Original article
Is sunshine the best disinfectant? Evaluating the global effectiveness of the Extractive Industries Transparency Initiative (EITI)

https://doi.org/10.1016/j.exis.2020.09.001Get rights and content

Highlights

  • The EITI operates on the principle of having accountable and transparent assessments of the extractive industries

  • As of January 2020, its revenue transparency standards were being implemented in 52 countries

  • This paper correlates the performance of the first 12 countries to attain EITI compliant status on key metrics

  • The EITI is correlated with positive improvements in regulatory quality, rule of law, control of corruption, and other metrics

  • EITI countries are correlated with lower and declining median per capita carbon footprints

Abstract

Corruption and sustainability remain central themes in the study of energy and climate governance as well as energy transitions. Almost half of the human population globally (3.5 billion people) resides in countries with large endowments of fossil fuels or minerals, yet many governments and companies operating in these countries do not release timely, full, open, transparent data about the extraction of those resources or the revenues produced. Many academic theorists have suggested that transparency—“timely and reliable economic, social and political information accessible to all relevant stakeholders” —can partially counteract some of the governance challenges facing the energy sector and improve social welfare. The Extractive Industries Transparency Initiative (EITI) operates on the principle of having accountable and transparent assessments of the ways that extractive industries companies interact with governments and moderate their social and economic impacts. As of early 2020, its revenue transparency standards were being implemented in 52 countries, and it included almost $2.5 trillion in government revenues from oil, gas, and mining spread across more than 300 years of report coverage. Does the transparency promulgated by the EITI produce better governance and development outcomes in EITI compliant countries? Does it accelerate or retard a transition to lower-carbon forms of energy? Using a unique dataset of 218 countries, the paper quantitatively assesses the correlative performance of the first 12 countries to attain EITI compliant status on a series of metrics over the period 2000 to 2020 compared to all non-EITI countries. These 12 EITI Compliant Countries reported 57 separate revenue streams covering oil, gas, and minerals; involved 652 companies; and were responsible for $169 billion in government revenue when they joined the EITI, meaning they represented a sizable chunk of EITI assets at that time.

Introduction

Over the past few decades, analysts, ethicists, and governance scholars have begun to direct a burgeoning amount of attention at the ethical, social, and environmental aspects to business, typically under the headings of “corporate social responsibility” or “multinational social responsiveness” (Kolk 2016). A core tenet of this literature is that private firms must not only meet their fiduciary responsibility to shareholders and their legal responsibility to avoid fraud and illicit activities; they must also promote a broader social agenda. This agenda frequently includes facilitating the prosperity of communities, minimizing environmental degradation, and contributing to the creation of safe and peaceful societies with strong institutions and equitable distribution of costs and benefits. Gallarotti (1995: 40) even suggested, writing more than two decades ago, that the business community was beginning to shift towards “green consumption,” a transition that had the potential to create “a new business ecosystem” enhanced by the principles of human rights, transparency, and sound governance.

These principles appear to be elusive, however, in the energy and extractive industries sectors. Almost half of the human population globally (3.5 billion people) resides in 81 countries with large endowments of fossil fuels or minerals (World Bank 2020a: 1), yet many governments and companies operating in these countries do not release timely, full, open, transparent data about the extraction of those resources or the revenues produced (Goldwyn 2008). As one scholar succinctly put it, “few industrial activities have as large an environmental footprint and are capable of wielding as much influence on the wellbeing of a society as a large-scale mine or oil and gas project” (Hilson 2012: 135). Another even argues that meeting sustainability or corporate social responsivity criteria in this sector amounts to a “mission impossible” given that their activities depend on community displacement and environmental degradation (Slack 2012). Canadian author and social activist Naomi Klein (quoted in McKibben 2012) was even pithier in her assessment: “With the fossil-fuel industry, wrecking the planet is their business model. It's what they do.” This point becomes especially pertinent given that fossil fuels will remain a key part of the global energy mix for at least the next few decades to come (World Bank 2014; Jewell et al. 2019; Jakob et al. 2020).

