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«DRAFT OCT-O9 ABSTRACT The resource curse afflicts many countries that export valuable natural resources like oil, gas and diamonds. Such countries ...»

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Clean Trade

Leif Wenar

DRAFT OCT-O9

ABSTRACT

The resource curse afflicts many countries that export valuable natural resources like oil,

gas and diamonds. Such countries are more prone to authoritarian governments, civil

conflict, and economic dysfunction. The article argues that the resource curse in the

“worst of the worst”-governed countries results from a failure to enforce property rights:

the property rights of each country’s people in that country’s natural resources. This right is a foundational principle of the modern state system. Yet it is violated when authoritarians and civil warriors sell off a territory’s resources in circumstances where the people could not possibly authorize those sales. Firms that buy resources from violent or severely repressive regimes are therefore receiving stolen goods, and passing these stolen goods on to consumers. Using a widely accepted metric, the article shows that at least one in every eight barrels of oil currently entering the United States has been stolen from its country of origin.

This article describes three property rights enforcement mechanisms that use existing domestic institutions to discourage resource deals with the worst regimes. The first mechanism is litigation against corporations that transport stolen resources into resourceimporting jurisdictions. The second mechanism is national legislation in resourceimporting countries to prohibit imports from severely resource-cursed countries. The third mechanism is an “anti-theft” trade policy that deters trade partners from buying stolen resources from the worst regimes. The agenda incorporating these mechanisms can draw support from a range of business interests and pressure groups. And these mechanisms can complement existing initiatives to fight the resource curse, for example initiatives regarding transparency and certification of resource sales.

The article argues that authoritarianism, civil conflict, and economic dysfunction in resource-cursed countries often result from a failure to enforce the established entitlements of the people of those countries. This violation of the principles of trade can be redressed by altering law and policy within resource-importing countries.

Clean Trade DRAFT OCT-O9 The main argument of this paper can be grasped by reading sections 1-14, omitting the “Question” sections along the way. That comes to around 11,500 words excluding footnotes. The “Question” sections, as well as the Appendices, are supplied for readers who want to follow up points of special interest.

This article is based on “Property Rights and the Resource Curse,” Philosophy & Public

Affairs (2008). Updatessince that article include:

- Increased emphasis on self-determination as the grounding for the principle of national ownership of natural resources (sections A2-A8);

- A proposal for extending the Clean Trade framework to address the problem of odious debt (A14);

- An initial exploration of the hypothesis that greater environmental damage and greenhouse gas emissions are follow-ons to the resource curses (A1);

- Situating the Clean Trade initiatives among other types of initiatives (transparency, export certification) directed at the resource curse (A9-A13).

Table of Contents

1. The Resource Curses

2. Our Contribution to the Resource Curses

3. The Ownership of Natural Resources

4. The Right to Sell Natural Resources

5. The Principles of Ownership and Sale

6. Passing Title: The Law of Property and Contract

7. Standards for Disqualifying Regimes as Resource Merchants

8. Question: Sources of Authoritative Notice

9. The Freedom House Ratings

10. Litigation of International Transfer of Extractive Resources

11. Question: Political Bias of the Ratings

12. Question: Political Pressure to Change the Ratings

13. Clean Trade Legislation

14. Clean Trade Import Policies

15. Question: Economic Sanctions have an Uneven Record of Success

16. Question: The Policies will Hurt the Poor in Resource-Rich Countries

17. Question: The Policies will Hurt the Poor in Trade Partner Countries

18. Question: The Happy Subjects

19. Question: The Incompetent People

20. Conclusion A1: Environmental Harm as a Resource Curse and Resource Threat A2: Defining the People and Their Rights A3: Philosophical Concerns about Peoples and their Resources A4: Self-Determination and Territory A5: Westphalian vs. Popular Sovereignty A6: Highlights in the History of Self-Determination A7: Self-Determination and Human Rights A8: The Resource Right and International Recognition

