The Securities and Exchange Commission (SEC) does not appear, at first glance, to be the place to look for envelope-pushing actions in sustainable development. It is best, and perhaps exclusively, known for its role in regulating the actions of Wall Street, a role in which it is considered fairly conservative. In an unprecedented move, Congress has quietly given the SEC a lead role in the most recent attempt to combat the corrosive effects of natural resource wealth on the creation of good governance in the developing world.
With the passage of the Dodd-Frank Financial Reform Act, Congress instructed the SEC to write and implement rules that require any publically traded company in the United States to disclose payments made for resources extracted in the developing world. The goal of the regulation is to end the ‘natural resource curse’: the phenomenon of countries with extremely high endowments of extractable natural resources (oil, coal, minerals, etc) being some of the least developed, despite receiving large payments for their resources. Although far from a hard and fast rule, the natural resource curse is pervasive and attributed by many to a lack of transparency and therefore high levels of corruption in the afflicted countries. The hope of SEC rule 1504 is that increasing transparency of payments will combat corruption and aid development in these countries.
Having received less public attention than its sibling rule regulating ‘conflict minerals’ originating in the Democratic Republic of the Congo, rule 1504 still languishes in the docket of the SEC commissioners. Remaining as draft regulations, the rules, which are still open to public comment, will not take effect until the commissioners vote to approve them. Even if they are approved, however, it is unlikely that the regulations will end the natural resource curse.
Rule 1504 is unlikely to make a substantial impact for two reasons. The first is that, lacking the general interest in 1504 that the conflict minerals rule received, the public commentary on 1504 has been dominated by the extractive industries, who are strongly opposed to the rule-making. Claiming that the disclosure requirements would place them at a competitive disadvantage to companies not traded in the U.S. – and therefore not subject to the rule – they argue that the voluntary disclosures they already participate in are sufficient.
While unlikely to totally stop the new rules, this argument may be sufficient to remove the requirement that payments be disclosed at a project level and instead allow disclosures to be made at an aggregated country level. Reporting at a country, rather than project, level creates substantial public action problems however. Research has demonstrated (subs. Req’d) that a cause of the resource curse is a lack of incentive for individuals to force those in power to fairly distribute the wealth generated by resources because the payments to any individual are too small to justify action; this is especially true when payments take the form of infrastructure development. Reporting at a project level helps to alleviate this by localizing the impacts of corruption and rent-taking. If disclosure indicates that a community of several hundred is being robbed of several million, the incentive for that community to act is stronger than if an aggregated disclosure indicates that a country of several million is being robbed of a few tens of millions.
The second, and more important, reason rule 1504 is unlikely to have a major effect is simply that the resource curse is a very complex phenomenon. The causes are many and combating it requires more than simple disclosure, particularly disclosure made in the United States. Third parties have limited ability to influence the dispersion of resource wealth in developing countries and the effectiveness of transparency is dependent upon the existence of a domestic civil society that is capable of holding leaders responsible in the event of wrongdoing. Unfortunately, these strong civil societies rarely exist in countries afflicted by the resource curse.
Recognition of the limits of rule 1504 should not be taken as evidence of its uselessness. The SEC commissioners should absolutely approve rule 1504 and they should maintain the requirement that disclosures occur at a project level. But ending the natural resource curse will require much more substantial action on the part of Congress and the rest of the developed world than simply increasing transparency cannot cure.
One potential, but likely politically impossible, step would be to not only require publically traded companies to disclose the payments they make, but to hold them responsible for how some of the funds are distributed. A prominently cited example in the debate around rule 1504 was the failure of Chad’s president to abide by the terms of a World Bank agreement describing how funds from Exxon would be distributed. Holding Exxon jointly responsible for future agreements of this nature might encourage a more equitable distribution of the resource wealth among citizens. Unfortunately, it might also simply cause Exxon to stop participating in such agreements at all and it raises thorny issues of national sovereignty.
But whether that example is workable, the point remains that solving the resource curse will require more substantial steps that those already been taken by Congress and the SEC with rule 1504. While a positive step, close examination of the rule reveals that, true to form, the SEC has not pushed the envelop in this new realm either.