The difference between oil and non-oil states

Much like Wehner and de Renzio, Ross finds that among democracies, a country’s mineral wealth does not have much effect on the transparency of the government budget. Among autocracies though, greater oil wealth correlates with less fiscal transparency. So oil wealth makes the budgets of undemocratic countries less transparent. But contrary to what one might have expected, Ross finds that non-fuel mineral wealth makes government budgets more transparent.

The paper also demonstrates that oil has an effect on budget transparency that goes above and beyond its more general effect on democratic accountability. So there appears to be a version of the resource curse aimed at budget transparency specifically.

Why, you might ask?

Its not EITI

Based on the available data, Ross does not find convincing evidence that the different levels of budget transparency in countries dependent on oil and those dependent on other kinds of mineral wealth, can be explained by membership in the Extractive Industries Transparency Initiative (EITI). He argues that if EITI pressures were responsible for the exceptional transparency of some mineral-producing autocracies, one would expect that most highly transparent mineral autocracies would be EITI members. However in Ross’s analysis, of the five authoritarian mineral producers that are relatively transparent (South Africa, Russia, Botswana, Namibia and Zambia) – only one (Zambia) is a member of EITI. In fact, the mineral-producing autocracies that are EITI members (Zambia and Kazakhstan) have lower OBI scores than the mineral-producing autocracies than are not members, although the differences are not statistically significant.

It’s not foreign investment either

Ross also doesn’t find evidence that the transparency anomaly can be explained by dependency on foreign investment. Oil rich countries derive much more revenue from their extractive industries than countries rich in other minerals derive from theirs. The argument would go that non-oil countries would be more transparent because they are more dependent on foreign investment. But Ross doesn’t find any link between foreign investment inflows and budget transparency.

The clue lies in who extracts

Unsurprisingly Ross concludes that learning more about the different levels of budget transparency in oil and mineral dependent countries should be a priority for future research. He finds a promising clue to this puzzle in the fact that in most autocracies the state manages oil extraction itself through national oil companies, making it easier to cloak revenue. The extraction of other minerals is more often managed by the private sector. This still doesn’t explain why the regular budgets of oil states would also be less transparent. But the lower revenue derived by non-oil states may make them more dependent on domestic revenue such as taxes and service charges. The research of Mick Moore on taxation and democracy suggests that dependence on the consent of citizens to pay tax may compel governments to be more transparent with the management of public resources.

What does all this mean?

One of the important implications of Ross’s findings for the policy and advocacy community is that domestic politics, and therefore national level advocacy, matter a great deal. Like Wehner and de Renzio, Ross finds that the way in which extractives are managed at country level is the key variable for their impact on budget transparency. In fact, it may matter more than the need to attract foreign investment, and more than international advocacy campaigns. Of course this does not make international advocacy for transparency irrelevant. It just means that international advocacy efforts should be based on a better understanding of domestic contexts, and have a complementary focus on country level advocacy.

Many historical, structural and natural factors may play a role in the level of budget transparency in a given country. While relevant, research on such factors are less helpful to the policy and advocacy community, because they focus on things that can’t be changed. Knowing for example that francophone administrative heritage countries tend to be less transparent than anglophone heritage systems may hold academic interest, but doesn’t tell us how to make budgets more transparent.  For this reason also Wehner and De Renzio’s analysis is interesting: they look at determinants of budget transparency that can and do change.

Wehner and de Renzio’s first finding is that free and fair elections have a significant effect on budget transparency. Countries that have recently had free and fair elections tend to have more transparent budgets. Interestingly, their results also suggest that high levels of transparency do not rely on a slow process of democratic maturation that may take decades or even centuries. Any recent free and fair elections seem to be enough. The rapid improvements in the OBI scores of countries like Mongolia and Liberia  seem to support these findings.

Interestingly Wehner and de Renzio also find evidence that free and fair elections reduce the well-known adverse effect of natural resource dependency on budget transparency. Natural resource dependency is therefore not an inevitable death sentence to transparency.

Finally, Wehner and de Renzio obtain results that greater political competition is associated with higher levels of budget transparency. They find that the better the representation of opposition parties in the legislature, the higher the level of budget transparency.

