WTO rules, member states are technically prohibited from implementing regulations that discriminate against foreign supplied goods. For example, a government cannot force an investing mining company to purchase all of its cement locally.

While there has been no official WTO challenge to the rapidly increasing number of countries installing local content provisions in mining and fossil fuel extraction regulations, there is mounting pressure on host countries from both extractive sector companies and the countries that house their headquarters.

Jesse Salah Ovadia has chronicled some of the pressure international oil companies have put on countries like Angola and Nigeria to weaken certain aspects of local content regulations.  Arguing that local content is an essential aspect of ‘petro-development’, Ovadia finds that oil company resistance is strongest on a few key aspects of regulations, while the United States government on the other hand has voiced more general and vociferous opposition to local content. Furthermore, in a recent article comparing local content in oil and gas across Sub-Saharan Africa, Ovadia concludes that with each new example of local content legislation, the requirements are gradually becoming less onerous for international companies.

I myself have been at meetings this year where I have seen international oil companies pushing against African governments using local content regulations, and instead advocating for reliance on voluntary approaches. While arbitrary local content regulations made without effective consultation with stakeholders are problematic, targeted requirements for investing extractive companies to purchase particular products and build domestic capacity should be part of the arsenal of policies a country has at its disposal.

Even more worrisome for developing country policy space to localise extractive sector procurement (and hiring), are the many bilateral and multilateral investment and trade treaties that are proliferating around the world. In most of these there are even further restrictions when it comes to local content provisions.

For example, in the bilateral investment treaty between Tanzania and Canada, requirements for technology transfer from an investing company are banned. Sadly I’m not too sure it will be Tanzanian technology that will be prevented from being transferred to Canada in this arrangement.

It is to no one’s benefit if developing countries continue to face resource curse outcomes, including the investing extractive sector companies.

On the host-country side the negative effects are obvious, and this current commodity downturn is exposing the need for increased local content.

For the mining and fossil fuel companies investing, the costs of underdevelopment from their activities include increased conflict with governments and communities, political instability, and the risk that governments will face pressure to increase extractive sector revenue in arbitrary and unpredictable ways.

For these reasons, both at the WTO level and in bilateral trade and investment agreements, transnational mining and fossil fuel companies and their home countries should be mindful to not push too hard on developing country governments as they seek to increase the level of local procurement and hiring in extractive industry activity.

On the developing country side, governments should be weary of seeking investment at all costs and signing investment and trade agreements that limit their own policy space. In this regard there is opportunity through initiatives like the African Mining Vision to coordinate policy across countries to avoid a “race to the bottom” in offering too many investment incentives.

Both governments and the extractive industries must recognise that local procurement is a meaningful way to create economic and social development from natural resource extraction. Let us ensure that global trade systems are not set up in a way that limits developing countries in supplying the extractive operations that are happening in their own backyard.

To keep up with the Agenda subscribe to our weekly newsletter.

Author: Jeff Geipel is the founder and venture leader for Mining Shared Value, an initiative supported by Engineers Without Borders Canada.

Image: A cargo ship is seen at the Miraflores locks in Panama City December 2014. REUTERS/Carlos Jasso.