Extracting value

Editorial, Financial Times

June 22 2004

The World Bank's governing board will shortly have to decide whether oil, gas and mining industries in poor countries do more harm than good. The bank's independent Extractive Industries Review says it should pull out of oil and mining. The bank's management, predictably, disagrees. But it needs to do more to make its case that such industries can be made to work effectively and durably for the poor.

The conduct of the review itself was unimpressive. The idea of placing ultimate power in the hands of an "eminent person" - in this case Emil Salim, former Indonesian environment minister under the dictatorial President Suharto - is flawed. It encourages damaging battles for that person's ear rather than constructive consensus among different views. Mr Salim's habit of making sweeping criticisms of the bank well beyond his brief hurt the credibility of his conclusions.

But those conclusions, that the bank pull out of oil and mining altogether, deserve to be taken seriously. As a broad spread of non-governmental organisations - not just the usual anti-bank suspects - argued, quite aside from the environmental considerations, it is hard to show that extractives have systematically helped relieve poverty in countries that do not already have somewhat successful economies and the rule of law.

It is difficult to find an example, perhaps with the exception of diamond-rich Botswana, of a country that has levered itself out of dire poverty principally using oil, gas or mining. More often, extractive industries distort the political as well as the economic life of poor
nations, encouraging the growth of a predatory elite fighting over revenues rather than the healthy competition of a diversified market economy. It is hard to look at corruption-racked countries such as Nigeria without concluding they might be better off never having discovered oil.

The World Bank needs to be cautious in getting involved. While projects in relatively well-run economies that would go ahead anyway are improved by its environmental and governance rules, it should be very careful about corruption-riddled countries where its involvement is the tipping factor making the project viable.

The bank argues that it can make projects in such countries worthwhile by imposing environmental safeguards and constructing transparent mechanisms for sharing revenues broadly in the country. But its capacity to do this is still being tested in high-profile projects such as the Chad-Cameroon oil pipeline, about which respectable critics such as the anti-corruption campaign Transparency International continue to harbour reservations.

On balance, for the bank to pull out of oil entirely at this stage looks like an overreaction. Blanket sector-wide bans are in any case clumsy instruments. But it must do better to show that its involvement can make a real difference if it is to justify a continued role in this most controversial area.