Reality in the commodity markets:

Opportunity for good governance reforms?

Daniel Kaufmann, President & CEO

Natural Resource Governance Institute (NRGI)
www.resourcegovernance.org

Keynote speech at the Mongolia Economic

Forum Ulaanbaatar, Mongolia, 31 March 2016


:
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www.resourcegovernance.org

,
2016 3 31-

The Governance Challenge: Outline in brief

Economics: crucial, but not alone: integrating into
governance political, economic & institutional
What is Governance; how measured; does it
matter?
Evidence from the world & Mongolia: Mixed
performance specific strengths & vulnerabilities
Governance in Extractives: a framework for
assessment & main challenges & findings
Lessons from global evidence & experience and
some implications for Mongolia: Governance
Reform Opportunity Now
3

WGI: Six Dimensions of Governance

Governance as the set of traditions and institutions by which
authority in a country is exercised-- specifically:
The process by which those in authority are selected and
replaced
VOICE AND ACCOUNTABILITY
POLITICAL STABILITY & ABSENCE OF
VIOLENCE/TERRORISM
The capacity of government to formulate and implement
policies
GOVERNMENT EFFECTIVENESS
REGULATORY QUALITY
The respect of citizens and state for institutions that
govern interactions among them
RULE OF LAW
5
CONTROL OF CORRUPTION

WGI Rule of Law, 2014

7
Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research
Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130

WGI Control of Corruption: the Americas, 2014

9
Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research
Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130

Voice and Accountability Performance WGI: Asia

Source: Worldwide Governance Indicators (http://www.govindicators.org), additional information at Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The
11
Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430
(http://ssrn.com/abstract=1682130).

Political Stability & Absence of Violence Indicator: Asia

Source: Worldwide Governance Indicators (http://www.govindicators.org), additional information at Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The
13
Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430
(http://ssrn.com/abstract=1682130).

Government Effectiveness Indicator WGI: Asia

Source: Worldwide Governance Indicators (http://www.govindicators.org), additional information at Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The
15
Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430
(http://ssrn.com/abstract=1682130).

Control of Corruption WGI: Asia 2014

Source: Worldwide Governance Indicators (http://www.govindicators.org), additional information at Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The
17
Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430
(http://ssrn.com/abstract=1682130).

Mongolia Governance Indicators: WGI 2000, 2007, 2014

Source: Worldwide Governance Indicators (http://www.govindicators.org), additional information at Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The
19
Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430
(http://ssrn.com/abstract=1682130).

Ukraine Governance Indicators

Source: Worldwide Governance Indicators (http://www.govindicators.org), additional information at Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The
21
Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research Working Paper No. 5430
(http://ssrn.com/abstract=1682130).

Worldwide Governance Indicators for Chile:

2000, 2007, 2014

Source: Kaufmann, Daniel, Kraay, Aart and Mastruzzi, Massimo, The Worldwide Governance Indicators: Methodology and Analytical Issues (September 2010). World Bank Policy Research
Working Paper No. 5430. Available at SSRN: http://ssrn.com/abstract=1682130

Managing Volatile Revenues

-10%

0%

-20%

-20%

-30%

-40%

Government revenue growth

(Chilean Peso)

Government revenue growth

(Venezuelan Bolvar)

Government expenditure growth

(Chilean Peso)

Government expenditure growth

(Venezuelan Bolvar)

Source: IMF World Economic Outlook Database

2015

20%

2013

0%

2011

40%

2009

10%

2007

60%

2005

20%

2003

80%

1999

30%

1997

100%

1997
1999
2001
2003
2005
2007
2009
2011
2013
2015

40%

2001

Venezuela

Chile

Expenditure volatility in Mongolia vs Ukraine

Ukraine
100%

90%

90%

80%

80%

70%

70%

60%

60%

50%

50%

40%

40%

30%

30%

20%

20%

10%

10%

0%

0%

-10%

-10%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

100%

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

Mongolia

General government revenue growth

General government revenue growth

General government total expenditure growth

General government total expenditure growth

Data source: IMF WEO

Mongolias Borrowing and Saving: Fiscal Balance

Mongolias Borrowing and Saving: Debt Accumulation

Makeup of Mongolias 2014 Exports

Source: The Atlas of Economic Complexity (http://atlas.cid.harvard.edu/explore/tree_map/export/mng/all/show/2014/) , this is a measurement of complexity that33
is
calculated based on how many different products a country can produce and the number of countries able to make those products

Makeup of Malaysias 2014 Exports

Source: The Atlas of Economic Complexity (http://atlas.cid.harvard.edu/explore/tree_map/export/mng/all/show/2014/) , this is a measurement of complexity that35
is
calculated based on how many different products a country can produce and the number of countries able to make those products

The Atlas of Economic Complexity: Country Rankings*

Economic Complexity Indicator Score

2.5
2.0
1.5
1.0
0.5
0.0
-0.5

Mongolia
(score of -1.41)

-1.0
-1.5
-2.0

Japan
South Korea
Czech Republic
United Kingdom
Slovakia
Ireland
China
Mexico
Estonia
Malaysia
Belarus
Lithuania
Bosnia-Herzegovina
Philippines
Ukraine
Greece
New Zealand
El Salvador
South Africa
Vietnam
Egypt
Argentina
Macedonia
Guatemala
Kuwait
Senegal
Cuba
Australia
Zambia
Cameroon
Qatar
Botswana
Uganda
Bangladesh
Turkmenistan
Mozambique
Gabon
Algeria
Malawi
Libya
Guinea
Angola

