Normative Narratives

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Green News: Properly Managing Natural Resource Revenues–A Focal Point of Sustainable Development

Following the adoption of the Sustainable Development Goals (SDGs) by the UN General Assembly, I would like to highlight a focal point of sustainable human development–utilizing natural resource revenue as a tool for sustainable human development.

Post-2015 Development Financing:

“There’s only so much amount of aid countries can rely on. Indeed, often you can’t rely on aid in the sense of relying on certain amounts every single year… it goes up, it goes down… governments fall in and out of love with the donors… so it’s not so reliable,” said Mr. Nolan.

“At the end of the day, a State operates on the basis of its own revenue collection. And a developmentally-oriented State, a State that actually wants to promote development through infrastructure, health, education spending, needs to raise most of the money itself.”

He added that raising revenue does not necessarily mean going into the rural areas and heavily taxing people. “It actually means taxing the better off in the society and also taxing companies, both domestic and foreign, more effectively.”

Tax rates, he noted, are very low in many low-income countries, in some cases under 15 per cent of gross domestic product (GDP). This could easily be increased by a series of reforms, as well as by better structuring of taxation in the extractive industries and greater attention to the transfer of money out of the country.

Meeting UN-backed climate goals requires leaving the vast majority of natural energy resource in the ground. But sustainable development is contingent on both the intrinsic (electricity) and market value of natural resources; one would be hard pressed to find a development practitioner that does not believe this revenue source is an essential piece of the development financing puzzle.

Developed countries have had decades, if not centuries, of using natural resources limitlessly in their pursuit of development; reliable access to energy is an indispensable part of poverty alleviation, economic growth, and modernization. We are essentially asking the worlds poorest countries to forgo the cheapest form of electricity available in the name of environmental sustainability (do as I say, not as I did). To reconcile this clear mismatch between ability to pay and necessity, the developed world must do more to reach it’s target of $100 billion per year by 2020 to help poorer countries fight climate.

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The “Natural Resource Curse“:

The “Natural Resource Curse”–the misappropriation of resource revenue–robs the worlds poorest countries of a needed source of development finance. Often times the natural resource curse finances armed conflicts, which cause immeasurable human suffering, roll back development gains, and make future development much more difficult (conflict is often associated with poverty and malnutrition which stunts physical and cognitive development, can prevent children from going to school, and can cause trauma that leads to lifelong psychological issues).

The Natural Resource Curse is not inevitable, but fighting it requires good governance and the security capacity to counter those who wish to extract revenues for their own privilege. Battling the Natural Resource Curse also requires effective sanctions regimes–by driving ill-gotten natural resource revenues to the black market, and attacking that black market and related international money laundering, international criminals and terrorists would lose an important source of funding.

Sanctions, of course, require broad based cooperation. There is a risk that in this era of disorder and instability, the international community might “ease up” on bad-but-stable governments. The importance of good governance of natural resource revenues shows this would be a short-sighted and ultimately counter-productive strategy for fighting international crime and promoting sustainable human development.

If the world is to simultaneously address the needs of Least Developed Countries (LDCs) and reach climate targets, we must focus on making sure LDCs leverage all the resources they do extract to maximize social welfare. Effective “South-South Cooperation“–the sharing of best practices between developing countries–would greatly enhance this effort.

Given the importance of the source, the propensity for corruption (“Resource Curse”), and the need to leave much of the existing deposits in the ground, when it comes to properly managing natural resource revenues for sustainable human development, there is little margin for error.

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Natural Resources and the SDGs:

Fortunately, proper natural resource revenue management is addressed many times throughout the proposed SDG text:

Goal 1. End poverty in all its forms everywhere

1.4 by 2030 ensure that all men and women, particularly the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership, and control over land and other forms of property, inheritance, natural resources, appropriate new technology, and financial services including microfinance.

