Trends in Multinational Corporations and the DRC Violent Economy

Introduction

After the Congo second war (1998-2001), the country has thereafter been recovering from a series of conflicts that broke out in the 1990s. This long period had several effects on the economy and it led to a social slump. According to KPMG, (2014, p. 4) the Congo is slowly recovering from decades of decline caused by systemic corruption since independence in 1960 and the conflict that began in May 1997. These factors have dramatically reduced the national output and the government revenue; it has increased external debt and resulted in the deaths of more than 5 million people from violence, famine, and diseases.

In fact, these experiences influenced the collapsed economic sector. More and more, the government and other existing international organizations are working on normalizing the economy including restructuring the chain of investments by targeting specific economic actors and sectors.

Since the country is dependent on natural resources, the restructuration targets specifically companies working in the mining sectors. The main focus is on how to integrate the existing mechanisms which govern the mining companies’ behavior such as their linkage to the corrupted economic sound of the country. It is from these factors that various authors conclude that the causes of the conflict are directly linked to the natural resources curse. Beyond of this lays a controversial debate on the contribution of the mining sectors in the Congolese development.

This paper critically assesses the positive as well as the negative role of conflict finances downplayed by some extractives industries in the socioeconomic development of Congo.

In the next pages, we will present the Democratic Republic of Congo (DRC) country profile, the role that multinational corporations can play or are playing in the socio-economic development. We will present some “rogue” mining companies and “responsible” companies.

1.      Quick Outlook of the Congolese Economy

DRC is a low income country, ranging 186 out 187 in the Human Development Indicator (2013). She has a population size of around 68 million and covers an area of 2. 344. 858 km2 with a GNI per capita of US$160. In 2012 the per capita income was rated around US$220. DRC remains among the most potential rich countries and she is a goop supplier for precious metal for the global market. The major exports are crude oil, diamonds, cobalt, copper, gold, coffee, tobacco, sugar, and wood products. It imports maize, wheat, food stuffs, transport equipment, and fuel (FAO, 2012). According to the World Bank (2014), “DRC has the potential to be one of the richest countries on the African continent and a driver for the African economic growth with 1,100 minerals and precious metals”.

Since 2010, the Congolese economy has performed well with an amazing economic growth of 8.5% in 2013. It is ranked the 4th country after Sierra Leone, Chad, and Ivory Coast in the economic performance (Africa Outlook, 2014). This result is due to the normalization within the mining sectors, the implementation of prudent fiscal and monetary policies, and the investment in infrastructure. Robust extractive industries have played an important role in this economic performance and the terms of trade of have been favorable to DRC due to stable trends in the commodity prices.

However, the Congolese financial system is shallow and underdeveloped (IMF Country Report No. 14/315, 2014) and it has contributed to the non-performance of the country in the business climate. The Business Climate Index 2014 ranked the Congolese environment 183 out of 189. This factor has a negative impact of attracting external investors.

The Congolese political economy is “a violent economy” surrounded by a history of wars. The presence of several actors in the conflict trade including the conflict entrepreneurs (predatory elites – looters, organized criminals, military manager, and political entrepreneurs), the conflict opportunists, and conflicts dependents cannot to sustain the stability of the Congolese economy.

In the political context, DRC is a fragile country due to weak institutions and the tense security situation in the eastern provinces. However, peacebuilding and economic recovery efforts are being carried out. As noted by the HDI (2014), the poverty rate is higher even though it fell from 71% in 2005 to 63% in 2012. Despite the eastern Congo crisis, DRC is a reconciled society expressed by the mutual acceptance of the different ethnic groups.

Despite the nature of its violent economy, DRC receives several investors, specifically in the mining sector. Some of these investors are working in the conflicting zones controlled by rebel groups and others in the zones under the state control. In the opinion of majority of Congolese, most of the multinational corporations working in the conflict zones sponsor the rebel groups in order to create a scenario without the control of the government where they can freely make profit from the resources. The next sections will provide a critical analysis of the role of multinational corporations, addressing the case of DRC.

2.      Multinational Corporations (MNCs)

Multinational corporations are important international agents of the global economy. They contribute to national revenue through foreign direct investment or social services (cf. Todaro& Smith, 2012, pp. 569). In the context of the DRC, extractive industries have positively contributed to the economic performance of DRC from 2012-2014.

As always, the presence of mining companies can be the source of development (Peace) or underdevelopment (conflict). This is in relation to the way they fulfil their social responsibility and create a safe environment for the benefit of the local population. In many cases, the presence of extractives industries in war torn countries and their linkage to criminal networks operating in conflicting zones where primary commodities are found becomes a bone of contention. Knowingly or unknowingly, they contribute in exacerbating the armed conflicts which have negative consequences on the livelihood of the population.

