The Natural Resource Governance Institute (NRGI) Ideas, Analysis & Power of Data Extractive Industry Transparency Initiative (EITI) and mandatory disclosure standards Resource Governance Index Natural Resource Charter Research: Contracts, tax regimes, revenue sharing, revenue management, local content, transparency and accountability Technical Assistance Fiscal regimes and contracts (e.g., Ghana, Guinea, Mongolia, Sierra Leone) Revenue management and distribution (e.g., Canada, Ghana, Indonesia, Libya, Mongolia, Myanmar, Nigeria, Peru, Timor- Leste) Capacity Building Parliamentary training program Training hubs (e.g., Oxford, CEU, regional)
Challenges and Reform Opportunities in Governance and Natural Resources: Mongolia and Asia in a Global Empirical Perspective Daniel Kaufmann, President & CEO Natural Resource Governance Institute (NRGI) www.resourcegovernance.org Lecture at the Mongolia Economic Forum Ulaanbaatar, Mongolia March 31 st, 2016
A Live Test: Culture, Information and Incentives: You are approaching your car in the empty and unattended garage late at night You see an envelope on the floor, and you pick it up It contains 20 bills of 100 euros each. If no possibility that anyone would know: No cameras, no monitoring, no reporting What would you do with such envelope full of cash?
A. If no possibility that anyone would know: You are alone, there is no monitoring, cameras, or possibility of resporting 33% Report and Return Funds 50% Undecided 17% Keep Option Finder Results: Various Audiences 17% Keep
B. If 30% probability that information is shared (e.g. 30% that camera recording info which may be reviewed) 22% Undecided 74% Return 4% Keep 74% Report and Return Funds
The Governance Challenge: Outline in brief Economics: crucial, but not alone: integrating into governance political, economic & institutional What is Governance; how measured; does it matter? Evidence from the world & Mongolia: Mixed performance specific strengths & vulnerabilities Governance in Extractives: a framework for assessment & main challenges & findings Lessons from global evidence & experience and some implications for Mongolia: Governance Reform Opportunity Now 6
WGI: Six Dimensions of Governance Governance as the set of traditions and institutions by which authority in a country is exercised-- specifically: The process by which those in authority are selected and replaced VOICE AND ACCOUNTABILITY POLITICAL STABILITY & ABSENCE OF VIOLENCE/TERRORISM The capacity of government to formulate and implement policies GOVERNMENT EFFECTIVENESS REGULATORY QUALITY The respect of citizens and state for institutions that govern interactions among them RULE OF LAW 7 CONTROL OF CORRUPTION
Worldwide Governance Indicators Data on six dimensions of governance covering well over 200 countries since 1996 until present Synthesis of hundreds of underlying indicators taken from about 30 different data sources Aggregate and individual indicators available at www.govindicators.org, about largest publiclyavailable governance database in the world Result of longstanding research project, featuring the Governance Matters series 8
Worldwide Governance Indicator Score WGI Control of Corruption: Select Countries, 2014 New Zealand Denmark Norway Switzerland Finland Sweden Singapore Luxembourg Netherlands Australia Germany Iceland Canada Japan United Kingdom Hong Kong Ireland Belgium Chile Austria Uruguay United States Bahamas Bhutan France Estonia Macao Taiwan Brunei Vanuatu South Korea Malaysia Saudi Arabia Fiji Italy South Africa Turkey Solomon Islands China Brazil Thailand Philippines India Mongolia Vietnam Indonesia Argentina Timor-Leste Mexico Laos Russia Myanmar Papua New Guinea Cambodia North Korea Guinea-Bissau Syria Yemen Libya South Sudan Somalia Equatorial Guinea Good Corruption Control 2.5 1.5 0.5 Governance Level Margin of Error -0.5-1.5-2.5 90 th -100 th percentile 75 th -90 th percentile 50 th -75 th percentile 25 h -50 th percentile 10 th -25 th percentile 0 th -10 th percentile Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130 9
WGI Rule of Law, 2014 Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130 10
WGI Control of Corruption: the Americas, 2014 Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130 11
Voice and Accountability Performance WGI: Asia Source: Worldwide Governance Indicators (http://www.govindicators.org), additional information at Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430 12 (http://ssrn.com/abstract=1682130).
Political Stability & Absence of Violence Indicator: Asia Source: Worldwide Governance Indicators (http://www.govindicators.org), additional information at Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430 13 (http://ssrn.com/abstract=1682130).
Government Effectiveness Indicator WGI: Asia Source: Worldwide Governance Indicators (http://www.govindicators.org), additional information at Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430 14 (http://ssrn.com/abstract=1682130).
Control of Corruption WGI: Asia 2014 Source: Worldwide Governance Indicators (http://www.govindicators.org), additional information at Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430 15 (http://ssrn.com/abstract=1682130).