OTHER RESOURCE-CURSE ALLEVIATION PROPOSALS

A9: Macroeconomic Policy and Stabilization Funds A10: Registration Initiatives: The Kimberley Process A11: Transparency Initiatives: EITI, PWYP A12: Revenue Distribution Initiatives A13: International Panels to Disqualify Resource Sales A14: Odious Debt and Loan Sanctions Consumers buy stolen goods every day. Consumers may buy stolen goods when they buy gasoline and magazines, clothing and cosmetics, cell phones and laptops, perfume and jewelry. The raw materials used to make many of these goods have been taken—sometimes by stealth, sometimes by force—from some of the most violated people in the world. These raw materials flow through the system of global commerce under cover of a rule in the international system that is little more than a cloak for larceny.





The plainest criticism of global commerce today is not that it violates some

Abstract

distributive standard, but that it violates property rights. The international commercial system breaks the first rule of capitalism in transporting stolen goods, and does so on an enormous scale. The priority in reforming global commerce is not to replace “free trade” with “fair trade.” The priority is to create trade where now there is theft.

Ending the global traffic in stolen goods will require no new theories or novel international agencies. The principles of lawful trade are well understood, and global commerce has already created powerful institutions to enforce property rights. These property rights are themselves fundamental in the international system. What is required is to use the existing institutions to bring all international resource sales into the system of enforced market rules. This article sets out a “clean trade” framework for doing this.

1. The Resource Curses

To understand how stolen goods reach consumers we can trace their raw materials back to the countries where the thefts take place. Social scientists have noticed a peculiar phenomenon in some less developed countries, which is a symptom of the violation of property rights that concerns us. They have called this the resource curse: many countries rich with natural resources are full of oppressed people, or poor people, or both. For many less developed countries, natural resources have become an obstacle to prosperity instead of its foundation.

The resource curse can afflict countries that derive a large portion of their national income from exporting high-value “extractive” resources such as oil, natural gas, gems and metals. These countries are in fact subject to three overlapping resource “curses.” They are more prone to authoritarian governance, they are at a higher risk for civil wars and coup attempts, and they exhibit greater economic dysfunction.1 Several causal pathways explain the correlations between natural resources and these pathologies in political economy.

It is also possible that environmental damage and greater greenhouse gas emissions are follow-on effects of these three resource curses. This hypothesis is explored below in section A1: Environmental Harm as a Resource Curse and Resource Threat.

First, resources correlate with authoritarianism.2 Authoritarian regimes can greatly increase their power by exporting natural resources. Oil, gas, and minerals fetch high bounties: whoever controls their sale often receives billions of dollars per year. A strongman or junta that seizes this revenue stream can use the money to pay for extra security forces, spies, and weapons to put down domestic challenges to their rule. The money from resource sales can also free authoritarians from raising revenues through taxation, and so release them from financial accountability to the citizenry.3 Authoritarians flush with resource money can also use these funds as sources of patronage, bribing local leaders and buying off nascent resistance movements.4 The second resource curse is civil conflict: civil war and coup attempts.5 Many rebel groups have sustained their expensive armies by seizing territory and selling off its resources. Other military leaders have sold off rights to future exploitation of territory they hope to capture.6 The presence of hydrocarbons and minerals in a country increases the risk of civil war, and these resources have played a major role in sustaining some of the longest-running and most ferocious conflicts in recent history. As for coup attempts, they become more likely in countries that contain one major revenue source (like Wantchekon surveyed 141 countries over a forty-year period and found that a 1 per cent increase in natural resource dependence can increase the likelihood of authoritarian government by nearly 8 per cent. Leonard Wantchekon, “Why do Resource Dependent Countries have Authoritarian Governments?” Journal of African Finance and Economic Development 5.2 (2002): 57-77.

As in Turkmenistan, where large energy export revenues enable the authoritarian regime to keep national tax rates very low. See generally Terry Lynn Karl, The Paradox of Plenty: Oil Booms and PetroStates (Berkeley, Calif.: University of California Press, 1997), pp. 58-64.

