Extractive Industries and Corruption: Investigating the Effectiveness of the EITI as a Scrutiny Mechanism

Anecdotal evidence and resource curse literature suggest that many countries have failed to exploit their natural resource wealth to finance the growth of their economies. Developing countries appear to be most affected. It is believed that poor governance, lack of transparency, poor accountability to their citizens, and corruption are the main culprits. In 2002, an international initiative sponsored by the UK government and backed by activist groups launched the extractive industries transparency initiative (EITI) with a view to mitigating the potential negative effects of resource wealth. The objective of this study is to investigate the effectiveness of this initiative that has gained much traction over the past decade as a scrutiny mechanism that fosters corruption control. In particular, this paper addresses two key questions: First, what are the observable factors that lead a country to voluntarily join the EITI? Second, do members of the EITI show greater improvement in corruption control relative to non-members? Our results indicate that poor countries and countries perceived as corrupt are more likely to join the EITI to signal their commitment to greater transparency and to improve their investment climate. Furthermore, the results suggest that corruption scores have so far not improved as a result of EITI membership using the control of corruption index developed by the World Bank.