What is the role of the state?

CHAPTER 2

What Is the Role of the State?
Joseph E. Stiglitz

ABSTRACT

In their dealings with the global extractive industries, national governments frequently fail to get full value for their resources. The key problem is that private-sector parties have interests to maximize their revenues and to minimize those accruing to the country. Full privatizations of rights to oil and gas wealthhave been marked by some of the worst abuses, with governments getting the worst deal. For countries with high-quality public management, and where there are not particularly difficult extraction problems, national oil companies should often play a central role in managing resources. Others face the difficult choice of trying either to improve public sector management or to rely on an imperfect andpossibly corrupt public sector to define relationships with a private sector whose goal runs counter to that of the public interest—minimizing payments to the public. Even in these cases there are a number of important guidelines that governments can follow to ensure they get better value for their assets: Institutions should always be strengthened before engaging in privatization; patience shouldbe practiced—it is sometimes better to keep oil wealth in the ground than to sell it badly; provisions should be identified for contract renegotiation ex ante; contracts should be minimally complex and evaluated on the basis of the incentives they generate and their per formance under different scenarios; finally, the timing of payments should be a function of the ability of the state to bear risk.Whatever the approach, the aim of government decisions should be to ensure transparency, ownership, and fairness.

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DEALING WITH OIL CORPORATIONS

INTRODUCTION

In the first chapter of this volume, we identified one of the central problems underpinning the resource curse: Too often countries do not get the full value of their resources. Consider a government genuinely interested inusing its good luck of an abundant resource endowment for the benefit of its people. But first it must somehow extract the resources from below the ground and sell them. To do that, it will have to rely on public employees and/or private contractors. It can hire the private contractors to undertake specific tasks, or it can sell them the natural resource in return either for a fixed amount or a royalty onwhatever is sold. Many of the parties upon whom it must rely, however, have another objective: maximizing their own income or well-being, which in turn means minimizing the amount paid to the government. This is a natural and inevitable conflict of interest. Both in the public and private sectors, there are many who would also like to use the country’s wealth for their own private purposes. Thus,a key challenge any government faces is to work out how to engage with these other actors, whose objectives inevitably differ radically from its own. In this chapter, I focus on one issue that is particularly relevant to answering the question: How should governments work with the private sector to maximize the total (expected present discounted value of ) revenue it receives from its naturalendowment? The traditional saying caveat emptor—let the buyer beware!—puts buyers on notice of the natural risks they face in buying goods in the marketplace. This chapter adds a new maxim: Let the owner beware! Be skeptical of those offering to manage your resources or to buy them from you. Their objective is not to increase your well-being, but theirs. And too often, the conditions that are requiredto be satisfied so that you can “trust the market” are not satisfied.1 There is another maxim: “A fool and his money are soon parted.” This is an even stronger warning to the publics in resourcerich countries: It is all too easy for politicians to connive with those in the private sector to take from you what is yours. This maxim may be less catchy but no less important: When it comes to natural...