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For VoxEU, 3 November 2010
Trade in loot
Thorvaldur Gylfason and Per Magnus Wijkman
When you buy a watch in an established jewelry store, you can ordinarily be pretty sure that the
watch is genuine and the purchase legitimate. But if you buy a watch from a street vendor with
his pockets bulging with watches, you ought to know that you are buying either a fake or loot, or
both. If your house is burglarized and your new watch stolen, your insurance policy covers your
loss in the first case. It will most likely not cover your loss in the second. Our laws, rules, and
regulations do not permit domestic trade in loot. But what about international trade in loot?
Poverty amid luxury
Consider the oil trade. Oil accounts for over half of world trade in commodities and oil
companies account for five of the ten largest corporations in the world, measured by earnings.
Huge quantities of oil are bought from countries where the powers that be have appropriated
the oil resources of their countries. Take Equatorial Guinea where oil was discovered after 1990:
GDP per person multiplied due to booming oil exports, to the United States in particular.
Equatorial Guinea’s per capita national income is now higher than Russia’s and three times as
high as China’s. Yet the vast majority of the people, half a million of them, are no better off now
than they were before the oil discoveries. Life expectancy at birth is 50 years compared with 68
years in Russia and 73 years in China. Every seventh child in Equatorial Guinea dies before its
fifth birthday. Why has the oil wealth not ‘trickled down’ to the common man?
President Teodoro Obiang Nguema Mbasogo has governed Equatorial Guinea since 1979,
having been re-elected a few times with 98% of the vote. The constitution authorizes him to rule
by decree. Wikipedia reports that “In July 2003, state-operated radio declared President Obiang
to be a god who is “in permanent contact with the Almighty” and “can decide to kill without
anyone calling him to account and without going to hell.”” Meanwhile, over a half of the
country’s population must get by on less than a dollar a day even if oil exports now amount to
about a barrel per person per day, or 80 dollars at the current price. Whatever the reason for
this maldistribution of the country’s oil wealth – illegal transfers of resource ownership, political
corruption, or gross inefficiency of public or private resource exploiters – few dare protest
against an authoritarian regime. Equatorial Guinea is not an exceptional case. The list of oil-rich
countries plagued by resource-related corruption, oppression, and associated political unrest is a
long one, and includes Chad, Guinea, Iran, Iraq, Libya, Nigeria, Saudi Arabia, Sudan,
Turkmenistan, Uzbekistan, and Venezuela. To varying degrees their natural resources have been
usurped by private or public persons. In these cases, their exports can be said to constitute trade
in loot.
Can international action help stop international trade in loot?
The International Covenant on Civil and Political Rights (ICCPR), adopted in 1966 and in force
from 1976, could be a start. It begins as follows: “All peoples have the right of selfdetermination. By virtue of that right they freely determine their political status and freely
pursue their economic, social and cultural development. All people may, for their own ends,
freely dispose of their natural wealth and resources without prejudice to any obligations arising
out of international economic co-operation, based upon the principle of mutual benefit, and
international law. In no case may a people be deprived of its own means of subsistence.” The
first article of the International Covenant on Economic, Social and Cultural Rights (ICESCR) is
identical.
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In effect, the ICCPR defines the natural resources of a state as a property owned in common
by its people to be freely disposed of by them in a democratic process or at least without their
right to democratic participation having been violated. This description also applies to the United
States where the people, as the original owners of the natural resources, have decided legally to
transfer some of this property to private individuals (at auctions for drilling rights, etc.). In other
countries (e.g., Angola), the constitution proclaims that it is the state that owns the resources – on
the grounds that the people have transferred the resources to the state (or because the state is
acting as an agent of the people). This means that the usurpation of such a resource, as in Equatorial
Guinea, can be viewed as a violation of the ICCPR because, by international law, it belongs to the
people. Put differently, the expropriation of natural wealth and its resultant gross maldistribution
constitutes a violation of human rights. The ICCPR is binding for its signatories as they have
committed to abide by it. Because Equatorial Guinea has signed and ratified the ICCPR, it should
in principle be possible to arraign President Obiang and his regime before the UN Committee on
Human Rights whose opinions all but a few rogue states endeavor to honor even if the
Committee cannot impose legal sanctions on violators. This applies also to the governments of
other afore-mentioned countries except Saudi Arabia as well as a few, mostly small, states which
have not signed the ICCPR. Importantly for its effectiveness, also the United States is a signatory.