According to Zandvliet (2005) “research has shown that the resources that attract [these] multinational companies, whether oil, gold, diamonds, or timber, are the same resources over which many of today’s conflicts are fought” (p. 185). Therefore, extractive industries find themselves guests to a conflict they did not want to be part of it.

The political economy of violence inside a particular state considers the MNCs as actors of violent economies (Todaro& Smith, 2012, pp. 684-694). However there is need to avoid a journalistic attitude which sees them as primary actors of underdevelopment (conflict). One needs not forget that companies do not have legal obligations to invest in specific countries or regions (Tripathi, 2008, p. 86), as it is more of a give and take.

In the developing countries especially those that are emerging from conflict or are in a conflict situation, new investments by MNCS encounter with a history of political violence. Often, but not always, it is established that their arrival worsens the conflict or plays a vital role in the duration the conflict.  In the same way, according to Bray (2003), “blessing mineral and petroleum resources are all too often seen as a curse to the countries that possess them and international companies associated with these industries are tainted accordingly” (p. 288).

  1. 3.      MNCs in the Peacebuilding Process

Furthermore, several times, we overlook the role of companies in peacebuilding. According to Tripathi, 2008, p. 85) “companies (MNCs) are not peacebuilding institutions even though they profit from peaceful conditions and their conduct can contribute to peacebuilding”. This confusion of considering them as primary actors of peacebuilding initiative project may end up at the heart of the social friction.

It is crucial that MNCs participate in peace-building efforts as complementary agents to state’s capabilities in order to transform the natural assets (land, water, crops, forests, animals and mineral resources) into developmental opportunities (Jackson, 2005, p. 155). The transformation of natural assets may offer job opportunities and change the standard of living.  This is explained by the fact that MNCs contribute to the economic growth of the country which has a positive impact on income distribution. In the view of Collier and Hoeffler (2000, p. 22), low income, slow growth, and primary commodity dependence make a country prone to civil war. This is to say that the multinational corporations’ role is still a determining factor in increasing state capacity to respond to the needs of the population.

The World Bank reported in 2013 that the Congolese economic performance over the last 4 years is mainly due to the extractive industries investment. Their higher contribution has an effect on reducing the level of poverty. Therefore, the high risk of conflict due to poverty or slow economic growth has also decreased at the same time. The reduction of the level of poverty means increasing job opportunities which in turn reduce the level of criminality that has brought a higher level of unemployed young people in the Congolese street.

One question we should fairly ask is “what would be the Congolese economy without the know-how or physical assets (productive infrastructure, roads, airports, office space, warehousing, factories, machinery, fuel, and energy) provided by multinational corporations to exploit and transform the available natural resources into sources of income? Cooperation with external investors creates the possibility for the transfer of new technologies which increase productivity and income (Perkins, Radelet, & Lindauer 2006).

Point in case is the bilateral protocol signed between China and DRC. The deal of the cooperation implied that in exchange for access to 10.6 million tons of copper and 600,000 tons of cobalt in the Katanga region, which represent $ 40 billion (Global Witness, March, 2011, p.4), China would invest US$ 9 billion in national-wide construction of vital infrastructure in the country. The total revenue from the copper and cobalt mines would come to at least $40 billion. China state companies would build 3500 km of roads and 3500 km of railways, 31 hospitals of 150 beds each and 145 dispensaries, and modernization of mining infrastructure (Global Witness, 2011, p.4).

From a positive perspective as that of Perkins, et al. (2006), trade provides low and middle-income nations with significant opportunity- ties to improve welfare, accelerate growth and development like in the Democratic Republic of Congo. Mostly, foreign investors offer more choices in quality, price, and exporting firms have generated rapid job growth for a large number of low-skilled workers which can have a strong impact on poverty reduction (Perkins, et al. 2006, p. 710).

In my view, the resentment vis-à-vis des MNCS is based on the duties and the nature of the contract those different multinational corporations signed with the Congolese government and their implementation on the ground.

4.      Corporate Social Responsibility (CSR)

CSR concerns with the way enterprises factor social, economic and environmental preoccupation in their investment activities. It remains a voluntary process. In most of the cases, there are guidelines which urge MNCs to incorporate in their investment strategic plan the social, environmental and economic benefits of their consumers and providers. The principal objectives of the CSR are to contribute to a sustainable development of the host country, to respond to the expectations of the different parties concerned by the contract, to respect the laws of the host country in accordance with the international standards, and to integrate those laws in those the organization (Shankleman, 2006).