However, many academic theorists have suggested that transparency—“timely and reliable economic, social and political information accessible to all relevant stakeholders” (Kolstad and Wiig 2009)—can partially counteract some of the governance challenges facing the energy sector and improve social welfare. The provision of information and the promotion of transparency have been known under certain conditions to reduce corruption, enhance regulatory governance outcomes, and contribute positively to social and economic stability (Hirschman 1970; Paul 1992; Stiglitz 2003; Jarvis and Sovacool 2011). Amartya Sen (2009), who won the Nobel Prize for Economics in 1998, argued that lack of transparency was the main factor contributing to the global financial crisis that began in 2008. Further research from public policy, political science, and economics seems to confirm this positive value to transparency (Kolstad and Wiig 2009; Williams 2011; Geginat 2012; Gupta 2010). The quip that “sunlight is the best disinfectant” comes to mind (Matisoff 2013), suggesting that opening things up to heat (greater public scrutiny), light (independent data), and fresh air (institutional forms) offer a compelling antidote to corruption.

In this paper, we ask: does the transparency engendered by the Extractive Industries Transparency Initiative (EITI)—a large, voluntary, multi-stakeholder organization—actually result in improved outcomes? How well do EITI countries perform, on various indicators, when compared to all countries as a reference class? To answer these questions, this study compares the performance of the first 12 countries to attain EITI Candidacy Status with a unique dataset involving 218 countries. We assess the median performance of all countries vs. EITI countries over the period 2000 to 2020 on various social, economic, and political metrics. We focus on aspects such as foreign direct investment, energy investment, interest rates, and national poverty gaps as well as aspects such as accountability, political stability, government effectiveness, regulatory quality, rule of law, and corruption. We find, interestingly, that EITI countries do perform better than the average on metrics related to regulatory quality, rule of law, control of corruption, foreign direct investment, and interest rates. We also note, however that the EITI does not see its Candidate countries improve on all metrics, especially those related less to economics and investment and more to political governance and democracy. We lastly examine a proxy for the dynamics of sustainability - carbon emissions reductions - between EITI countries and non-countries

In embarking on this path, we hope the paper makes multiple contributions to the literature on politics, governance, and policy, given that it sits at the nexus of business practices, the environment, ethics, transparency, poverty and sustainable development. First, the paper focuses intently on a pervasive problem facing international governance: corruption. Corruption, defined as “the abuse of public power for positive gain” (Petrou and Thanos 2014), is a salient issue worldwide, one only intensified by the interconnectedness of commerce wrought by globalization (Akhter 2004). Although there are various types of corruption and perspectives on whether it is essentially “good” or “bad” for the global economy—some view it as a “grabbing hand” or “sand” in the wheels of commerce; others as a “helping hand” and “grease” for the wheels of commerce (Petrou and Thanos 2014; Cuervo-Cazurra 2016)—there is less contention over its growing prevalence. One business survey documented that almost one-quarter (23 percent) of corporate managers stated their firm “had lost business” due to bribes (Hess 2012). Another Ernst & Young survey noted, similarly, that one-quarter of executives reported an “incident of bribery within the past two years” (quoted in Hess 2012, p. 60). Most studies of corruption, Judge et al. (2011) surmise, focus on the causes of corruption rather than the effects of corruption. Here, we go one step further, showing the (determinately positive) economic effects of lessening and minimizing corruption in the resource-rich countries adhering to EITI principles.

Second, we offer a more comprehensive, timely, and rigorous assessment of the EITI than the existing literature. Studies across the disciplines of governance (Caspary 2012), public administration (Brinkerhoff and Brinkerhoff 2011), law (Friedman 2011; Eigen 2006-2007; Hess 2012), innovation and governance (Smith et al. 2012; Corrigan 2014), accounting (Moses et al. 2018; Otusanya 2011), energy studies (Sovacool 2013), development studies (Acosta 2013), business strategy (Mouan 2010), corporate social responsibility (Frynas 2010), and political science (Haufler 2010) have all qualitatively praised the EITI for its theory, intent, or application, but not tested such preconceptions statistically. Two peer-reviewed studies to our knowledge have attempted to assess the efficacy of the EITI, but narrowed their approach to only the two countries of Azerbaijan and Liberia (Sovacool and Andrews 2015), or utilized a limited (premature) dataset that ended in 2012 (Sovacool et al. 2016), a timeframe that even the authors admitted weakened the explanatory power of the study. Our study, by contrast, offers a quantitative, comparative assessment of EITI efficacy with a dataset extending into the most recently available data as of 2020.