Goal 5. Achieve gender equality and empower all women and girls

5.a undertake reforms to give women equal rights to economic resources, as well as access to ownership and control over land and other forms of property, financial services, inheritance, and natural resources in accordance with national laws

Goal 12. Ensure sustainable consumption and production patterns

12.2 by 2030 achieve sustainable management and efficient use of natural resources

Goal 16. Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels

16.4 by 2030 significantly reduce illicit financial and arms flows, strengthen recovery and return of stolen assets, and combat all forms of organized crime

16.5 substantially reduce corruption and bribery in all its forms

16.6 develop effective, accountable and transparent institutions at all levels

16.7 ensure responsive, inclusive, participatory and representative decision-making at all levels

Goal 17. Strengthen the means of implementation and revitalize the global partnership for sustainable development

Finance

17.1 strengthen domestic resource mobilization, including through international support to developing countries to improve domestic capacity for tax and other revenue collection

17.3 mobilize additional financial resources for developing countries from multiple sources

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Green News: The U.S. and China Discuss Energy Poverty, Sustainable Development in Africa

“Common But Differentiated Responsibilities”:

During the recent APEC summit, President’s Obama and Xi Jinping announced what could be a landmark environmental agreement. The U.S. pledged to reduce carbon emissions by 26 percent to 28 percent from 2005 levels by 2025. China pledged to reach peak emissions by 2030, while increasing its renewable energy consumption to 20% of total consumption (China currently gets about 10% of its energy from zero emission sources).

This announcement has been received well by the international community. With the two largest GHG emitters on board (in gross emissions, the map above shows per-capita emissions), many believe this announcement could galvanize support for a legally enforceable climate treaty, to be finalized during the 2015 UN Climate Change Conference in Paris.

Another potential area of cooperation, which has received far less attention but is nonetheless significant, were discussions between the U.S. and China regarding clean energy investment in Africa (original article):

The United States is considering partnering with China on improving electricity in Africa and the proposal could be part of bilateral discussions when President Barack Obama visits Beijing next week, two sources involved told Reuters.

The 48 countries of sub-Saharan Africa, with a combined population of 800 million, produce roughly the same amount of power as Spain, a country of just 46 million.

The shortage imposes a massive burden on economies in the continent, constraining growth and leading to hundreds of millions of people remaining mired in poverty.

China’s policies in Africa have also been described by some African leaders as “neo-colonial” – lending money to impoverished states to secure natural resources and support state-owned Chinese construction companies.

U.S. Secretary of State John Kerry hinted this week that discussions during the APEC conference to conclude a Trans-Pacific Partnership (TPP) would involve energy agreements in other parts of the world.

“The TPP is not only a trade agreement but also a strategic opportunity for the United States and other Pacific nations to come together, to bind together,” Kerry said in a speech in Washington on Tuesday.

“Second, powering a clean energy revolution will help us address climate change while simultaneously jump-starting economies around the world,” Kerry added.

Approximately 1.3 billion people in the world live without access to energy, 95% of which live in Sub-Saharan Africa or developing Asia. Without access to energy, it is impossible for a society to modernize; energy access is an indispensable component of poverty reduction. How those who currently live without access to energy fulfill their energy needs will be a primary determinant in meeting global emission targets.

According to the International Energy Agency, 2/3 of known fossil fuel reserves must stay in the ground in order to reach global emissions targets. This will require both ambitious climate agreements from large emitters such as the U.S. and China, as well as aggressive investments in clean energy in countries that do not currently emit as much.

(For more reading on Africa’s Energy and Economic landscape, check out the 2014 World Energy Outlook Special Report on Africa)

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Natural Resource Revenues, Accountability, and Development:

The Post-2015 Development Agenda, while appreciating the role of official development aid (ODA) in financing development initiatives, also recognizes the limits of relying on such a volatile source of funding. In order to reliably secure the finances needed for sustainable human development, developing countries will need to mobilize natural resource revenues in a responsible way.

This is admittedly  tall order. Historically, the “natural resource curse” has led natural resource revenues to be extracted by corruption rulers, cementing the rule of regressive, extractive regimes. Nigeria’s Sovereign Wealth Fund, while imperfect, provides a model for bringing transparency and accountability to natural resource revenue management.

