Benefits from raw material extraction often remain in the hands of a rich fewImage: BGR
February 14, 2011
Legislation in the US has imposed new regulations on companies trading in raw materials. It's hoped the rules will shine light on cash flows that often benefit only a corrupt elite instead of helping reduce poverty.
Since July 2010, companies listed on the US stock market have to disclose payments they make to both the US and foreign governments for commodities such as oil or minerals.
The aim is to change a culture of abuse that has developed over revenues from raw materials imported from poor countries. While many developing nations are rich in natural resources like minerals, oil or gas, revenues earned through them often flow into the pockets of a corrupt elite and bypass the majority of the country's population, especially the poor.
The prices for copper, gold, oil or rare earths have been increasing in the past few years. Demand in industrialized countries continues to rise along with competition for unexplored resources, for example in Africa.
For developing countries rich in natural resources, their export could be a springboard to greatly improved economic and social development. But, according to Stormy-Annika Mildner from the German Institute for International and Security Affairs (SWP), this lucrative business has often slowed down development rather than helped it.
"Most of these countries have disappointing economic growth rates. They have high discrepancies in income, high poverty levels and low levels of education. Transparency is very low while corruption is very widespread," she said.
"The list of countries where there are violent conflicts and civil wars caused by the fight for revenues from raw materials is very long."
To try to counter this, the Extractive Industries Transparency Initiative, or EITI, was founded in 2003. It was designed to improve the transparency of cash flows associated with the extraction of oil, gas and other natural resources.
However, instead of having binding rules, it is based on voluntary commitments, and only a handful of countries, including Ghana, Liberia and Mongolia, meet all its requirements. An increasing number of people say that tougher rules are needed to make global monitoring more efficient.
"We need some kind of control mechanisms to be installed," said Bernd Pfaffenbach, state secretary at the German federal ministry for economy. Germany is one of the largest importers of raw materials.
In the United States, a financial reform package was passed in July including toughening up transparency rules for companies trading raw materials. Part of the goal is to minimize the trade of so-called blood diamonds and minerals from countries like the Democratic Republic of Congo.
All companies trading on the US stock market have to disclose payments, including taxes, fees and licences made to foreign governments in connection with oil, gas or mineral deals.
Huge market, big potential
Joseph Williams, chief coordinator with "Publish what you Pay", a network of NGOs , says that the new transparency rules in the US market have a huge impact globally.
The US stock exchange covers 9 out of the 10 largest internationally operating companies and 8 out of 10 international mining companies. It includes big Chinese players like Petro China and Petrogaz, the Brazilian state-run company.
"We are talking about a massive market," he said. "Having rules there really has very far-reaching consequences."
The Hong Kong Stock Exchange has already passed similar regulations. The UK and the EU are considering transparency rules for their financial sectors, and the topic is also on the agenda for the next G20 meeting.
But to increase transparency, it is necessary to strengthen civil society in developing countries. Often, citizens do not know how national resources could benefit their country, according to Helmut Reisen of the OECD Development Center in Paris.
He says that NGOS, think tanks and other political actors have to be alert and active, and press freedom needs to be ensured so that information about cash flows is transparent and corrupt governments can be made responsible.
"Making cash flows between extracting companies and mineral-rich developing countries transparent should serve to take revenues away from corrupt kleptocrats," he said. "That is an incentive for honest politicians to seek office and honest civil servants to take a job in the public sector."
But big companies are still reluctant when it comes to opening up their books to outsiders. They are afraid that the monitoring process will increase bureaucracy, and therefore costs.
Yet mounting political pressure could make it hard for companies to maintain the status quo, according to Bright Okogu, director-general of Nigeria's Federal Budget Office.
He cited the case of the country's national oil company, which was reluctant to cooperate when the government launched audits of the sector.
"We hit them on the head and took them to the former president and they didn't like that," he said.
But in the long run, according to Pfaffenbach, companies can also benefit from making their cash flows transparent.
"If a company is known to conduct their business in an honest way, that's good for its image. Just like they want healthy food, consumers also demand products and resources that have been produced under good governance principles," he said. "That is the approach - the money stays in the country and will be used there in a good way."
Author: Sabine Kinkartz (jam) Editor: Sarah Steffen