The resource curse in the wake of the Arab Spring.

• Author: Brannigan, Megan R.

1. INTRODUCTION II. BACKGROUND A. The Resource Curse B. Disclosure and Accountability C. The Foreign Corrupt Practices Act (FCPA) D. "Leading by Example": The Cardin-Lugar Amendment and the SEC E. The Global Environment Following the Arab Spring III. ANALYSIS A. The United States' Role in the Future of Disclosure B. The Necessity of Disclosure in the Years Following the Arab Spring IV. CONCLUSION I. INTRODUCTION

   The great irony of oil, gas, and mineral resource wealth is that poverty, corruption, and social unrest often accompany the blessing of mineral resources. (1) This phenomenon is known as the "resource curse" (the Resource Curse). (2) The International Monetary Fund (IMF) maintains that the Resource Curse is not Inevitable (3)--countries that promote "prudent and transparent management practices" have flourished in spite of their resource wealth. (4) In an attempt to mitigate corruption and poverty, arguably sourced from mineral resource revenues, there has been an international effort to enable citizens of resource-rich developing nations through the publication and disclosure of mineral resource payments and revenues. (5) Emboldened with this information, citizens are empowered to hold their governments accountable for the mismanagement of mineral resource revenues. (6)

   The effort to cure the Resource Curse begins with the publication of payments made by mineral extraction companies to resource-rich host-countries and the publication of revenues received by the host-countries, in a format easily accessible to citizens. (7) When payment and revenue information is published, it is more difficult for the leaders of resource-rich nations to conceal revenues made from mineral development exports, and subsequently more difficult to hide government waste and corruption. (8) The Extractive Industries Transparency Initiative (EITI) was one of the first efforts to formalize a payment disclosure and publication process. (9) A call to arms by several non-governmental organizations (NGOs) prompted the creation of this voluntary initiative. (10)

   During the late 2000s financial reform in the United States, Congress added a provision, termed the "Cardin-Lugar Amendment," to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in order to apply the principles of the EITI to resource extraction companies operating within the United States. (11) The Cardin-Lugar Amendment added Section 1504 to Dodd-Frank and delegated authority to the Securities and Exchange Commission (SEC) to draft detailed payment disclosure regulations for mineral extraction companies already disclosing earnings to the SEC. (12)

   The vast majority of the extractive industry did not welcome the initial SEC regulation (the Rule)--amidst great division between investors, former industry players, and extractive companies, the SEC implemented the administrative regulations on August 22, 2012. (13) NGOs and the legislators who initially sponsored Section 1504 praised the SEC action. (14) Some critics, however, immediately claimed that the SEC went too far in its requirements and argued that the provisions would place mineral extraction companies in the United States at a material disadvantage to state-owned and foreign-listed companies. (15)

   Representatives of the petroleum industry, including the American Petroleum Institute (API), promptly filed suit against the SEC. (16) The lawsuit alleged the SEC acted arbitrarily and capriciously in enacting the Rule. (17) The same parties also petitioned the District of Columbia Circuit Court to review the Rule. (18) The Circuit Court found that it had no jurisdiction over the matter and dismissed the case. (19) In July 2013, the District Court for the District of Columbia ultimately vacated the Rule, sending it back to the SEC "for further proceedings." (20) The SEC declined to appeal the ruling, opting instead to redraft the Rule. (21)

   The United States set a new standard in the passage of Section 1504. (22) The European Union followed suit, proposing a similar law. (23) The EU Accounting and Transparency Directives (the Directives) went into effect in June 2013, following the course set by the United States. (24) Now the SEC must restart the rulemaking process, following the adoption of other international legislation. (25)

   In this Comment, I will argue that despite attacks on Section 1504, it is imperative that the congressional intent is supported; any changes that the SEC makes to the Rule should be consistent with both the EITI and the EU Directives, lest the United States will be responsible for creating a disjointed disclosure process. If the SEC promulgates a new Rule that is consistent with the new global standard, the citizens of Resource Cursed nations will benefit from the stable production of data and the companies required to disclose will benefit from a unified approach to compliance. The United States may be the first nation to confront this issue, but it will be far from the last. Payment disclosure will benefit the citizens of host-countries. (26) Today, the potential impact of disclosed information, in the hands of citizens who are ready, willing, and able to utilize and "disseminate information of government atrocities," is at its height in the wake of the Arab Spring. (27)