Neocolonialism and corruption will not lead to development. When it comes to investing in Africa, the “return on investment” is in creating stable, resilient allies, who can positively contribute to global security and become new markets for trade; it is a long-game, not a short-game.

Lots of people have their hands out to grab resource “rents”. Therefore, a strong network of accountability is required if natural resource revenues are ever to benefit a countries poor / marginalized. This network includes social accountability (individuals, civil society organizations, and NGOs); corporate accountability (businesses operating in developing countries); and good governance at all levels (local, national, and international).

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The Extraterritorial Responsibilities of Global Leadership:

During the APEC summit, President Obama urged China to be a partner in ensuring world order:

U.S. President Barack Obama said on Monday a successful China was in the interests of the United States and the world but Beijing had to be a partner in underwriting international order, and not undermine it.

“Our message is that we want to see China successful,” Obama told a news conference. “But, as they grow, we want them to be a partner in underwriting the international order, not undermining it.”

He urged China to move “definitively” to a more market-based exchange rate and to stand up for human rights and freedom of the press.

At the risk of sounding cliche (or like a Spiderman move), with great power comes great responsibility. If China wants to be recognized as a global leader, it must show the world it is capable of fulfilling the obligations associated with such a role.


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Conflict Watch: Hard Power, Soft Power, and Sustainable Human Development

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The Importance of Soft Power:

May 3rd marked World Press Freedom Day, during which high ranking UN officials recognized the important roles that freedom of expression, press, and access to information play in the development process:

The United Nations is marking World Press Freedom Day today with an appeal to all States, societies and individuals to actively defend press freedom as a fundamental right and as a critical contribution to achieving and sustaining the Millennium Development Goals (MDGs).

This call was made in a joint message by Secretary-General Ban Ki-moon and Irina Bokova, Director-General of UN Educational Scientific and Cultural Organization (UNESCO), who said UN bodies are already working together and with other partners under UNESCO’s leadership to create a free and safe environment for journalists and media workers around the world.

Their message goes on to stress that this year, the international community has a once-in-a-generation opportunity to prepare a long-term agenda for sustainable development to succeed the MDGs when they end in 2015.

“Successfully implementing that agenda will require that all populations enjoy the fundamental rights of freedom of opinion and expression, the officials said, underscoring that those rights are essential to democracy, transparency, accountability and the rule of law. “They are vital for human dignity, social progress and inclusive development.”

Also marking the Day, 31 specialists from the largest body of independent experts in the UN Human Rights system called on all Governments to promote and protect the rights to freedom of expression and information, freedom of peaceful assembly, and freedom of association and public participation.

Protection of these fundamental freedoms is essential for full realization of all human rights for all and for the achievement of related development goals. “States must develop more inclusive political processes and allow the media to play a key role in guaranteeing the right of everyone…to freely access information and engage in meaningful development related discourse.”

The experts, known as Special Procedures of the Human Rights Council, comprise the Organization’s largest body of independent fact-finding and monitoring mechanisms that address either specific country situations or thematic issues in all parts of the world.

“Without free media to advocate for and monitor the implementation of the new set of post-2015 targets, there can be no real development for all marginalized, vulnerable or discriminated against. Not now, not ever,” declared the experts.

Mr. Ban said that every day of the year, the fundamental freedom to receive and impart ideas through any media is under assault, “to the detriment of us all.” Indeed, journalists are being singled out for speaking or writing uncomfortable truths – kidnapped, detained, beaten and sometimes murdered.

“Such treatment is completely unacceptable in a world ever more reliant on global news outlets and the journalists who serve them,” said the UN chief.

He told the briefing that last year, 70 journalists were killed; many caught in the cross-fire of armed hostilities. Fourteen more have suffered the same fate this year. Also last year, 211 journalists were being held in prison. Some 456 journalist have been forced into exile since 2008. And since 1992, well over 1,000 journalists have been killed – nearly one per week.