Mongolia Governance Indicators: WGI 2000, 2007, 2014 Source: Worldwide Governance Indicators (http://www.govindicators.org), additional information at Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430 16 (http://ssrn.com/abstract=1682130).
Ukraine Governance Indicators Source: Worldwide Governance Indicators (http://www.govindicators.org), additional information at Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430 17 (http://ssrn.com/abstract=1682130).
Worldwide Governance Indicators for Chile: 2000, 2007, 2014 Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 40% 30% 20% 10% 0% -10% -20% -30% Managing Volatile Revenues Chile 100% 80% 60% 40% 20% 0% -20% -40% Venezuela Government revenue growth (Chilean Peso) Government expenditure growth (Chilean Peso) Government revenue growth (Venezuelan Bolívar) Government expenditure growth (Venezuelan Bolívar) Source: IMF World Economic Outlook Database
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Expenditure volatility in Mongolia vs Ukraine 100% Mongolia 100% Ukraine 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% -10% -10% General government revenue growth General government total expenditure growth General government revenue growth General government total expenditure growth Data source: IMF WEO
Mongolia s Borrowing and Saving: Fiscal Balance
Result of Mongolia s Borrowing: Debt Accumulation Percent of GDP 100 90 80 70 External Debt Domestic Debt EST. 60 50 40 30 20 10 0 2011 2012 2013 2014 2015 2016 Source: World Bank November 2015 Mongolia Economic Update
Makeup of Mongolia s 2014 Exports Source: The Atlas of Economic Complexity (http://atlas.cid.harvard.edu/explore/tree_map/export/mng/all/show/2014/), this is a measurement of complexity that 23 is calculated based on how many different products a country can produce and the number of countries able to make those products
Makeup of Malaysia s 2014 Exports Source: The Atlas of Economic Complexity (http://atlas.cid.harvard.edu/explore/tree_map/export/mng/all/show/2014/), this is a measurement of complexity that 24 is calculated based on how many different products a country can produce and the number of countries able to make those products
Japan South Korea Czech Republic United Kingdom Slovakia Ireland China Mexico Estonia Malaysia Belarus Lithuania Bosnia-Herzegovina Philippines Ukraine Greece New Zealand El Salvador South Africa Vietnam Egypt Argentina Macedonia Guatemala Kuwait Senegal Cuba Australia Zambia Cameroon Qatar Botswana Uganda Bangladesh Turkmenistan Mozambique Gabon Algeria Malawi Libya Guinea Angola Economic Complexity Indicator Score The Atlas of Economic Complexity: Country Rankings* 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0 Mongolia (score of -1.41) -1.5-2.0-2.5 *Note: Due to number of countries covered, only select countries are labeled in this chart. Mongolia is ranked 114 th out of 124 countries. Source: The Atlas of Economic Complexity (http://atlas.cid.harvard.edu/explore/tree_map/export/mng/all/show/2014/), this is a measurement of complexity that 25 is calculated based on how many different products a country can produce and the number of countries able to make those products
Singapore South Korea China Chile Azerbaijan Kazakhstan Russia Brazil Ukraine Tajikistan Kyrgyzstan Mongolia Global Competitiveness Index Score Best 7 Global Competitiveness Index: 2007-2015 2007 2015 6 5 4 3 Worst 2 Note: Mongolia s rank in 2007 is 101 out of 131 and in 2015 is 104 out of 140. Source: World Economic Forum, 2015-2016 Global Competitiveness Report, http://reports.weforum.org/global-competitiveness-report-2015-2016/ 26
New Zealand Norway France United Kingdom Germany Georgia South Korea Poland Argentina Spain Bangladesh Costa Rica El Salvador Dominican Republic Mongolia Kenya Ukraine Mali Tanzania Cameroon Burkina Faso Senegal Tunisia Sri Lanka Liberia Rwanda Trinidad & Tobago Angola Nigeria Bolivia Fiji Cambodia Equatorial Guinea Myanmar Open Budget Index Score Best 100 Worst 90 80 70 60 50 40 30 20 10 0 2015 Open Budget Index: Mongolia scored 51 (ranked 39 th among 102 countries) 27 Source: International Budget Partnership 2015 Open Budget Index, http://internationalbudget.org/opening-budgets/open-budget-initiative/open-budget-survey/
