LET us be clear about an implicit assumption about the work of the Extractive Industries Transparency Initiative (EITI): Its objective goes beyond transparency of revenues, contracts, and ownership. Neither is the objective limited to generating domestic resources, done in a transparent way. The EITI’s distinct contribution is to promote revenue, contract, and ownership transparency, which in turn is a necessary condition to finance and build development, anchored on fairness, equity, and sustainability.
From this viewpoint, transparency and financing are intermediate goals, albeit absolutely critical goals. In this light, “transparency to stimulate domestic resource mobilization” and the resources generated from the extractive industries are variables that affect people’s well-being, economic growth, and all-round development.
Nevertheless, the reverse causality can also happen. Growth and development lead to greater transparency and better tax effort.
But setting aside endogeneity, we see that transparency and better domestic resource mobilization are correlated with growth and development. Transparency and domestic resource mobilization are likewise associated with better institutions. Economics and political science literature has established that good, strong institutions predict well-being, development, and prosperity.
Thus, in this discussion, we emphasize not only how transparency in the extractive industries enables better tax effort. What is equally important is to stress transparency AND tax effort as part of shaping good institutions and likewise being an outcome of good institutions.
Incidentally, John Nye in his book, War, Wine and Taxes (2007), asserts that Britain’s or the United Kingdom’s wealth and prosperity, set in motion as far back as the very late 17th century, can be principally attributed to taxes (particularly commodity taxes on wine), which financed the building of a good civil service and bureaucracy. This shows how taxes can shape institutions. But how taxes will be wisely spent is part of the equation. And here, transparency matters.
Let me give a couple of examples of how these variables — transparency, tax effort, institutions, and growth or development interact.
On the policy level, EITI is a seal of good housekeeping and hence attracts tax-compliant companies that value reputation. Said another way, companies that want to avoid reputational risk or, worse, shame, will have the incentive to be tax-compliant, join EITI, and observe rules on transparency.
This also makes the tax administration work of revenue-collecting agencies simpler and more efficient. They can shift attention to other firms in ferreting out tax evasion.
Still in relation to policy, the EITI enables a policy dialogue that can lead to the appropriate tax design or the crafting of optimal tax rates. In this regard, the policy and institutional quality of the different stakeholders is improved.
And how about those who guard the guardians, the communities and civil society organizations? They bring to the table developmental concerns beyond economics and finance. Communities and indigenous peoples highlight the political, the social, and ecological issues. Thus, the EITI, springing from the platform of revenue transparency, becomes an all-around development affair.
For the communities and indigenous peoples, EITI participation is empowering in many ways. One area that is perhaps underemphasized is how the EITI process becomes an alternative learning system for those in the marginalized communities who have no formal education. They learn the rules: local, national, and global. They learn to appreciate numbers and signs. They learn practical skills in negotiating, in scrutinizing contracts, and in understanding value chains and the formal economy, among other things.
All this is good for transparency, for revenue generation, and for building institutions.
A final point: The contribution of the extractive industries to total revenue, output, and employment might be low at the aggregate level. But in certain local areas, and these are usually the poor isolated areas plagued with armed conflict, the extractive industries play a major developmental role, for better or for worse. They can either alleviate or worsen poverty, abet or reduce conflict.
In addition, even though the contribution of the extractive industries to the economy is relatively low, the good practices that EITI brings on tax compliance, transparency and accountability, cooperation, and inclusiveness can spill over to the broader economy.
Thus, the whole is greater than the sum of EITI’s parts, especially with regard to improving the quality of our institutions.
Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.