As for the post-2015 agenda, he said free media, traditional and new, are indispensable for development. They can promote transparency about the new goals that Member States will adopt – progress as well as shortfalls. “Social media and mobile technologies offer new tools for accelerating citizen participation and economic and social progress,” he said, adding that the media’s watchdog function is essential for holding Governments, businesses and others to account.

Echoing those sentiments, John Ashe, President of the UN General Assembly, said freedom of expression and freedom of the press are fundamental rights that form an essential pillar of democratic societies. “When journalists are able to report freely, they support informed citizen participation in political and social processes and promote civic engagement,” he added.

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The Limits of Soft Power:

Access to information can combat corruption, fuel populism, and give a voice to the voiceless; the role press freedom in sustainable human development cannot be understated.

However, as much as it pains me to admit it, there are limitations to what “soft power” can achieve. A free press essentially acts as a “spotlight” on abuses of power and social injustices. There are forces that are directly opposed to “Westernization” or “Modernization”; against such forces, shining a “spotlight” is almost entirely ineffective.

An example of such targeted violence is currently playing out in Nigeria, where Boko Haram terrorists (loosely translated to “Western education is a sin”) last month kidnapped over 200 schoolgirls:

These girls, ages 15 to 18 and Christians and Muslims alike, knew the risks of seeking an education, and schools in the area had closed in March for fear of terror attacks. But this school had reopened so that the girls — the stars of their families and villages — could take their final exams. They were expected to move on to become teachers, doctors, lawyers.

Instead, they reportedly are being auctioned off for $12 each to become “wives” of militants. About 50 girls escaped, but the police say that 276 are still missing — and the Nigerian government has done next to nothing to recover the girls.

“We are now asking for world power countries to intervene,” the desperate father of a missing 18-year-old girl, Ayesha, told me by phone. He said that the parents had given up on Nigerian government officials — “they are just saying lies” — and pleaded for international pressure on Nigeria to rescue the girls.

If the girls aren’t rescued, “no parent will allow their female child to go to school,” Hadiza Bala Usman, who has led protests in Nigeria on behalf of the missing girls, warned in a telephone interview.

The best tool to fight extremism is education, especially of girls — and that means ensuring that it is safe to study. The greatest threat to militancy in the long run comes not from drones but from girls with schoolbooks.

More than 200 teenage girls have just been enslaved because they had the brains and guts to seek to become teachers or doctors. They deserve a serious international effort to rescue them.

According to Modernization theory, democratization and other rights based movements are the result of civil society initiatives, which occur when large portions of society become empowered via human capital investment. If people believe they will become targets for embracing “Western” ideals, and that they will not be protected, they will be less inclined to invest in their futures, stymieing modernization efforts.

To be clear, the sort of security that enables human capital investment comes from police forces, peacekeepers, and armies that are accountable to their people, not by international forces dropping bombs / drone strikes, which actually fuels radical sentiments.

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Synergy Between Soft and Hard Power:

In the field of poverty reduction / economic development, it has long been recognized that peace and security are necessary preconditions for sustainable human development. As advances in information and communication technology and improvements in good governance theories shift the focus towards “soft power”, we must not forget the important role that basic security plays in sustainable human development. This is not an either or issue, but a question of finding the right balance between these two synergistic forms of assistance.

While national governments are the primary human rights duty bearers, in the developing world many governments lack the capacity to provide even basic security / public goods. The international community must compliment “good governance” via both “hard” and “soft” support.

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Third World Injustices Result In First World Problems:

When discussing injustices in the developing world, people often say (with varying degrees of indifference) “why should I care?”. If the moral / ethical reasons do not get you, there are “selfish” reasons to promote sustainable human development.

Essentially, sustainable human development it is the only way to reverse trade imbalances and the flow of jobs being outsourced to the developing world. Maybe you do not care about people in other countries, but you probably care about having a job and the general state of your countries economy.

If the “Great Recession” has tough us anything, its that we cannot financially innovate our way to prosperity in an increasingly divergent global economy–it does not work for 99% of us even in the developed world! Only through partial global economic convergence can the majority of people in the developed world hope for “a better future”.