-2.5

*Note: Due to number of countries covered, only select countries are labeled in this chart. Mongolia is ranked 114 th out of 124 countries.
Source: The Atlas of Economic Complexity (http://atlas.cid.harvard.edu/explore/tree_map/export/mng/all/show/2014/) , this is a measurement of complexity that37
is
calculated based on how many different products a country can produce and the number of countries able to make those products

Global Competitiveness Index: 2007-2015

7

2007

2015

Note: Mongolias rank in 2007 is 101 out of 131 and in 2015 is 104 out of 140.
Source: World Economic Forum, 2015-2016 Global Competitiveness Report, http://reports.weforum.org/global-competitiveness-report-2015-2016/

Mongolia

Kyrgyzstan

Tajikistan

Ukraine

Brazil

Russia

Kazakhstan

Azerbaijan

Chile

China

Worst 2

South
Korea

Singapore

Global Competitiveness Index Score

Best

39

Worst 0

41

New Zealand
Norway
France
United Kingdom
Germany
Georgia
South Korea
Poland
Argentina
Spain
Bangladesh
Costa Rica
El Salvador
Dominican Republic
Mongolia
Kenya
Ukraine
Mali
Tanzania
Cameroon
Burkina Faso
Senegal
Tunisia
Sri Lanka
Liberia
Rwanda
Trinidad & Tobago
Angola
Nigeria
Bolivia
Fiji
Cambodia
Equatorial Guinea
Myanmar

Open Budget Index Score

2015 Open Budget Index:

Mongolia scored 51 (ranked 39th among 102 countries)

Best 100

90

80

70

60

50

40

30

20

10

Source: International Budget Partnership 2015 Open Budget Index, http://internationalbudget.org/opening-budgets/open-budget-initiative/open-budget-survey/

1. Norway
2. United States (Gulf of Mexico)
3. United Kingdom
4. Australia (Western Australia)
5. Brazil
6. Mexico
7. Canada (Alberta)
8. Chile
9. Colombia
10. Trinidad and Tobago
11. Peru
12. India
13. Timor-Leste
14. Indonesia
15. Ghana
16. Liberia
17. Zambia
18. Ecuador
19. Kazakhstan
20. Venezuela
21. South Africa
22. Russia
23. Philippines
24. Bolivia
25. Morocco
26. Mongolia
27. Tanzania
28. Azerbaijan
29. Iraq
30. Botswana
31. Bahrain
32. Gabon
33. Guinea
34. Malaysia
35. Sierra Leone
36. China
37. Yemen
38. Egypt
39. Papua New Guinea
40. Nigeria
41. Angola
42. Kuwait
43. Vietnam
44. Congo (DRC)
45. Algeria
46. Mozambique
47. Cameroon
48. Saudi Arabia
49. Afghanistan
50. South Sudan
51. Zimbabwe
52. Cambodia
53. Iran
54. Qatar
55. Libya
56. Equatorial Guinea
57. Turkmenistan
58. Myanmar

2013 Resource Governance Index

100

80

60
98
92
88
85
80
77 76 75
74 74 73

Satisfactory (71-100)
Partial (51-70)
Weak (41-50)
Failing (0-40)

70
68
66
63 62
61
58 57
56 56 56
54 53 53
51 50
48 47 47 47
46 46 46 46
43 43 43 43 42 42
41 41

40

20

Source: Natural Resource Governance Institute: 2013 Resource Governance Index, http://www.resourcegovernance.org/rgi
39 38
37
34 34 33
31 31
29 28
26
19
13
5 4

43

2013 Resource Governance Index: Mongolia

45
Source: Natural Resource Governance Institute: 2013 Resource Governance Index, http://www.resourcegovernance.org/rgi

But does Governance Matter?

OK, governance can be measured,

with caution
But does it really matter?

47

Development Dividend of good governance & corruption

control: Resource-Rich vs. Non-Resource Rich countries

GDP per capita (PPP)

Resource-Rich Countries

Non Resource Rich

45,000
30,820

12,712
10,272
6,851
3,941
10,000

5,000
0

Poor Corruption Control

Average Corruption
Control

Good Corruption
Control

Sources: GDP per capita (atop each column) from World Bank World Development Indicators, 2012.
Corruption Control data from Worldwide Governance Indicators (WGI, 2012) Countries grouped into terciles based on WGI49
Control
of Corruption scores. Resource Rich country classification according to IMF (2010).

The Natural Resource Charter (NRC)

Domestic governance

Discovery &
deciding to
extract

Getting a
good
deal

Managing
revenues

Investing for
sustainable
development

International governance
51

Global Lessons and Some Implications

1. Consolidate & Build on earlier Transformative Achievements
in Political & Institutional Dimensions of Governance
-- Political and Civil Liberties, Free Press
-- Anti-Corruption program
-- Transparency reforms: i) Budget; ii) Mining Transparency:
Contracts, Beneficiary Ownership, Subnational, License
allocation, SOE (Erdenes), EITI +
2. Addressing major challenges in Economic Governance
-- Macroeconomic & debt management, lowering risks of default
or bailout: consensus on prudent fiscal, monetary & debt policies
-- Realism on mining prices, & policies of Future Heritage Fund
-- Reality of global mining foreign investments (& art of negotiation)
-- Economic diversification program: implementation & macro.
Seizing the Moment: Towards national consensus

53