Third, the paper connects discussions of corruption and transparency with the pressing theme of energy transitions, namely exploring how EITI countries re-invest in low-carbon forms of energy (or not). For in principle, the EITI can be a powerful tool that shifts national energy transitions through improved corporate, regulatory, community, and market monitoring. The literature from regulatory governance and law suggests that by distributing more accurate information about oil, gas, and mineral resources, the EITI can create a mechanism for firms to self-monitor by producing a series of periodic reports on their revenues and contracts at each of their facilities or projects (Karkkainen 2000-2001). Competitors could peer monitor to highlight their comparative performance and to augment accountability to standards of best practice. Legislators could regulatory monitor by establishing baselines, profiles, and trends in revenue collection (and extraction rates) at many levels (facilities, firms, communities, states) to make benchmarking comparisons between them and determine the efficacy of national policies and standards. Civil society groups and individuals could community monitor within a given area and thus devise measures such as political pressure on elected officials. Investors, insurers, lenders, and even employees could market monitor the performance of firms to assess potential liabilities and analyze the expected impact of certain suppliers and products. This collectively enhanced monitoring could culminate in unprecedented access to information about revenues and corruption as well as pressures to divest from fossil fuels and reinvest in low-carbon forms of energy. This is a critical area of research for it exposes the political economy of fossil fuel regimes (Rennkamp et al. 2017; York and Bell 2019; Balmaceda 2018); it is fossil fuel countries that will remain responsible for the bulk of future greenhouse gas emissions, yet it is also those very countries that must urgently decarbonize to meet the goals of the Paris Accord (Lamb and Minx 2020). This intertwines discussions of governance with those of grand energy transitions.

To make its case, the paper proceeds as follows. It first briefly discusses the topic of corruption within the energy and mining sectors, and proceeds to trace the history and importance of the EITI. It then introduces readers to our research methods and sources of data before presenting the results of our analysis. We elaborate on why it is that the EITI has a seemingly significant effect on some economic and development metrics, but a rather innocuous effect on other governance indicators. We conclude with a few key implications for those interested in corruption, corporate governance, and transparency.

Section snippets

Corruption, corporate governance, and the EITI

Its creators intended from the start that the EITI address a pervasive problem facing the international business community: corruption. As previously noted, a general definition of corruption is “the abuse of entrusted power for private gain” (Cuervo-Cazurra 2016). Public corruption refers to when an elected politician or member of government obtains personal income or benefits in exchange for giving a company or individual a good or preventing a bad; private corruption refers generally to when

Research design and limitations

As was hinted at above, most of the studies making claims about the EITI are grounded in research designs that have small sample sizes (one country or two countries as case studies), and that do their analysis at a fixed point in time (with interviews or data collection done once). This paper seeks to move beyond research dominated by single country/project case studies (e.g. the EITI in Nigeria) or assessing only a single dimension to EITI (e.g. its impact on corruption, or taxes). Instead,

Results: evaluating the effectiveness of the EITI

This section of the paper presents our results. As Table 3 summarizes, EITI countries performed better than all countries across the five dimensions of regulatory quality, rule of law, control of corruption, foreign direct investment, and lending interest rates. EITI countries did not perform better than all countries across the five dimensions of voice and accountability, political stability and violence, governmental effectiveness, energy investment, and poverty gap. Readers can browse

Discussion: what benefits does the EITI offer?

What are we to make of these complex and somewhat conflicting trends? On the whole, EITI countries seemed to do better—to improve more rapidly than all other countries—in some economic dimensions related to foreign direct investment as well as regulatory quality, rule of law (enforcement) and corruption. EITI countries, by contrast, performed more poorly than other countries in areas mostly within the confines of political and social governance: media openness and accountability, political

Conclusion and implications

Our assessment of the EITI reveals at least three salient conclusions, correlations related to corruption, correlations about corporate governance, and correlations about transparency and accountability.

First, the EITI affirms the import and power of information as a tool to minimize grand public sector and private sector corruption. Merely by enabling the provision of accurate information about oil, gas, and mining revenues to the broader public and civil society, the EITI has helped bridge

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