Saturday, October 30, 2004

The Extractive Industry Review - my answer to the NGOs

A draft of the World Bank’s Management Response to the Extractive Industries Review (EIR), which refers to how the World Bank should engage itself with the oil, coal, and mining sectors in general, was discussed by its Board of Executive and the following comments reflects my very personal opinions and which I sent by e-mail in October 2004 to each one of those over 900 persons who had previously e-mailed me about it with their opinions.

The EIR discussions ... a missed opportunity


I am one of the executive directors of the World Bank who recently were bombarded with your mostly similar and spam-like messages urging us to approve word by word all the recommendations that the so-called “eminent person” made in conclusion of the Extractive Industries Review (EIR).

Most of what is said in the EIR is logical and already has been considered and applied by the World Bank. Nonetheless, there were some issues and recommendations that carried more than a hint of radicalism. These extremist suggestions blind the world from finding the pragmatic solutions it so urgently needs to solve the problems of environmental degradation and adequate energy availability.

In his book, The Future of Ideas: The Fate of the Commons in a Connected World, Random House, 2001, Lawrence Lessig writes that “a time is marked not so much by ideas that are argued about as by ideas that are taken for granted.” In this respect, I had big hopes that the discussions on the EIR would help us unlock the current debate, which seems to be suffering from another bout of failure of imagination.

Unfortunately that was not to happen, since many of the really significant problems and solutions were just ignored, while minor issues were highlighted. Even the Bank management’s final response, although technically quite adequate, in using an excuse-us-NGOs-for-daring-to-disagree tone, does not put forward the differences of opinions with sufficient strength and clarity.

In this and all other respects, the real challenges still lie ahead of us. Therefore, I wish to send you herewith my thoughts on some of the issues covered by the EIR, hoping this will help to focus our energy and concerns in more productive directions. By the way, what follows are strictly personal opinions and they do not reflect any formal statement made during the discussions of the Board, as these need to be confidential to guarantee that they are never taken out of their overall procedural context. And so, in a nutshell, here is what I think of the EIR.

The high growth rates of some countries, which are undergoing the highly energy-demanding transition from bicycles to cars, are forcing the world to face two very important constraints more than ever: general energy availability, and the capacity of an already overstretched environment to absorb the carbon impact of such growth.

Instead of discussing issues such as whether the world needs to find a way to tax excessive energy consumption to promote fairer global distribution of energy use, or how to compensate for the quickly growing opportunity cost of not developing environmentally sensitive areas such as the Amazon Jungle, some very parochial NGO perspectives captured the EIR, and most of the participants just played along.

Yes, we all want clean energy, but given the urgency and magnitude of the problem, it must be clear that the world cannot afford to waste resources on unaffordable solutions. The money not spent on early prototypes of hybrid cars, or on subsidizing wind or solar-power generation plants that are not yet economically justifiable, could be much better spent on research for truly sustainable renewable energy sources, fighting poverty, or even directly paying for environmental priorities, such as keeping the Amazon intact.

Yes, the world should move away from coal and oil, especially as oil is too valuable just to produce energy. But as the price of gas has reached the unaffordable level of US $6 per Mcf (one thousand cubic feet) and is generating billions of dollars in losses for electricity generators, realities are driving the world back to coal. In this respect in particular, the recommendation of the so-called “eminent person” for the Bank to withdraw fully from coal, gas, and oil is so completely out of synch with current realities that perhaps the Bank should have done best by just ignoring it.

Although countries with annual incomes of US $30,000 per capita might survive using uneconomic environmental approaches, those with US $3,000 or less will certainly not. In this respect, the Bank should have reiterated more firmly that under no circumstances can it be allowed to cut the umbilical cord that needs to run between its efforts aiming at poverty-reduction on the one hand and economic rationality on the other.

Yes, human-rights issues are of extreme importance, and the Bank, by nature and through the quality of its people, does always give them due consideration. But to tie up the Bank and its extractive-industries (EI) operations with additional sector-specific formal rulings will only hinder reaching the acceptable balance between individual human rights and collective human rights.

Yes, the interests of indigenous groups should always be considered respectfully, but assigning special and near-veto rights to them will clearly infringe on the rights of the rest of us, who all are indigenous to this planet.

Yes, if we all agree that a holistic approach is needed, why is then the analysis of the demand side for the resources produced by the extractive industries missing? It is clear that in most cases, the share of revenues among local participants has not been adequate. But to ignore the fact that the slice of the pie to be shared locally might be too small—as many nonrenewable resources are sold at a price equal to their marginal extraction cost and therefore don’t leave much room for earnings—is not really an objective approach.

Yes, initiatives such as the Revenue Transparency Initiative might not be perfect, but they are a step in the right direction, and the Bank should pursue them always, not only in the EIR. For instance, the use of the economic surpluses created when granting patents, presumably to pay for research, should also be more transparent so as to better measure the prohibitively high prices of vital medicines. Since the treasury of most industrialized countries perceive through their gasoline taxes more fiscal income from a barrel of oil than the producer, this not only begs the question of who might really be cursed, but also whether those flows could also benefit from more transparency. Taxes collected on gasoline in the name of the environment (more than $100 billion a year on unleaded gasoline in Europe alone) of which basically nothing really goes to the environment and much of which has even been used to subsidize the coal industry could be the foundation for a real environmental global fund or, better yet a global tax program. By the way, if we are to have a global tax based on a gasoline tax, then I am of the opinion that ALL countries should pay an amount per liter consumed, albeit at rates that are adjusted for their national income per capita. (Even the poorest have the right to feel they are contributing toward a shared world cause)

Yes, there is always a need for better practices, as in gender issues, but for EIR to go to such an extreme as to single out the sector and specifically link it with issues such as rape and prostitution is unacceptable, both on moral and intellectual grounds.

Friedrich List wrote that free trade was the means through which an already industrialized country “kicks away the ladder by which it has climbed up, in order to deprive others of the means of climbing up after it.” If we were to paraphrase List, the way the “eminent person” wanted the EIR to conclude would have kicked away the ladder for many undeveloped countries, preventing their use of their natural resources.

In conclusion, it is unfortunate that these EIR discussions did not advance a more rational agenda, especially since the World Bank is one of the few worldwide institutions that could really establish a leadership role in environmental and energy issues. Nonetheless, let us not cry over spilled milk. There are so many urgent challenges and opportunities for the Bank and all of you to play a truly creative and proactive role.

For instance, in one African country, millions of small and unorganized miners who need their jobs in order to survive create severe environmental damage. The same country also suffers yearly deforestation of hundreds of thousands of acres of forest. In such a case, wouldn’t perhaps a “Forest-Growing Miner Cooperative” be a quite sensible program for the world to sponsor? Would not this make more sense as an investment vehicle for all those environmentally sensitive dollars that the rich nation’s consumers are currently willing to spend on much less worthy proposals, such as building windmills in their gardens or driving around in their hybrids?

Let us not be busybodies blocking the world from going forward. Let us instead be very busy bodies helping it to go forward … in the right direction.