As Wenar (2008) points out, the ICCPR makes it possible in principle to stem ongoing
international trade in loot. He argues that those who purchase oil from Equatorial Guinea are
buying loot. Wenar‘s point is as simple as it is basic: A people‘s right to its natural resources is a
human right, and the inviolability of human rights is protected by international law, notably the
ICCPR and the ICESCR, and likewise firmly enshrined in many national constitutions. To help stop
trade in loot at the local level, Wenar proposes a Clean Trade policy framework for importing
states to strengthen public accountability in exporting countries. This could pull the carpet from
under rulers such as President Obiang and his ilk and help prevent their violations of human
rights.
Privatization presupposes democracy
The ICCPR entails that an authoritarian government is not free to transfer natural resources to
private ownership. This is because people under authoritarian rule are not in a position to “freely
determine their political status and freely pursue their economic, social and cultural
development.” President Obiang’s regime in Equatorial Guinea has deprived the people of “its
own means of subsistence,“ thus violating the ICCPR. There is no doubt, however, about a
democratic government’s authority by law to transfer natural resources from public ownership
to private hands as the United States government has done with that country’s oil wealth. This is
because there can be no doubt that the American people “freely determine their political status
and freely pursue their economic, social and cultural development.”
By Icelandic law, Thingvellir, the site of Iceland’s ancient Parliament (est. 930), must forever
belong to the people. The law was passed long ago to make sure that Thingvellir could not in
future be passed into private hands. The ICCPR does not go that far. It does not declare explicitly
that natural resources must forever belong to the people. Rather, the proclamation of the
people’s right to “freely dispose of their natural wealth and resources” subtly limits the right of
an authoritarian government to transfer national resources from public to private ownership.
Because the ICCPR is binding on signatories, local laws on the ownership of natural resources
ought to accord with the ICCPR. Such clauses are embedded in the constitutions and laws of
many countries. For example, Iraq’s constitution from 2005 proclaims that “Oil and gas are the
property of the Iraqi people in all the regions and provinces.“ Norway’s law of the sea from 2008
contains the following clause: “Wild marine resources belong to the Norwegian people.” Article
1 of Iceland’s fisheries management law from 1991 makes a similar proclamation. In 2007, the
UN Committee on Human Rights declared that the Icelandic fisheries management system by
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which annual catch quotas are allocated free of charge to vessel owners who can either fill their
quotas at sea or sell them constitutes a violation of human rights. The Committee instructed the
Icelandic government to rectify the situation by removing the discriminatory element from the
system.
Externalities can preclude privatization
Common property resources whose exploitation involves externalities call for special regulatory
institutions and ownership arrangements. For example, individual ownership by several parties is
inefficient when the separately owned oil wells drill into the same oil pool. The same applies
when separately owned fishing vessels in a country (or countries) exploit a migratory fish stock
common to the vessels (countries). In such cases, economic efficiency requires creating national
(international) institutions to regulate exploitation while ensuring that the proper owners of the
resource receive the economic rents generated by exploiting the common resource (Wijkman,
1982). These owners can be defined as, for example, the people living in a local community,
region, country, or group of countries affected by the externalities of exploitation of the
common property resource. This requires institutions to ensure that the users pay the owners
for its use. This is the operational implication of the fairness argument firmly embedded, as
Wenar (2008) points out, in primary documents of international law such as the ICCPR and the
ICESCR. This legal argument has all too often been overlooked by economists and politicians due
to the consequent institutional complexities. In these cases, simple privatization is likely to be
both inefficient and unfair.
