Rethinking Global Finance (II)

Two  weeks ago I alerted readers to the fact that global financial institutions, like the World Bank and the International Monetary Fund (IMF), are presently in the process of rethinking the advice they give to governments around the world. They have become acutely aware that the present trajectory of financial practices is simply not sustainable.

Johnny West, founder of OpenOil, a Berlin-based consultancy in oil and other extractive industries, and columnist for Petroleum Economist, has written extensively about some of the new thinking that is happening in these global institutions.

At the heart of this re-orientation is the notion that much more of the profits of extractive industries like oil and mining should flow towards local governments. According to Paul Collier, governments should then use these funds to “Invest in investing: the creation not of industries but of the infrastructure to support them, that infrastructure being partly physical, such as roads and utilities, and partly social, such as developing trading and legal systems which encourage private investment.”

Unlike manufacturing that actually makes something people need, extractive industries are making massive profits by delivering products to people who own them in the first place. (Consider that in 2008 Exxon made a profit of $45 billion dollars – the largest profit ever recorded by a company.) Because of this unique dimension of extractive industries, it is argued that we can stay well within capitalist orthodoxy by also applying unique taxation practices for these industries without creating market distortions.

The traditional argument is that these massive profits are justified because of the huge risks these companies take in discovering their products. However, with present computerized data now available on the substructure of most of the earth’s surface, the risks are substantially reduced. Why, for example, should government not use this data to identify where oil and minerals are located and then auction off the rights of extraction to the highest bidder. Nova Scotia did just that recently. It invested $15 million in oil exploration and then sold extraction rights for $900 million. You could argue that the rightful owners got the lion’s share of the profits.

There is cause for concern, for example, when corporations are extracting large amounts of oil from some African countries which are largely fed by Save the Children or the World Food Program. What would happen if, in such cases, the IMF moved in to advise local governments to insist that most of those oil profits should go to feed their own people and strengthen local infrastructure?

Some of the impetus for this new way of thinking is coming from Latin America where an increasing number of countries are claiming ownership of their own oil and minerals. It is becoming clear, that if private companies want to stay in the game, they will have to be willing to make major concessions. The World Bank and the IMF should see the writing on the wall and begin advising governments differently in relation to their extractive industries.  

Jack Heppner