See the literature on Libya cited in Michael L. Ross, “Does Oil Hinder Democracy?” World Politics 53.3 (2001): 325-61, at pp. 333-34. See also Nathan Jensen and Leonard Wantchekon, “Resource Wealth and Political Regimes in Africa,” Comparative Political Studies 37 (2004): 816-41; Daron Acemoglu, James Robinson, and Thierry Verdier, “Kleptocracy and Divide-and-Rule: A Model of Personal Rule,” MIT Department of Economics Working Paper No. 03-39 (2003).

On resources and civil conflict see M. Doyle and N. Sambanis, “International Peacebuilding: A Theoretical and Quantitative Analysis,” American Political Science Review 94.4 (2000): 779–801; Michael

L. Ross, “A Closer Look at Oil, Diamonds, and Civil War,” Annual Review of Political Science 9 (2006):

265-300. See especially the line of debate between Collier & Hoeffler and Fearon: Paul Collier and Anke Hoeffler, “On Economic Causes of Civil War,” Oxford Economic Papers 50 (1998): 563-73, and “Greed and Grievance in Civil War,” Oxford Economic Papers 56 (2004): 563-95; Paul Collier, Anke Hoeffler and Dominic Rohner, “Beyond Greed and Grievance: Feasibility and Civil War,” Oxford Economic Papers 61 (2009): 1-27; James Fearon and David Laitin, “Ethnicity, Insurgency, and Civil War,” American Political Science Review 97 (2003): 75-90; James Fearon, “Primary Commodity Exports and Civil War,” Journal of Conflict Resolution 49 (2005): 483-507.

For example, Pol Pot supported the Khmer Rouge army by capturing a strip of Cambodian territory rich in rubies and sapphires; and Sassou of Congo-Brazzaville sold future drilling rights to a French oil company to support his private militia. See Michael L. Ross, “The Natural Resource Curse: How Wealth Can Make You Poor,” in Natural Resources and Violent Conflict: Options and Actions, ed. Ian Bannon and Paul Collier (World Bank, 2003), pp. 1-37; and Ross, “Booty Futures,” working paper (2005).

www.polisci.ucla.edu/faculty/ross/ bootyfutures.pdf.

offshore oil) that will enrich whoever controls the national government.7 The contribution of extractable resources to civil conflict has been affirmed by academics, nongovernmental organizations, and UN Security Council resolutions.8 Civil conflict is one reason that resource-rich countries are subject to the third resource curse: economic dysfunction.9 Collier and Hoeffler estimate that it takes twentyone years for a country to catch up to the GDP it would have had without a civil war.10 Even without civil conflict, resource-dependent economies are more vulnerable to growth-retarding economic shocks, adverse exchange-rate effects, and corruption.11 The fact that these resources can be extracted either by small groups of foreign experts (e.g., with oil) or unskilled domestic laborers (e.g., with alluvial diamonds) gives the regimes that control the resource revenues little incentive to invest in the health or education of the people. The more a country relies on exporting minerals, the worse its standard of living tends to be.12 Resource dependence is correlated, for example, with higher rates of child malnutrition, lower healthcare and education budgets, higher illiteracy rates, higher poverty rates, higher income inequality between the populace and the political elite, and lower life expectancy.13 Around 3.5 billion people live in countries (about 50 of them) where extractive commodities play an important role in the economy. This is a very large group potentially subject to the resource curse. Of course abundant resources are neither necessary nor sufficient for authoritarian repression, civil conflict or low growth. For example, Eritrea Philippe Le Billon, “The Political Ecology of War: Natural Resources and Armed Conflicts,” Political Geography 20 (2001): 561-84; Paul Collier and Anke Hoeffler, “Coup Traps: Why does Africa have so many Coups d’Etat?” (Centre for the Study of African Economies, 2005).

See, for example, Oxfam, “Africa at the Crossroads,” Oxfam Briefing Paper 19 (2002); Global Witness, The Sinews of War: Eliminating the Trade in Conflict Resources and “Faced with a Gun, What Can You Do?”: War and the Militarisation of Mining in Eastern Congo (London: Global Witness, 2006;

2009); UN Security Council Resolutions 1625 (2005) and 1653 (2006).



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