The Icelandic fisheries management system is a case in point. In Iceland, it has been
suggested, among other proposals to allow the resource rent to accrue to its rightful owner, that
an ‘Open Market Fisheries Committee’ be set up and vested with a broad mandate and broad
powers to set market-based fishing fees to maximize the long-run profitability of fisheries for the
benefit of the sole national owner (Gylfason and Weitzman, 2003). The idea is that, like central
banking, the setting of fisheries management instrument values, including fees, is too important
to be left in the hands of politicians. The fisheries authorities should be above even the hint of
suspicion of manipulation. There needs to be clear and specific management and accountability
structures, formalized in the national interest by reform legislation. This is the idea behind
independent yet accountable Central Banks as well as independent judiciaries and supervisory
authorities and, yes, a free press. The idea is applicable across a broad range of natural
resources, including oil. The risk that such an independent authority might be prone to capture is
not negligible, but it does not constitute an insurmountable obstacle. After all, we do have
independent judiciaries. Outsourcing would be another possibility. The 24 members of the EMU
outsource their monetary policy to the European Central Bank as a matter of course.
Public accountability and clean governance
Nigeria is another country that does not have much to show for its huge oil earnings. Nigeria’s
per capita GDP grew more than twice as fast in the 1960s as it did subsequently despite the
colossal export revenue boom of the 1970s onward. Per capita growth in Nigeria has averaged
1.1% per year since 1960. Life expectancy at birth has increased from 38 years to 48 years, two
years behind Equatorial Guinea. Gross mismanagement of the oil rent appears to be at the root
of Nigeria’s problems.
To get Nigeria growing again Sala-i-Martin and Subramanian (2003) have proposed that oil
revenues be transferred from public hands to the private sector. But the private sector, like the
public sector, is far from infallible as events since 2007 have demonstrated once again. Consider
this analogy: If judges prove corrupt, the solution is not to privatize the judicial system. Rather,
the solution must be to replace the crooked judges and reform the system by legal or
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constitutional means aimed at securing the integrity of the courts. As recent developments in
Russia and elsewhere have illustrated, privatization, if not well managed, is prone to political
capture and corruption. Thus, privatization is not a solution if corruption is already rife in the
public sector. Strong institutions for clean governance are essential for development.
When a country is ready to take the privatization route it matters to whom in the private
sector the oil rent is transferred. If the rent is divided evenly among the adult population as in
Alaska, the allocation can be deemed fair and the beneficiaries have an interest in ensuring that
oil production is efficient. If, on the other hand, the resource rent is granted to select interested
parties as in Iceland (fishing boat owners), the allocation is neither fair nor do fishermen have an
interest in efficiency. The Norwegian national oil trust fund is a model that deserves to be
applied by other oil producing countries.
Conclusion
Weak institutional structures in many oil exporting countries entice those who believe that
‘anything goes’ to appropriate other people’s money, resulting in inefficient and inequitable
outcomes. International organizations can play an important role in helping local governments
to withstand the pressures of interest groups determined to capture natural resource rents at
the expense of the common man. Wenar (2008) has pointed to important international
initiatives to encourage increased transparency in the use of natural resource revenues, such as
the ICCPR and ICESCR. Further, the Extractive Industries Transparency Initiative (EITI) aims to set
a global standard for transparency in oil, gas, and mining. The Natural Resource Charter (NRC)
lays out “a set of principles for governments and societies on how to best manage the
opportunities created by natural resources for development.” The Revenue Watch Institute
(RWI) promotes the responsible management of oil, gas, and mineral resources for the public
good. Together these initiatives can add some bite to the bark of the UN Committee on Human
Rights by working directly with those involved in international trade in what may be loot. As a
result, resource-rich developing countries will, we hope, be able to invest more in public health,
education, and legal institutions – important sources of economic growth.
References
Gylfason, Thorvaldur, and Martin Weitzman (2003), “Icelandic Fisheries Management: Fees vs.
Quotas,” CEPR Discussion Paper No. 3849, March. See also Dwindling fish: what’s the catch?
Sala-i-Martin, Xavier, and Arvind Subramanian (2003), “Addressing the Natural Resource Curse:
An Illustration from Nigeria,” IMF Working Paper No. 03/139, July.
United Nations (2007), International covenant on civil and political rights,
CCPR/C/91/D/1306/2004, 14 December.
Wenar, Leif (2008), “Property rights and the resource curse,“ Philosophy and Public Affairs, Vol.
36, No. 1, Winter, 1-32. For more, see wenar.info/CleanTrade.html.
Wijkman, Per Magnus (1982), “Managing the Global Commons,“ International Organization, Vol.
36, 511-536.