Karl - Ensuring Fairness: The Case for a Transparent Fiscal Social Contract

full all chapter5 chapter6 chapter7 chapter8 chapter9

chapter4 chapter5 chapter6 chapter7 chapter8 chapter9

Transparency and Accountability

Policy, Legal and Contractual Framework

Sector Organization and Institutions

Fiscal Design and Administration

Revenue Management and Distribution

Sustainable Development

Karl, T.L., “Ensuring Fairness: The Case for a Transparent Fiscal Social Contract”, in Escaping the Resource Curse, Humphreys, M., Sachs, J.D., Stiglitz, J.E., (eds.), (New York: Columbia University Press, 2007)

The author identifies the key features of dependence on natural resource rents and deduces from them that the resource curse is primarily a political and institutional problem and not an economic phenomenon. It is argued that once resource rents start to be accrued by the producing state, the state in question simply becomes a “honey pot”, a place where as a result of the scramble for oil resources, international and external forces take their places to forge their stake in the nation's resources. These external pressures, according to the author, are just as much a contributory factors to the curse as internal political factors.

The author further argues that because the roots of the issues largely result from political and institutional instabilities, a solution to the problem begins with political institutions through the establishment of political institutional agreements. The proposal is for a far-reaching fiscal and social contract which creates incentives to change the rent-seeking behavior in oil rich economies. The agreement should be broad-based and cover a large group of stakeholders in the industry, including governments, citizens, companies, and international financial institutions and require all stakeholders to commit to being more open about their dealings in the industry.

Starting from a point of systematic transparency is, in the author's view, the best approach, especially for many of the producing countries whose inadequate institutional frameworks prevent alternatives routes. Some of the alternative suggestions, such as diversifying the tax base, sterilizing and removing revenues through natural resource funds (NRF’s) and privatization, cannot be the starting point because to be able to successfully implement these changes there needs to be adequate state apparatus. Many of the producing countries, in the author's view, lack this state apparatus largely as a result of their historical formation. It is therefore essential that for these countries a different approach is used, citing the advancement of transparency initiatives (example: Publish What You Pay and Extractive Industries Transparency Initiative), their widespread acceptance and the initial impact they have made in getting all stakeholders, especially governments and oil companies, to open up about their oil receipts and encouraging accountability. These initiatives, the author believes, should be the first step towards curbing rent-seeking behavior; anything else would simply rearrange the issues by transferring them from one stakeholder to another.

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