Economic Research Forum (ERF)

Transnational governance of natural resources for the 21st century

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The race for natural resources to power the simultaneous energy and digital transitions the world is experiencing rages among the major powers. As this Brookings column argues, appropriate transnational governance is essential to achieving an orderly, sustainable and inclusive exploitation of natural resources.

In a nutshell

Regulation at the national level has often failed to address issues of overexploitation of natural resources as well as displacement, environment degradation and risk to biodiversity, which are often best managed by local communities.

Transnational governance should account for the interdependencies related to peace and stability, global health and climate issues in a world increasingly organised into blocs.

Advanced economies should acknowledge the shift in the development paradigm from one exclusively centred around extraction and exports of natural resources to that of promoting domestic productive capabilities locally and hence good jobs.

Natural resources – whether they are water, land, underground or in the air – should be seen as common goods, meant to be shared by all. That means their governance arrangements – to be tailored according to the specific property of each resource – should be in harmony at the local, national, regional and global levels to ensure they are used sustainably and in a way that protects the environment and the people who depend on them. This has proven to be very complex.

Throughout history, harmonious sharing of common goods has seldom been achieved. Today’s scramble for natural resources by major powers is far from new. It stems from a long-standing and fundamental asymmetry between advanced and less advanced economies – not only in terms of access to and demand for natural resources, but in terms of advances in technology, military might and state and private sector capabilities in general.

A good example is the competition among 19th century European empires for natural resources such as copper, tin, rubber, timber, diamonds and gold. The advance of steam engine navigation made access to and transport of these resources much easier for these empires. The resources were essential to powering industrial revolutions. People in the colonies where the resources were located, benefited little, if at all. As a result, former colonies have a complex history with which a number of countries, including many in Africa, continue to grapple.

Fast forward to today. The race for natural resources to power the simultaneous energy and digital transitions the world is experiencing rages among the major powers. Both transitions rely heavily on technologies that require such resources as rare earth metals for semiconductors, cobalt for batteries and uranium for nuclear power.

But the transitions also mean that historically valuable natural resources and their associated investments – prominently oil and other fossil fuels – will eventually become stranded, with severe consequences for countries almost totally reliant on those assets, especially those with weak state capacity. The last oil price super-cycle might already be underway, the end of which could herald an increase in the number of failed states.

That race for natural resources has become more acute as major powers have entered into strategic rivalries – especially between the United States and China, but also between China and Europe. This time an appropriate transnational governance of natural resources is essential to achieving an orderly, sustainable and inclusive exploitation of natural resources so these transitions do not leave people, especially those in developing countries, behind.

Developing countries have had difficulties managing their natural resources – so much so that the term ‘resource curse’ was coined describing the paradox of countries rich in natural resources performing worse than countries that are resource poor. Volatility, loss of competitiveness, excessive indebtedness, and internal and external conflicts are behind the poorer performance of resource-rich countries.

Research has shown that good institutions, unsurprisingly, moderate that curse. But which ones? There are two key areas:

  • The policies and institutions that govern the opening of the resource sector to attract investment and hence generate revenues for the state.
  • The quality of redistributive institutions that govern how the proceeds from the exploitation of these resources are used and benefit people, including in terms of human capital.

Moreover, regulation at the national level has often failed to address issues of overexploitation of natural resources as well as displacement, environment degradation and risk to biodiversity, which are often best managed by local communities. The work of the late Elinor Ostrom has shed important light on the design of self-organised user communities to achieve sustainability in the exploitation of natural resources.

Several international initiatives have focused mainly on transparency. They include the Extractive Industry Transparency Initiative and the Natural Resource Charter. A number of NGOs have been very active in the space.

Legislation in the United States and the European Union (EU) strives to hold accountable their multinational corporations by mandating that those companies disclose their payments in countries in which they operate. It is more difficult to hold state-owned enterprises accountable because of a lack of transparency and a complex web of interests and cross-subsidies.

The development of environment, social and corporate governance norms (ESG) – with roots in the socially responsible investing movement that began in the 1970s – are means by which investors and others can gauge how responsibly a corporation behaves environmentally. But it is unclear whether ESG assessments are sufficient to force firms to internalise the complex sets of externalities at different levels required to achieve sustainable behaviour. It is also unclear whether and how these norms could be enforced.

One encouraging sign is that consumers in advanced economies appear to be changing their behaviour concerning the environment. But investor behaviour, especially in developing countries, may not be so amenable to change. The challenge with all these initiatives is the difficulty in translating them into the right context and fostering ownership, especially at the local and national levels. More needs to be done to integrate local, national, regional and global actors to achieve better outcomes.

For example, the EU’s relationship with regions such as Africa and the Middle East – and especially with China – will be crucial to shaping the transnational governance of natural resources. Transnational governance should account for the interdependencies related to peace and stability, global health and climate issues in a world increasingly organised into blocs. If externalities are to be internalised, it will require:

  • Technology transfers from advanced to developing economies to provide the tools to address the threat of climate change and meet climate goals.
  • Access to international capital markets through, for example, green, nature, or blue bonds instead of opaque resource-backed loans with non-traditional creditors such as China.
  • Ways to ensure that foreign direct investment (FDI) delivers on local contentment and jobs to address rising discontent in communities where mining or other extractive industries operate.

 

More generally, advanced economies such as the EU should acknowledge the shift in the development paradigm from one exclusively centred around extraction and exports of natural resources to that of promoting domestic productive capabilities locally and hence good jobs.

Specifically, the process of deepening the African continental free trade agreement should be accompanied by coherent arrangements at the regional level on tax, trade, competition, and financial policies. The integration of the EU carries valuable lessons in that regard that could be shared and learned. Focusing on energy, agriculture and mineral resource sectors as foundational elements of that integration and partnership will ensure the sustainability of these investments for all parties.

 

This article was originally published on the Brookings Future Development blog.

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