COMMENT: A warning for the World Bank

COMMENT: A warning for the World Bank

By Mark Moody-Stuart, Financial Times

May 04, 2004

How do you translate a country's mineral and oil wealth into economic wealth, in a way that reduces poverty, protects the environment and upholds social stability?

This is a critical, complex question faced by resource-rich countries across the developing world.

Currently before the World Bank Group are the conclusions of a review of its involvement in the extractive sector conducted by Emil Salim, a former Indonesian environment minister. I was on an advisory panel to Dr Salim while he was preparing his report. However, his final recommendations - which the bank is considering - concern me deeply. Though laudable in their aims, and praised by activist groups, some of them could harm the very countries they seek to help.

Resource wealth can be a blessing or curse, depending on how it is used. Some nations have seen revenues from oil and mining projects squandered through corruption or used to fund conflict. Other problems have also been evident: for example, communities have sometimes received too small a share of the economic benefits from projects, thus exacerbating social tensions.

On the other hand, some countries have clearly succeeded in using their mineral wealth to help drive economic and social development - among them Chile, Botswana, South Africa and Malaysia (as once did America and Britain). For countries that are still mired in poverty and have few other economic opportunities, developing their natural resources may present their only realistic hope for participation in the global economy.

Dr Salim's report contains much to applaud. It rightly focuses attention, for example, on upholding human rights, and on the need for transparency. Nor is this a call on my part for less pressure on companies to behave responsibly. My concern is that Dr Salim's recommendations would limit the World Bank's ability to leverage higher standards and thereby help countries translate their resources into a blessing.

While in principle supporting the bank's continued participation in the sector, the report proposes various restrictions that together would limit its involvement in mining and oil projects, whatever their characteristics. For example, it recommends supporting projects in a country only after comprehensive governance criteria are met. Encouraging better governance is clearly important. But constraining the bank's involvementbefore standards are met could mean that the poorest countries find it more difficult to take the first steps towards exploiting their natural resources effectively and thereby starting on a path towards poverty reduction and better standards of governance.

Meanwhile, those countries that can attract sufficient private investment to exploit their minerals and oil without the bank's assistance will do so - and the bank will be less able to influence governments and companiesto develop these resources in the right way. Importantly, the bank has its own social and environmental "safeguard" policies applied to projects. In certain cases these policies may need strengthening.

Nonetheless - as noted by the International Council on Mining and Metals, an industry association established to promote good practice in the mining sector - the current policies already help set standards for private investors. The bank's continued involvement in projects is thus important for improving performance across the board.

The report's proposals that the bank phase out investments in oil by 2008 and immediately avoid new coal developments are flawed for similar reasons. Those least developed countries that depend on the bank's assistance to develop their coal or oil as well as shape their overall energy policies may have to forgo important economic opportunities. Meanwhile, other countries will continue to exploit their coal and oil through private investment - but with the bank exerting less influence on standards. In this and other areas, the consultation process underlying the report I believe paid insufficient attention to the views of governments, particularly of developing countries.

Another potentially counter-productive proposal is that extractive projects should require the "free prior and informed consent" of local communities. Without doubt, the rights of local and indigenous peoples need to be carefully protected. But requiring that all elements of a community are able to show benefit raises the bar to a level that, if observed in developed countries, would mean no road or major development would ever happen. Wholly accountable governments may thereby be prevented from undertaking projects key to their national development.

In short, driven by the laudable desire to ensure that the bank supports only projects guaranteed to have positive impact, the report's recommendations could actually limit its ability to help countries exploit their natural resources successfully and responsibly. As the bank mulls its final response to the report, it should keep in mind: this is too important an issue for an unthinking response.

Sir Mark Moody-Stuart is chairman of Anglo American