1. Norway 2. United States (Gulf of Mexico) 3. United Kingdom 4. Australia (Western Australia) 5. Brazil 6. Mexico 7. Canada (Alberta) 8. Chile 9. Colombia 10. Trinidad and Tobago 11. Peru 12. India 13. Timor-Leste 14. Indonesia 15. Ghana 16. Liberia 17. Zambia 18. Ecuador 19. Kazakhstan 20. Venezuela 21. South Africa 22. Russia 23. Philippines 24. Bolivia 25. Morocco 26. Mongolia 27. Tanzania 28. Azerbaijan 29. Iraq 30. Botswana 31. Bahrain 32. Gabon 33. Guinea 34. Malaysia 35. Sierra Leone 36. China 37. Yemen 38. Egypt 39. Papua New Guinea 40. Nigeria 41. Angola 42. Kuwait 43. Vietnam 44. Congo (DRC) 45. Algeria 46. Mozambique 47. Cameroon 48. Saudi Arabia 49. Afghanistan 50. South Sudan 51. Zimbabwe 52. Cambodia 53. Iran 54. Qatar 55. Libya 56. Equatorial Guinea 57. Turkmenistan 58. Myanmar 2013 Resource Governance Index 100 80 98 92 88 85 80 77 76 75 74 74 73 Satisfactory (71-100) Partial (51-70) Weak (41-50) Failing (0-40) 70 68 66 60 63 62 61 58 57 56 56 56 54 53 53 51 50 48 47 47 47 46 46 46 46 43 43 43 43 42 42 41 41 40 39 38 37 34 34 33 31 31 29 28 26 20 19 13 5 4 0 Source: Natural Resource Governance Institute: 2013 Resource Governance Index, http://www.resourcegovernance.org/rgi 28
2013 Resource Governance Index: Mongolia Source: Natural Resource Governance Institute: 2013 Resource Governance Index, http://www.resourcegovernance.org/rgi 29
But does Governance Matter? OK, governance can be measured, with caution But does it really matter? 30
The 300% Development Dividend From Improving Governance & Controlling Corruption $30,000 $3,000 $300 High Corruption Medium Corruption Low Corruption Data Source for calculations: KK 2004. Y-axis measures predicted GDP per capita on the basis of Instrumental Variable (IV) results for 31each of the 3 categories. Estimations based on various authors studies, including Kaufmann and Kraay.
GDP per capita (PPP) Development Dividend of good governance & corruption control: Resource-Rich vs. Non- Resource Rich countries Resource-Rich Countries Non Resource Rich 45,000 30,820 12,712 10,272 6,851 10,000 3,941 5,000 0 Poor Corruption Control Average Corruption Control Good Corruption Control Sources: GDP per capita (atop each column) from World Bank World Development Indicators, 2012. 32 Corruption Control data from Worldwide Governance Indicators (WGI, 2012) Countries grouped into terciles based on WGI Control of Corruption scores. Resource Rich country classification according to IMF (2010).
2014 Sovereign Bond % Yield Sovereign Bond % Yield vs Worldwide Governance Indicator Composite: The 1,000 basis points dividend of good governance? 16 14 Egypt, Arab Rep. Uganda r = -0.776 12 Pakistan Kenya Brazil 10 8 Russian Federation India Vietnam Indonesia Turkey South Africa 6 4 2 China Colombia Mexico Philippines Thailand Iceland Greece Botswana Hungary Romania Croatia Chile New Zealand Malaysia Poland Australia Bulgaria Israel Korea, Rep. Italy Latvia Lithuania Slovenia Portugal Spain United States United Ireland Norway Singapore Kingdom Canada Czech Republic France Belgium Hong Kong SAR, China AustriaNetherlands Sweden Taiwan, China Denmark Finland Germany Switzerland Japan 0-1.50-1.00-0.50 0.00 0.50 1.00 1.50 2.00 2013 Worldwide Governance Indicator Score Sovereign Bond % Yield is obtained from countries 10-year bonds as of April 21, 2014. Source: Worldwide Governance Indicators, available at: www.govindicators.org and 10-Year Government Bond Spreads, available at: www.investing.com/rates-bonds/government-bond-spreads. 33
Mongolia Sovereign Bond Yield Source: http://www.ft.com/fastft/2016/01/14/mongolia-looking-to-tap-dollar-bond-market/
WGI Control of Corruption, 2011 Governance Trends in RR countries Trends in Control of Corruption past decade, Extractive vs. Non-Extractive Intensive Countries, 2002-2011 0.8 0.6 0.4 0.2 0.0-0.2 Control of Corruption in: Extractive Countries with satisfactory Governance Non-Extractive Intensive Countries -0.4-0.6 Extractive- Intensive Countries (All) -0.8 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Worldwide Governance Indicators, 2012. The extractive countries with satisfactory control of corruption trend line (atop) includes a dozen countries.