   While resource-rich developing nations are calling for change and democracy, the United States has the potential to shape the world's extractive industry. (28) Much like the way the Foreign Corrupt Practices Act (FCPA) transformed the global economy, so too will the U.S. approach to resource revenue disclosures. (29) If the United States and other market leaders move in tandem towards transparency, disclosure will become the global norm and non-subscribing foreign nations will feel pressured to follow suit. (30)

   In Part II, this Comment will discuss: (A) the cause and effect of the Resource Curse; (B) how nations benefit from fuller disclosure; (C) a brief history of the FCPA and how the United States has historically promoted social goals through regulation; (D) the legislative development of Dodd-Frank, the initial SEC Rule, and the current state of flux; and (E) the global environment following the Arab Spring. Part III will analyze: (A) the domestic move for international disclosure; and (B) how the Arab Spring makes the issue of disclosure more relevant today. Finally, Part IV will conclude.

2. BACKGROUND

   1. The Resource Curse

      "'[T]he irony of oil wealth': those countries with the most urgent needs are also the least likely to benefit from their own geological endowment. "

      --MICHAEL L. ROSS (31)

      Payment disclosure provisions are necessary because of the political and economic phenomenon that accompanies resource wealth. In the developing world, oil, gas, and mineral resource blessings are paradoxically a socioeconomic and political curse. (32) Compared to resource-poor developing nations, developing nations rich with mineral resources are "[fifty] percent more likely to be ruled by autocrats," (33) the possibility of civil war is more than doubled, (34) and the governments are fifty percent larger in size. (35) These states tend to be "more secretive, more financially volatile, and provide women with fewer economic and political opportunities." (36)

      When mineral resources are discovered in a non-democratic nation, government income and expenditures tend to grow astronomically. (37) On the contrary, developed nations, rich with mineral resources, tend to be protected from the Resource Curse because their governments are funded by taxes and are therefore more accountable to their citizens; oil-funded governments receive income through the sale of state-owned mineral resource assets. (38) The turmoil attributed to resource wealth and the relative peacefulness of resource-poor countries is most visible in Africa. (39) Resource-rich countries like "[t]he Congo, Angola, and Sudan have been torn by civil strife, and Nigeria suffers from endemic corruption, while resource-poor countries such as Burkina Faso and Ghana are equally poor but more peaceful and democratic." (40)

      The economic phenomenon of the Resource Curse has been thoroughly studied. (41) Political and economic scholars find that three processes come into play following the discovery of mineral wealth, creating the perfect storm, aptly named the Resource Curse: (1) the "Dutch Disease," (2) an economy that tracks the fluctuation of oil prices, and (3) political unrest. (42)

      1. Economic Impacts and the Dutch Disease

         The Dutch Disease has oft been named as one of the culprits for a resource-rich state's decline. (43) The Dutch Disease was coined when, during the 1960s, the Netherlands experienced an economic boom after "large natural gas deposits [were discovered] in the North Sea." (44) Exports not related to natural gas fell from demand as the value of the Dutch guilder grew. (45) When the value of natural gas exports spiked, the exchange rate for the Dutch guilder appreciated. (46) It subsequently became more expensive to produce goods domestically than it was to import them. (47) As the Dutch began to rely on imports and the Dutch currency continued to rise in value, domestic industries outside of the mineral resource sector became less and less competitive. (48) This process came to be known as the "spending effect"--it "ma[de] exporting non-natural resources commodities more difficult and competing with imports across a wide range of commodities almost impossible...." (49)

         Coupled with the "spending effect" was the "resource pull effect" (50)--when labor and capital began to shift from other, non-natural resource production industries towards the production of minerals. (51) When an economy experiences a boom in the production of oil and gas resources, domestic demand grows for "all goods including nontradeables, which cannot be imported...." (52) Thus, the economy responds by shifting resources that cannot be imported...