While exploratory, this research suggests that proponents of budget transparency can promote greater transparency by supporting broader political reforms such as changes in the electoral system and other measures that enhance political competition. Along similar lines, more research that looks at the impact of media freedom on transparency would also be interesting.

Further, while it is helpful knowing that elections and political competition determinants are statistically associated with budget transparency, reformers and advocates also need to know how this happens. Just what does political competition and elections do to make budget transparency?

One of these papers provides convincing evidence that high levels of budget transparency can contribute to favorable credit ratings. But the links between budget transparency and credit ratings are sometimes not as straight forward as one might expect.

Financial markets have played an increasingly important role in the ability of both developed and developing countries to finance their budget deficits. Emerging markets in particular have succeeded in accessing credit to support their spending on infrastructure and to restructure existing debt on more favorable terms.

But before financing a country’s debt, lenders will assess the creditworthiness of the particular country so that it can set interest rates that will make the transaction profitable to them. In a recent research paper prepared for the Open Budget Initiative, Farhan Hameed finds that countries with higher levels of budget transparency are rewarded with better credit ratings. And the better the credit worthiness, the more favorable the terms of the debt.

Transparency shields against shocks

Hameed also finds limited evidence that more transparent countries are less likely to have their credit ratings downgraded because of sudden changes in market sentiment. Markets assess the merits of more transparent countries on the basis of known economic data rather than mere ‘market sentiment’.

Transparency can therefore help steady the boat of government finances in turbulent economic times, especially in smaller, outwardly oriented economies like South Africa that are more exposed to global market forces.

Medium transparency countries can benefit the most

But not all countries can access the rewards of budget transparency. Medium transparent countries like Tanzania, the Philippines and Mongolia stand to gain the most. Untransparent countries may not reap these benefits . If transparency brings to light adverse information, such countries may initially be punished by having their credit worthiness downgraded. Over the medium to long-term this effect should however diminish and these countries should also start reaping the rewards available to more transparent countries.

Highly transparent countries may also not reap the market benefits transparency improvements because they may have published enough budget information already for markets not to be impressed by further information.

Don’t jump to easy policy conclusions

Before we get too excited about the implications of this research, Hameed cautions against drawing easy policy conclusions . At this time, he writes, we cannot be completely sure about the nature of the link between transparency and financial markets. While it is likely that credit ratings are dependent on budget transparency, it is also possible that a more capable government may adopt transparent practices in order to benefit from better ratings. This would mean that improved credit ratings are caused by lenders’ perception of the capability of the government, rather than just of its budget transparency practices. In other cases, more transparent practices may be driven by other considerations such as political competition.  Future research should therefore investigate other determinants of transparency to better understand what brings about budget transparency and improved credit ratings.

More budget transparency research

Other themes dealt with in the OBI series of working papers does just this and provides greater insight into the other determinants of transparency such as natural resource dependency and administrative legacy. The OBI has also commissioned a series of case studies that go deeper into the drivers  and consequences of budget transparency in specific countries. The results of this research will be published in an edited volume by mid-2012. Watch this blog for further news!

PS Farhan Hameed was previously a researcher at the IMF and taught economics at Lahore University for Management Sciences. He is currently working with the Government of Canada.

Welcome

Distinguished participants – I am honored to be here.

Introduction

Last year, I was sitting next to a woman – let’s call her Lydia – on a bus ride through rural Uganda when, suddenly, she called out: “Look at that school. It has a new roof now because the community complained about the previous one.” Several miles later, she cried out again, “Now look at this bridge! The public contractors used an inferior cement mix.”

I asked her if she was from the office of public works. “No,” she said proudly, “I have been trained as a community budget monitor. It has changed my life. When I take the kids to school, I monitor. At my village clinic, I monitor. I’m always looking, asking questions, reporting problems. I make sure the government does not waste my money.”

Lydia’s role grew out of a partnership between government and civil society that tracks public money from the central government to local governments – and that has greatly reduced public corruption.

Ladies and gentlemen, we need more Lydias – all over the world. They have a better sense of what their villages need and how to deliver it than people in far-away capitals.

We need them not only to monitor public resources, but to help develop and execute solutions to poverty and inequality.

The era of accountability has arrived.