In a blog a few months ago, I ran into an interesting study called “I’m The Guy You Pay Later“; written by law enforcement officials, it argues that money not invested in early childhood education ends up being spent on the back-end on criminal justice expenditures. I can’t help but recognize similarities in the debate over official development assistance (ODA); we can support “good governance” now, or pay the prices later (unsustainable levels of military spending / related underinvestment in other aspects of our economy, the decline of living-wage jobs / high unemployment, etc.).

Another argument against ODA is that it is never effective–this is simply not true. ODA (both “soft” and “hard”), when complimenting “good governance” domestic resource mobilization in the developing world (natural resource revenue accountability, stemming illicit financial outflows, tax system reforms) can help finance the various programs (at all levels; global, regional, national, state, local) the vast majority of people in both the developed and developing worlds need.


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Economic Outlook: “Supply-Side” Issues Keep 1/3 Of Children Under-Educated

Original article:

“This learning crisis has costs not only for the future ambitions of children, but also for the current finances of Governments,” says the independent Education for All (EFA) Global Monitoring Report Teaching and Learning: Achieving Quality for All,commissioned by the the UN Educational, Scientific and Cultural Organization (UNESCO).

“Around 250 million children are not learning basic skills, even though half of them have spent at least four years in school. The annual cost of this failure: around 129 billion,” it says, noting that in around a third of countries, less than 75 per cent of primary school teachers are trained according to national standards. Some 57 million children are not in school at all.

“These policy changes have a cost,” UNESCO Director-General Irina Bokova says in a forword. “This is why we need to see a dramatic shift in funding. Basic education is currently underfunded by $26 billion a year, while aid is continuing to decline. At this stage, Governments simply cannot afford to reduce investment in education – nor should donors step back from their funding promises. This calls for exploring new ways to fund urgent needs.”

The report notes that in 2011, around half of young children had access to pre-primary education, but in sub-Saharan Africa the share was only 18 per cent. The number of children out of school was 57 million, half of whom lived in conflict-affected countries. In sub-Saharan Africa, only 23 per cent of poor girls in rural areas were completing primary education by the end of the decade.

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Supply and Demand Side Impediments to Education:

My professor for Community Economic Development  had an interesting way of framing development challenges. She urged the class to think about development challenges as primarily “supply-side” or “demand-side” issues.

As one would expect in a development economics course, education was a recurring topic; was the education-gap primarily a demand-side issue (are parents in the developing world not sold on the advantages of education, perhaps compared to the immediate need for income from child labor), or a supply-side issue (was it a lack of schools, roads, electricity, teachers, etc.)?

Of course, supple-side concerns can perpetuate  demand-side issues. For instance, if a parent does not believe their child will receive an adequate education, they may be more inclined to send their child to work instead of school. Therefore, in instances where there is an immediate need for child-labor income, it is all the more essential to ensure that a viable alternative (adequate education) exists.

According to this UNESCO report, the education-gap is primarily a supply side issue. This is encouraging news; given adequate government funding, development aid, and accountable / transparent governance, the education-gap is not an insurmountable problem. There is not some cultural difference holding back educational goals. Given the opportunity, parents will send their children to school (as proven by inputs from “The World We Want” Post-2015 National and Thematic Consultations).

However, even “good governments” that receive development aid face fiscal constraints–notably small tax revenue bases and high borrowing costs. Therefore, these governments must consider innovate means of “stretching a dollar” of education expenditure. One idea worth considering is combining prerecorded classes (taught by an excellent teacher), with an in-person “teaching assistant” to facilitate discussion, monitor homework assignments, and answer basic questions.

Similar to using nurses / physician assistants instead of doctors in certain instances to keep healthcare costs down, using a teaching assistant would put less pressure on finding the elusive “quality teacher” (which tend to be in short-supply even in developed countries). Prerecorded classes could be translated into dialects so that traditionally marginalized groups would have access as well.

This hybrid online / in-person model is not a panacea, but it does present a reasonable substitute for quality education given supply-side constraints. It is certainly an alternative education policymakers in developing countries (and poorer areas in developed countries) should explore.