Global Competitiveness Index Score View of the Firm: Frequency of Bribery (WEF-EOS) High Corruption 7 6 5 4 3 2 Low 1 Corruption Awarding of public contracts and licenses Diversion of public funds Obtaining favorable judicial decisions Imports and exports Annual tax payments Note: Score is reversed so that a higher number indicates higher corruption. Mongolia s rank in 2007 is 101 out of 131 and in 2015 is 104 out of 140. Source: World Economic Forum, 2015-2016 Global Competitiveness Report, http://reports.weforum.org/global-competitiveness-report-2015-2016/ 36
It is the P Word: State Capture & Legal Corruption Late 90 s: recognizing that Politics matters (not just PE ) P : Political High Level Corruption, State Capture how elites collude and privatize public policy Redefining Corruption? Traditional Definition: Abuse of Public Office for Private Gain Or: The Privatization of Public Policy 37
%of all Firms report negative impact of grand corruption Seize the State, Seize the Day Research on Capture, 1999-2000: Differences in Transition Countries on the Extent of State Capture 50 % 45% 40% 35 % 30% 25% 20 % 15 % 10 % 5% 0 % Hungary Estonia Russia Azerbaijan Adverse Impact of Purchases of: Parliamentary legislation Decrees Central Bank Influence 38
Costs of State Capture Private Sector grows and invests less Average rate of growth '97-'99 30 Output Investment 25 20 15 10 5 0 High capture Countries Low capture countries 39
% Firms report 'corruption' Bribery vs. Legal Corruption (& soft Capture), 2004 % Firms report corruption 40 Nordic Countries 20 G-7 East Asia 'Tigers' (NICs) United States 0 Corporate Bribery Source: Author s calculations based on EOS 2004.
% Firms report 'corruption' 80 Bribery vs. Legal Corruption (& soft Capture), 2004 % Firms report corruption Nordic Countries 60 G-7 40 20 East Asia 'Tigers' (NICs) United States 0 Corporate Bribery Corporate "Legal Corruption" Source: Author s calculations based on EOS 2004.
The international environment can help or hinder 44 implementing countries Over $1 trillion in payments and revenues in EITI reports by 34 countries. Natural Resource Charter Precepts 11 & 12 Dodd-Frank Financial Reform Act Illicit financial flows are estimated to cost developing countries over US$1 trillion annually US$10 for every US$1 received in aid. Source: Global Financial Integrity Image source: The Economist
Towards a broad analytical framework: the Natural Resource Charter ( charter ) Comprehensive approach for thinking through the resource governance challenge and providing an analytical framework for policy reform Builds and expands on the EITI; endorsed by several governments & international institutions Accumulated experience and knowledge of over 200 academics, practitioners, & other experts Second edition published in 2014, further materials being produced live document 43
The Natural Resource Charter (NRC) Domestic governance Discovery & deciding to extract Getting a good deal Managing revenues Investing for sustainable development International governance 44
The Charter governance & decision chain components are translated into 12 specific precepts covering key legal, institutional and policy issues Domestic governance 1. Forming a strategy & building institutions 2. Ensuring accountability & transparency Discovery & deciding to extract Getting a good deal Managing the revenues Investing for development 3. Exploration & choosing operators 4. Taxation 5. Local impacts 6. National resource companies 7. Allocating the revenues 8. Smoothing expenditure volatility 9. Improving public expenditure 10. Engaging private sector International 11. Role of international companies governance 12. Role of international governance actors 45
Extra-budget expenditure $32 Billion
Global Lessons and Some Implications 1. Consolidate & Build on earlier Transformative Achievements in Political & Institutional Dimensions of Governance -- Political and Civil Liberties, Free Press -- Anti-Corruption program -- Transparency reforms: i) Budget; ii) Mining Transparency: Contracts, Beneficiary Ownership, Subnational, License allocation, SOE (Erdenes), EITI + 2. Addressing major challenges in Economic Governance -- Macroeconomic & debt management, lowering risks of default or bailout: consensus on prudent fiscal, monetary & debt policies -- Realism on mining prices, & policies of Future Heritage Fund -- Reality of global mining foreign investments (& art of negotiation ) -- Economic diversification program: implementation & macro. Seizing the Moment : Towards national consensus 47
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Copper Price ($/MT) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 2016 World Bank, IMF and Private Sector* Copper Price Projections 0 Copper price IMF Copper projection WB Copper projection TE Copper projection *Note: WB price projections come from the January 2016 World Bank Commodity Markets Outlook ((http://www.worldbank.org/en/research/commoditymarkets). IMF price projections come the February 2016 IMF Commodity Price Forecast (http://www.imf.org/external/np/res/commod/index.aspx). TE 48 price projections come from Trading Economics (http://www.tradingeconomics.com/commodities) as of March 2016. Data for TE projections is limited so averages were used to extrapolate missing data.
Power of Transparency & Data If it cannot be measured, it cannot be controlled Lord Kelvin Not everything that counts, can be counted, and, not everything that can be counted, counts Einstein -------------------------------------------------------------. Thank You! 49