RESOURCE DEVELOPMENT: LAW, INSTITUTIONS, AND WHAT LIES BENEATH

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development and Investment
(Apr 2009)
CHAPTER 1A
RESOURCE DEVELOPMENT: LAW, INSTITUTIONS, AND WHAT LIES BENEATH
Elizabeth Bastida ^*
Centre for Energy
Petroleum and Mineral Law and Policy
University of Dundee
Scotland

Elizabeth Bastida is a qualified lawyer in Argentina (Specialisation in Natural Resources Law, University of Buenos Aires (cum laude); LL.M in Resources Law and Policy (CEPMLP, Dundee; with distinction), Ph.D (CEPMLP/Dundee) Elizabeth Bastida is a part-time Lecturer and the Mining Programme Director at the Centre for Energy, Petroleum and Mineral Law & Policy, University of Dundee. Elizabeth is also involved in a few international initiatives relevant to the mining sector and works as a consultant to various governmental, intergovernmental, non-governmental organisations and corporate institutions, as well as companies. Her work and research interests revolve around the linkage between extractive industries and sustainable development, and the interface between international investment, environmental law and human rights, and law and development. She started her research career as a fellow at the Institute of Social and Legal Sciences `Ambrosio Gioja', Law Faculty, University of Buenos Aires, and practised in law firms, including Hope, Duggan & Silva in Buenos Aires, with responsibilities in the Mineral and Environmental Law section.

Session on Resource Development: The Key Role of Law and Institutions

RMMLF/IBA Conference - Buenos Aires, 20 April 2009

Recent years have seen controversy over the impacts of resource exploitation on development. Some have suggested that good institutions, including legal institutions, are key to ensuring that the overall developmental impact of resources exploitation on a country's economy and society is positive. Critics of this proposition have stressed that good institutions need to be firmly embedded in the particular contexts of different societies where they operate, to ensure their legitimacy and ultimately, their effectiveness.

This session will start with a brief review of the status of this debate. It then discusses how characteristics and evolving trends in the legal and institutional framework have been analysed, focusing on the oil and gas sector in Argentina and on the mining sector in Peru.

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Working paper - Comments are very welcome

1) Introduction

From a historical perspective mining has often been considered as an activity that contributed crucially to economic development. The special economic position of mining has found legal expression in established principles of public interest and precedence accorded to mining activities over other forms of land use.

However, the long-held belief that mining creates wealth per se has been under intense scrutiny in recent years. Proponents of the "resource curse" have suggested an inverse correlation between extractive industries, including mining, and economic, political and social outcomes. They have argued that mineral-endowed countries have experienced less economic growth than countries with comparatively little mineral resources.¹

This proposition has not remained undisputed. Some have suggested that mineral resource endowment is not the problem, but that a lack of good institutions undermines positive developmental outcomes.²Good institutions have been found crucial to ensuring that the overall developmental impact of resources exploitation on a country's economy and society is positive. Not least, this explanation has fit nicely with the "good governance" agenda that has dominated development policy circles since the late 1990s.

There is an ongoing debate on the role of law and legal institutions for development, but this debate has not discussed the challenges it poses for resource development.³ This working paper seeks to do this by asking two questions: First, how has the resources and development debate evolved? And second, to what extent has that debate led to legislative and other changes of a legal nature?

The working paper sketches out in broad terms some of the theoretical strands that have contributed to reviewing the role of law and legal institutions in resource development. The intention of this draft paper is to invite broader discussion with the objective to advance understanding of debates, trends and likely directions in the legal and regulatory regimes for the resources sector in countries in Latin America - as discussed in this Conference. We appreciate comments.

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2) The 1990s: Role of Law & Institutions in Supporting Markets

From the late 1980s and over the 1990s, the dominant proposition was that foreign investment in the resource industries would play a vital role in helping countries overcome economic crises by generating tax revenues and foreign exchange that would, in turn, contribute to economic growth.⁴ The proposition assumed that the potential benefits would automatically trickle down to benefit society more broadly.

The Washington Consensus incorporated this proposition.⁵ It assigned private investment a leading role and stressed that this would require a well-functioning legal system to forge a climate of stability and predictability which would lead to increased business activity and increased foreign investment.⁶

Not least, theoretical claims put forth by New Institutional Economists provided the intellectual underpinnings of this view. In contrast to neoclassical economists, proponents argued that legal rules and institutions can strongly influence economic activities because they define the rules of the game and structure human interaction.⁷ The positive impact on economic growth arises because efficient legal systems reduce business and political uncertainty and reduce transaction costs. Law contributes to well-functioning markets by guaranteeing property rights, enabling contract enforcement, optimising regulation and providing protection against arbitrary government power. These characteristics have been considered central to the "rule of law".

Traditionally, the rule of law has meant the primacy of law over the exercise of discretionary government powers, placing emphasis on form, procedure and process. The International Financial Institutions (IFIs) championed a concept of the rule of law in its development assistance projects that stressed the creation of markets.⁸ Interpreted as a core component of "good governance", proponents stressed enhancing "political accountability, participation, an effective legal system, transparency and flows of information between governments and their citizens".⁹

Salacuse has noted that in a market-led model, law has become a set of rules within which individuals and entities conduct their economic and social activities according to their individual interests; law allocates resources and ensures the rules of the game, with a pre-eminent role for private law.¹⁰ As regulation is seen as placing obstacles to economic activities, deregulation or the "elimination of screening and approval requirements involving protracted bureaucratic procedures and subjective judgement", becomes a key objective of legal reform.¹¹ The thrust of the link between law and investment lies in two concepts that are instrumental to the investment decision: risk and return.¹²

In the mining sector, a massive reform of the legal and institutional regimes for the sector took place, with about 120 countries reforming their legal regimes for mining in the period 1985-2002.¹³ The new generation of mineral laws and agreements was featured by the shrinking of the need and scope for "negotiation" between the State and private, often foreign, investors. The result was a move towards reliance on general, standardised frameworks, aimed at providing competitive conditions to private investment. Whenever agreements were in place, they were used to strengthen investment protection, particularly by stabilising the fiscal terms applicable -but also environmental and general regulatory terms, as seen in a few African countries-.¹⁴ This process went along with emerging environmental regulation and occurred in a new democratic political context in developing countries.

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3) Extractive Industries & Development: The Role of Institutions in Promoting Development

The reform process was indeed successful. In global terms the friendly environment to private investment had a dramatic impact on the industry's structure and geographical distribution. Mining companies found themselves with a tremendous expansion of possible countries in which to invest, including new frontiers that had been previously closed. State-owned companies were restructured and privatised and, in contrast to developments in the petroleum industry, very few remained. The "new geographies of mining investment" evidenced a relative shift to developing countries during boom periods, coincidental with overall rising investment flows.¹⁵ Latin America achieved the greatest share of exploration, signalling an impressive growth of mining investment.

As mining investment materialised and interacted with local communities, the natural environment and economies, there was a growing sense of disenchantment on the benefits that mining purports to bring about. This coincided with a growing body of literature on the "resource curse" thesis, which propounds that resource-rich countries may fail to benefit from their endowment and actually under-perform less well-endowed countries.¹⁶

The thesis has been challenged with the recognition that some resource-rich countries have performed relatively well (as Botswana, Chile, Indonesia, Malaysia, the United Arab Emirates and mineral-rich OECD countries). Building on the observation that poor development outcomes in resource rich economies should not be taken as automatic, it has been suggested that good institutions could provide a cure to the resource curse.¹⁷

Key studies...