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The Role of Good Governance:

Governments should have an interest in delivering a quality education to all children. Under-education has both an immediate ($129 billion lost in global put) and future costs (the report said that ensuring an equal, quality education can increase a country’s gross domestic product per capita by 23 percent over 40 years.).

This normative stance requires a long-term and accountable outlook on governance. It is always easier (and personally beneficial) to embezzle development aid than invest in education. This is one reason why democratic governance plays such an important role in development. Governments must be made accountable to their constituents, otherwise socially beneficial policies will be foregone for personal benefits.

Furthermore, when development aid does not go to its intended recipients, it fuels anti-development-aid sentiments. People in the U.S. often argue “why do we send money abroad when we have social problems at home”? When this aid does not go where it is supposed to go (which to be fair, is fairly often), these people see their views as vindicated. Of course it is not an “either-or” situation; there is no reason why the richest nations in the world cannot reach their 0.7% of GDP aid commitment while also addressing domestic concerns. Development aid is a popular scapegoat, not only because the beneficiaries aren’t “us” but “them”, but also because people chronically overestimate the amount we spend on official development aid (ODA).

ODA should be conditional on “good-governance”, including independent oversight of aid-delivery. It is fair for those paying for the aid, and those receiving it. Any government that uses the “national sovereignty” excuse to deny independent oversight of aid-delivery should be found in violation of Article 2.1 of the International Covenant on Economic, Social and Cultural Rights, which states:

“Each State Party to the present Covenant undertakes to take steps, individually and through international assistance and co-operation, especially economic and technical, to the maximum of its available resources, with a view to achieving progressively the full realization of the rights recognized in the present Covenant by all appropriate means, including particularly the adoption of legislative measures.”

 


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Economic Outlook: In a Well Timed Shift, Mexican President Embraces FDI in Energy Sector

Total Oil Produced in barrels per day(bbl/day) Mexico

Original Article:

President Enrique Peña Nieto of Mexico on Monday, pushing one of the most sweeping economic overhauls here in the past two decades, proposed opening his country’s historically closed energy industry to foreign investment.

Mr. Pena Nieto’s goal, like those of presidents before him, is to recharge Mexico’s economy by tackling areas that analysts agree hinder its expansion, which has averaged just 2.2 percent a year since 2001, according to the Organization for Economic Cooperation and Development.

Perhaps the worst of those is the creaky energy sector. Demand for energy in the country is growing so fast that Mexico could turn from an energy exporter to an energy importer by 2020, the government says.

Already, Mexico must import almost half its gasoline, mostly from the United States. Mexican companies pay 25 percent more for electricity than competitors in other countries, the government says. Although Mexico has some of the world’s largest reserves of shale gas, it imports one-third of its natural gas.

“With the reform that we are presenting, we will make the energy sector one of the most powerful engines in the economy,” Mr. Peña Nieto said at a ceremony to present the plan on Monday.

Mexico’s left-wing parties have been adamant that the Constitution’s 75-year-old prohibition on private investment should remain ironclad. From the right, the National Action Party, or PAN, proposed energy reform last month that would go even further than Mr. Peña Nieto to invite in private investment.

Public opinion is also suspicious about opening up the industry. A survey last year by CIDE, a Mexico City university, found that 65 percent of the public opposed private investment in Pemex, the state-owned oil monopoly.

The proposal would allow private companies to negotiate profit-sharing contracts with the government to drill for oil and gas. Under such a scheme, the reserves would continue to belong to the Mexican state, but investors would get a share of the profits. Private investment would be allowed in refining, oil pipelines, and petrochemical production.

Since the 1994 North American Free Trade Agreement exempted energy from Mexico’s broad economic opening, presidents have attempted to loosen the prohibitions that give Pemex sole control over all oil and gas exploration and production. No joint ventures are allowed. Those past proposals have often withered in Congress.

But this time, the precipitous decline of Mexico’s energy industry may work in Mr. Peña Nieto’s favor.

