- The Washington Times - Monday, August 9, 2004

Extractive industries — oil, gas, and mining — characteristically evoke economically wayward shrillness or myopia born of popular suspicion.

In 2001, for example, the World Bank began a comprehensive evaluation of its lending to the extractive industries . The exercise culminated in an Extractive Industries Review (EIR) recommendation by independent adviser Emil Salim, former Indonesian state minister for population and environment, to phase out oil-related loans by 2008 in favor of “investments in renewable energy development.”

Last Tuesday, the World Bank prudently parried the proposal as a cure worse than the disease, but nevertheless raised investment standards for extractive industries on the zany assumption a barrel of oil or lump of coal has a special burden of alleviating poverty or promoting the rule of law.

Extractive industries are not economic mutants. They respond to the same profit motive and supply and demand curves as other lines of commerce. Community attitudes toward business, however, are driven more by passions than by Adam Smith’s “Wealth of Nations,” a bible of free enterprise.

History has made extractive industries scapegoats of demagogues or populists for a mixture of deserved and undeserved reasons.

Oil has been associated with foreign imperialism or colonialism. Iran’s democratically inclined Mohammed Mossadegh was overthrown by the British MI6 and the American Central Intelligence Agency because of his nationalization of the Anglo-Persian oil company. President Lazaro Cardenas of Mexico nationalized American oil companies thought to embody foreign domination in 1938 to great domestic applause. Libya’s Col. Muammar Gadhafi followed Cardenas’ instruction.

Oil also symbolizes environmental pollution, for example, the staggering Exxon Valdez oil spill, rig explosions in Santa Barbara, and contamination of the Niger River delta by a major American oil company. Citizen rescue missions to save fish and fowl from oil slicks provide ocular and indelible evidence of an allegedly irresponsible industry. Coal mining conjures up images of devastated landscapes and lethal floods from broken dams.

Oil and gas are regularly implicated in monumental governmental corruption. Nigeria, Angola, Guinea Bissau, Chad, Azerbaijan, Kazakhstan, and Iraq are illustrative. Halliburton has become synonymous with unholy industry-government flirtations or marriages.

Diamond mining has become associated with bloody civil wars in Liberia, Angola, the Democratic Republic of Congo, Congo Brazzaville, and Sierra Leone. Diamond trading also is suspected of bolstering al Qaeda’s financial nimbleness.

The oil and gas industry is perceived as exceptionally greedy because of high profit margins when a commercially viable discovery is made. The public generally fails to consider the enormous sums expended on dry wells, which should be included in assessing the profitability of striking a gusher.

These visceral connections between wretchedness and the extractive industries occasion overwrought economic recommendations epitomized by the EIR.

Mr. Salim faulted oil-extraction projects funded partially by World Bank investments for failure to alleviate poverty or to protect the environment. He insisted: “Local communities and the environment end up providing subsidies in terms of environmental and social costs, for the sake of economic development. … [Yet] the fruits of this economic development in most cases do not trickle down to local communities who live in project areas.” The EIR author also urged the World Bank to deny resource extraction loans to ill-governed impoverished nations, and instead underwrite economically unsustainable renewable energy projects.

Business, however, is neither philanthropy nor religion nor governmental reform. It is production of goods and services desired by consumers at prices set by competitive incentives and pressures. Investments boost social welfare by directing economic resources to satisfy individual wants.

Local communities hosting resource extraction projects enjoy no special moral or equitable claim to benefit from the investments of others. Employment decisions should pivot on the skills, diligence and honesty of applicants, not on their places of residence. Investments that increase the sum of human happiness are praiseworthy irrespective of its geographic dispersal. A local community that happens to sit atop oil, gas, gold, or coal has no lien on their extraction.

The poor may be preferred in religion and before God, and may hold a preferred position in literature. But the poor emphatically do not enjoy preferential treatment in sound economics. Community prosperity rests on incentives for work and aquiring skills to satisfy needs reflected in open market prices.

In prosperous countries like the United States, the idea of prohibiting loans that would neglect trimming poverty rates would be ludicrous. Erstwhile altruistic societies that clashed with human nature, such as Brooke Farm or Owenite communities, uniformly derailed.

Good governance, local good will, and environmental safeguards all affect the investment risk of the World Bank in extractive industries. Accordingly, all should be loan yardsticks, in contrast to poverty relief. James D. Wolfensohn, chairman and president of the World Bank Group, declared in responding to the EIR that “our investments and policy advice in the extractive industries should benefit the poor first and foremost.”

A chief way to accomplish that is by mutually educating government, private business, and civil society of their varied goals and ambitions to achieve optimal economic harmony.

Bruce Fein is a constitutional lawyer and international consultant at Bruce Fein & Associates and the Lichfield Group.

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