Why Are Extractive Industries Prone to Corruption? (Part I)

September 13th, 2013

This blog post is the first post in a series on the connection between extractive industries and corruption in developing countries.

Natural resources, particularly fuels and ores, are often associated paradoxically with stagnant economic growth. More intuitively, natural resource wealth is also often associated with poorer governance, most notably corruption. Understanding why this is the case, however, is not necessarily intuitive. To that end, I’ll explore the correlational relationship between natural resource wealth and corruption in this post and show a model for examining these issues. Next week, I’ll use these theories to talk about some specific hypotheses explaining the relationship between large exports in extractive industries and corruption in developing countries.

The relationship between corruption and natural resource wealth, like so many things in this world, is not empirical. Notably, it’s difficult to tease out a cause and effect relationship between natural resource endowments, corruption, and governance, particularly without observing the effect of other factors—as geography, poverty, and conflict—which also tend to be correlated with natural resources and governance.

I won’t summarize the literature exhaustively, but some examples are relevant. Leite and Weidman (2002), for example, use a cross-country model to find that larger exports of fuels and ores are associated with worse corruption scores, while agriculture and food exports are related to better scores. There are also some empirical studies that have shown resource wealth, particularly in minerals and ore, lead to increased corruption. For example, Vincente (2010) compares San Tome and Principe to Cape Verde, to show how the discovery of offshore oil reserves in San Tome and Principe may have resulted in increased perceived corruption in the public sector.

While the results of the studies I summarized above did find a positive relationship between corruption and natural resource endowments, there have been others that have not found a correlation between these variables (particularly in between-country studies).

While these studies do find a correlational relationship between corruption and extractive industries, they do not present a model for understanding how the phenomena are related. In fact, I don’t believe the presence of extractive industries alone does not inherently lead to exploitation. Rather, it is the effect that these industries have on other economic and political conditions that can drive corruption.

Conceptually, a model would help to clarify these issues. To that end, I think it’s useful to look at a model presented by Tsegaye Lemma, a policy analyst with the United Nation Development Program’s Bureau for Development Policy. Lemma defines corruption as a function of monopoly, discretion, accountability, integrity, and transparency. Specifically:

Corruption = (Monopoly + Discretion) – (Accountability + Integrity + Transparency)

Extractive industries, meanwhile can affect each of these components of governance and economic conditions. This is a useful framework for considering these issues. Next week, when I consider alternative hypotheses to explain the connection between extractive industries and corruption, I’ll point out their connections to this model.

Written by Ann Hollingshead

Follow @FinTrCo