Pemex, which was long an important source of crude imports into the United States, is spending more to pump less. As Mexico’s giant Cantarell oil field in the shallow waters of the Gulf of Mexico has declined, production has dropped 25 percent from the peak in 2004, to just over 2.5 million barrels of oil a day.

At the same time, the amount the government budgets for Pemex to invest has steadily climbed to $26 billion this year. To increase production and reserves, Pemex needs to drill in the deep waters of the Gulf of Mexico and in onshore deposits of shale oil and gas. But the company has neither the capital nor the expertise to increase production significantly, analysts say.

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There are a number of reasons why now is the proper time for Mexico to open up its energy industry to FDI. Mainly;

1) Economic: Loose monetary policy is conducive to FDI. Investors can borrow at historically low rates, while energy is a relatively safe investment (if anything energy prices will only go up as the global economy strengthens). Even if Mexico puts strict regulations and high taxes on foreign operations (which it certainly should, more about this later), the opportunities for a relatively low risk-high reward investment exist. These factors will attract many potential investors, allowing Mexico to drive a harder bargain and secure the best deal for the Mexican people.

2) Political: Political instability and armed conflict in the Middle-East and Northern Africa make Mexico’s main competition for FDI much less attractive. Venezuela and Russia ramped up anti-Western rhetoric in recent months; the trust needed for large-scale investments may be compromised. Look at the updated 2013 Political Risk Map;  Mexico is arguably the most politically stable major oil producing country, both in terms of internal stability and in a regional context. When considering investing in extractive industries–with high start-up costs and very asset-specific capital investments–peace, stability, and trust are very important components of any deal. These factors are often more important than traditional “race to the bottom” incentives.

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The Mexican people are right to be wary of private investment in their natural resources. Natural resource rents can be a powerful tool for human development, if they are used the right way. However, globalization in extractive industries in the past decades has been marked with human rights violations, corruption, exploitation, and violence. This so called “natural resource curse” is not inevitable, but without proper oversight and accountability, “bad” governments will always be willing to cut lucrative deals from themselves and private corporations, at the expense of society as a whole. 

I do not see this as an issue in Mexico for a few reasons. Primarily, the linkages between governance, extractive industries, corruption, and sustainable human development are now well understood by the international community. Mexico, by waiting to liberalize it’s energy sector, has the benefit of adopting best practices / avoiding worst practices from past ventures. There is also a strong belief in Mexico that the oil belongs to the people. Political opposition, once the energy sector is liberalized, will manifest itself as “watch-dog” organizations and other social accountability mechanisms. Social accountability (aided by social media and ICT), relatively good governance at the global and national level, alongside the comparative advantages addressed earlier, suggest that Mexico will have a very positive experience liberalizing its energy sector (assuming the political will to develop exists).

If Mexico’s natural resources stay underground, they cannot be utilized for development purposes. The article cites a lack of capital and expertise holding back the Mexican energy sector–FDI addresses both of these impediments.  A new trend Mexico may want to utilize is having private investors pay for development projects–such as schools, hospitals, or other human capital enhancing institutions–as a way of signalling the investors desire for a mutually beneficial and long term relationship. Furthermore, because of high taxes, private companies will make it a point to run operations as efficiently as possible, maximizing both their share and Mexico’s share of profits. A quadruple layer of private, governmental, international and social accountability will exist, diminishing opportunities for  embezzlement and corruption by state or private interests.

The time is right for Mexico to liberalize it’s energy sector from a policymaker and investors point of view. However, this does not necessarily mean that the Mexican lay-man will agree with this assessment. The Mexican people’s distrust of FDI in extractive industries is understandable; it is the Mexican governments job to educate the public, assuring them that policies and safeguards will be put in place to ensure that liberalizing the energy sector benefits society as a whole, not just vested interests.

“It is fine to appeal to rationality, but when it is about these issues, it’s indispensable to touch the audience’s heart,” wrote an analyst, María Amparo Casar, in the Excelsior newspaper last week.

In a democracy, big policy changes generally require popular support. The rational political economy argument for liberalizing Mexico’s energy sector is strong. The remaining road block is convincing the Mexican people that such liberalization is in their best interests.