How to Restore Trust? Falling Prices of Raw Materials and Political Crisis


*This blog post was published on the GobernArte blog in Spanish.

Latin America and the Caribbean are going through a deep crisis of trust in their governments, which covers both their ability to effectively and efficiently manage public resources, and the integrity with which they do so.Citizens are increasingly and rightly demanding better services and less corruption. Tolerance for inefficiency and the ineptitude of governments has dropped considerably as societies become increasingly connected and informed.

On the one hand, it is important to recognize that the challenges of governance and controlling corruption are particularly acute in countries rich in natural resources. On the other hand, it is key to emphasize that our region has entered a phase of economic slowdown, partly due to the falling prices of raw materials. This scenario requires that governments take concrete actions to restore trust in its institutions. They need to do more with less.

This was the context in which the Inter-American Development Bank, among other stakeholders, participated in the 7th Global Conference of the Extractive Industries Transparency Initiative (EITI) held February 23-25, 2016 in Lima, Peru.

The central theme of the meeting was to reflect on the challenges and opportunities for promoting transparency and better governance in the extractive industries, as a key to restoring citizens’ trust in the sector. However, discussions were almost monopolized by the analysis of the particular moment that the region (and the world) is experiencing following the sharp fall in prices of raw materials that began in mid-2014.

On the basis of the discussions at this event, we would like to reflect on two questions: What does it mean to restore trust in institutions, and how would this impact the extractive industries? What can be done about it?

It is critical to restore trust in institutions.

Restoring trust in institutions is the most important challenge of governance in the extractive sector at all levels of government. And it is not only about rebuilding the relation between the different actors (governments, businesses, and civil society) but doing it on schedule. When we talk about trust in institutions, we not only refer to those who manage the resources generated by the extractive sector, but also to the companies and agencies responsible for monitoring and supervising activities in the sector.

Restoring trust in institutions is not only a priority – it is an urgent issue for the extractive sector. In our previous blogpost, we indicated five reasons why in the coming years we foresee a steady increase in effort to improve governance in the extractive sector. And we focused on how countries in the region are responding to corruption scandals; the reaction to the social conflict of extractive projects; greater awareness of the great challenges of governance that exist at sub-national levels of government; the recognition that clean business is good business; and an internationally coordinated push for transparency.

To these reasons, we must add that the era of abundance appears to be over. The sharp drop in prices of raw materials accompanies growing uncertainty in the global economy and a feeling of discomfort in the extractive sector. To put it plainly, we are at a crossroads due to the lack of trust in governments combined with multiple stresses associated with low commodity prices.

The challenges of governance in the extractive sector create stresses on societies and difficulties for both the public and private sector. A recent study by Harvard University points out that mining projects valued between $ 3 and $5 billion have reported weekly losses of $ 20 million and production delays caused by social conflicts. An analysis of 190 projects operated by major international oil companies (large-scale projects) shows that the time required to meet the deadlines of the project has doubled compared to previous decades.

The key to restoring trust not only improves fiscal transparency, it is also part of a comprehensive and long-term effort to communicate in a more effective, efficient, and transparent manner to citizens about the benefit and impact (both positive and negative) of mining activities.

There is still a limited understanding of the impact, both positive and negative, associated with the extractive industries. The sector requires better metrics to monitor the effects of extractive industries that take advantage of development opportunities and mitigate potential risks. We do not always have solid information on activities in the sector.

Improving information management not only implies greater accountability. Interested parties should have access to information on technical and operational aspects, including development plans and projected resources produced by industry (including oil, gas, and minerals) impacts, as well as those who are affected by the investment in the sector, such as water, and land and energy, among others.

Soon we’ll talk about possible solutions to these problems that are emerging at the level of sub-national governments.






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