For the past few months Guinea has been ruled by a young army captain who led a successful coup. Not that you'd necessarily know about it: the regime has only hit the world news twice. The first time was for shooting 150 pro-democracy demonstrators: international protest at this abuse has now escalated into an arms embargo. The second time was when the regime signed a $7bn resource-extraction deal with the Chinese. This infusion of money has made a mockery of international pressure.
But to grasp the deeper affront, the sheer scale of the deal must be appreciated. Guinea is currently a no-go area for reputable resource-extraction companies and so the Chinese faced no competition. If under these conditions they are prepared to pay $7bn for the rights to resource extraction, it is reasonable to suppose that they are worth much more. Yet the national income of Guinea is only $3bn. These natural assets, vast relative to its income, were the society's lifeline out of poverty. They have been disposed of in haste by a regime without legitimacy.
Guinea is an extreme instance, but the disregard of the Chinese for standards of governance in winning resource-extraction contracts has become a leitmotif. The result has been not only a scramble for Africa, but a race back to the bottom. After decades of shaming behaviour, by the Millennium the major resource-extraction companies of the OECD were being pressured into decency. New legislation across the OECD ensured that if they bribed, they committed a criminal offence within their home country. They became subject to scrutiny from NGOs. New awareness among young people ensured that employees expected their companies to behave in a socially responsible manner.
The Extractive Industries Transparency Initiative (EITI), launched in 2003, rapidly gained over 30 signatories from governments and companies committed to transparent reporting of their activities. China is not party to the EITI and so has a massive competitive advantage over firms constrained by honesty.
Yet Chinese involvement in African resource extraction can be a force for good. They have provided a welcome infusion of competition, raising prices for African resources and reducing prices for the construction projects on which many Chinese firms now bid. The Chinese innovation of offering a package of infrastructure in return for extraction rights can also be socially useful. It ensures that the natural assets are replaced by some other asset instead of being used exclusively for consumption.
Resource extraction in Africa has been problematic because of the way in which the rights to extract natural resources have been sold, and because African governments have not been sufficiently accountable to their citizens. Wherever rights are sold through secret bilateral negotiations, the outcome is suspect due to problems of agency and asymmetric information. The agency problem is that the citizens who are the rightful owners of the rights to natural assets cannot adequately control their political representatives who conduct the negotiation. The information problem is that companies know far better than governments what extraction rights are worth. There is a simple solution to these problems: auctions between informed bidders, properly verified, are not subject to corruption and reveal fair value.
Addressing the lack of accountability of government to citizen is more difficult. Elections are not enough: typically in resource-rich countries they work very badly as politicians divert resource revenues to finance the patronage systems that keep them in power. Citizens need to understand the chain of decisions involved in harnessing natural assets for development. New technology has made the information problem less daunting.
Historically, Africa's natural resources have been plundered. The few have stolen from the many, and the present has stolen from the future. The foreign companies and governments that extract Africa's resources in circumstances in which the revenues are unlikely to benefit ordinary people, alive and to come, connive at plunder. By any reasonable assessment that is what the Chinese have done in Guinea. In all African societies there are brave people struggling for change: 150 of them were just murdered in Guinea. The international community has a responsibility to ensure that their bravery is not in vain.
Paul Collier, CBE is director for the study of African economies at Oxford UniversityReuse content