Over the past decade, we have seen a powerful global civil society movement for open government emerge, with citizens, independent organizations, and the media leading campaigns for public access to information, for natural resource revenue transparency, and for opening budget and aid decisions to public scrutiny.

These campaigns have often succeeded where civil society and champions in government work together. This kind of collaboration is the core of the Open Government Partnership vision.

Transparency and participation

Making OGP partnerships work will depend on public information and public participation – both of which can be boosted through technology.

Lydia couldn’t hold Uganda’s government accountable if the government did not make timely public information available and accessible.

But, that’s not enough. Greater access to information must come with participation opportunities so that citizens and civil society organizations can use it to improve accountability.

OGP countries have committed to working with civil society organizations on developing and implementing country action plans. These commitments must be fully realized, and we will hear about the progress so far over the next two days.  We can learn from:

• Indonesia, which brought the major civil society federations into a forum as partners in developing the first action plan.

•  Mexico, which is reaching widely into civil society by enabling multi-stakeholder negotiating forums for each commitment.

But, we must go further by integrating participation opportunities into the action plans themselves. For example,

• In Brazil, a massive national consultation is planned to ignite a dialogue on transparency and accountability.

• In the Philippines, action plans include citizen audits and participatory budgeting at the national level.

• Tanzania’s plans enable citizens to give feedback on service delivery and other critical issues with a guaranteed response time from government.

Effective, meaningful participation can produce better policy choices and a more efficient implementation of those policies.

But, what is even more exciting:

Participation energizes citizens, turning them into vital actors in shaping their countries’ future. It knits them into the fabric of governance, and recognizes the important role that their knowledge and skills can play.

Lydia proudly told me that being a citizen monitor has, quote, “changed my life.” The more Lydias we can engage, the more they can help change the lives of their countries.

This won’t be easy

But, these benefits won’t be easy to achieve.

Governments generally do not have extensive experience in engaging citizens between elections.

Governments will not necessarily get their action plans right the first time, and they will need to admit and correct their mistakes.

CSOs will need to recalibrate their relationships with governments.

They have to become allies of government in this venture, while retaining the right to be independent and critical.

They will also face the challenge of reaching deeply into civil society, well beyond the organizations in this room.

The payoffs

So the challenges are great, but imagine what we can do if we succeed.

We have a critical decision to make. We can continue to conduct governance and development as we have for decades, or we can take a different path.

The issue is whether we continue to see ourselves as opposing actors, or we see development as a partnership – where success depends on the knowledge and capacity of all of us.

OGP is about this fundamentally new vision. Through it, we can create the victories and relationships that boost development and build a new approach to public policy and governance. (Our work can be the defining initiative of a generation.)

OGP already covers more than a quarter of the world’s population. Together, we can improve the lives of millions of people.

Let’s get to it.

Thank you.

First Annual Meeting of the Open Government Partnership Kicks Off Today

What: Government and civil society representatives from 53 countries around the world, including the International Budget Partnership, will meet in Brasilia for the first annual meeting of the Open Government Partnership – a new global initiative that brings together government, civil society, donors, and the private sector to promote transparent, effective, and accountable governments – with institutions that empower citizens and are responsive to their needs and aspirations. 

A special highlight is the speech by OGP co-chair & IBP director Warren Krafchik’s at 10:15am (U.S.A. Eastern Time). Watch it as it happens – details below.

When: Tuesday, 17 April 2011, 9:30 a.m. (Brazil)/12:30 p.m. (UTC/GMT)/08:30a.m. (U.S.A. Eastern Time)

PARTICIPATE VIRTUALLY
The Open Government Partnership (OGP) is providing a number of interactive online platforms to open the discussion to all.

Follow the proceedings live: From the speeches given by world leaders to the panel discussions with open government practitioners, all of the activities during OGP Annual Meeting 2012 will be available from anywhere in the world. The entire event will be broadcast live on the web at http://www.opengovpartnership.org/Brasilia2012.

Register and join the discussion: Alongside the webcast, the OGP will host a live chat where visitors can post comments directly. Tweets and Facebook updates discussing theOGP meeting will also be viewable in the chat (be sure to use hashtag #OGP2012 on Twitter). To join the discussion, you need to register here.