In the mining and labour code of the DRC, CSR is among the binding elements that all MNCs are obliged to respect (art. 1, 47, 83 and 8, art. 212 and art. 55 and 177 respectively). However, the same mining codes are not explicit on what should be the CSR requirements.

The implementation of these principles encounters challenges from the government side as well as from the side of extractive industries. For example, in the eastern Congo, some extractives industries do not consider community members’ land rights, health, environment, livelihoods, and cultural practices in their project action (Drangnis, 2014, p. 8). This is due to the non-participation of local communities during the negotiation and consultations phase (p. 44). From this factor, it will not be correct to only blame the MNCs but the tardiness or the good-will of the Congolese government remains questionable. Rarely, local communities benefit from mining operations. In most cases where some of the mining corporations are operating, the local population experiences a chronic poverty.

Finally, community resettlement during the exploration process is one of the major challenges. Article 452 of the Congolese constitution requires companies to provide compensation in the event of relocation of the populations. The relocation process includes supporting the social impact and the fulfillment of social, economic, and civil rights of the communities that will be affected by the company operations. However, in most cases, the compensation does not translate equally what local communities have lost by leaving their proprieties.  This has been in many cases the source of violent conflicts between the local population and the industries.

Rights and Accountability in Development (RAID) published a research survey in September 2009 which outlined the major challenges in the implementation and monitoring of the mining contracts signed between the Congolese government and the Chinese Companies. For RAID (2009, pp. vi-vii ), despite the different existing legal framework, Chinese companies have little or no understanding of not only the international labour standards but also of Congolese law specifically, the Labour and Mining Code. They fail to respect environmental standards, labour conditions (lack of protective clothing, training and procedures, illegal mining with the use of child labour – some as young as 10 years old), corruption, inefficiency, undermining the work of the Congolese police, labour inspectors and the courts.

For the sake of a critical analysis, I will discuss to what extent extractives industries has played a role in the deadliest violence in the eastern Congo and provide a case where some of these extractive industries are playing an important role in building the Congolese human capital in the same post-conflicting zone.

5.      Case Studies
5.1.            Rogue or Curse Extractives Industries  

A common historical grievance against MNCs, specifically extractives industries in Congo, is their direct or indirect contribution to the different conflicts that the country has experienced since 1994 to date. According to Collier ( 2007, p. 21) “there have been several cases where international companies have advanced massive amounts of funding to rebel movements in return for resource concessions in the event of rebel victory”. The victory of former President Kabila in the first Congo War (1996-1997) was partially fixed by massive amounts advanced from extractives companies to facilitate deals with resource extraction. He signed almost $500 million worth of deals with the mining companies in Lubumbashi by the time he seized power (Collier, 2007)

For Africa Progress Panel (2103, p. 56), though endowed with some of the world’s richest mineral resources, the DRC appears to be losing out because state companies are systematically undervaluing assets. Concessions have been sold on terms that appear to generate large profits for foreign investors, most of them registered in offshore centers, with commensurate losses for public finance. This is happening because of the corruption in the Congolese mining industry and the privatization of the mining sector by political elites.

Extractive industries have been accused of fuelling the conflict in the eastern Congo. The United Nations Security Reports UNSC (S/2012/843) pointed out that companies like Huaying and TTT/CMM, SOCAGRIMINES, CLEPAD Anvil Mining and Danzer Group and others operate illegally in the region and have direct links with armed rebel groups and neighbouring countries. They use the same armed groups to escape from government control (Business & Human Rights Resource, 2014). They have collaborated with rebel groups, neighbouring countries like Rwanda, and Uganda. Earlier this year, the United Nations Security Resolution S/2014/42 showed the amounts of Tantalum and Tungsten exports from Rwanda which confirmed that there are still companies which are illegally dealing with minerals smuggled out of Congo into Rwanda.

This company’s operations are against the Bench marks for measuring business performance which assert that “what is required for a company working in natural resources producing area is the strict application of high standards for the respect of human rights, environmental protection, and respectful treatment of local populations”. A major consequence for such behaviour is that there is loss in the state’s revenues and taxes. Furthermore, these extractive industries do not respect labour conditions as they engage in child labor and the level of poverty among employees is high despite being in employment.

This observation should be accompanied by some remarks. It is not entirely confirmed that the mining companies are the only ones fuelling the eastern Congo conflict, though some are involved in the conflict trade while some are reducing towards normalisation. Enough Project (2014) published a report depicting that natural resources have fuelled violent armed conflict and invited corporate misbehaviour for decades in eastern Democratic Republic of the Congo (“Congo”). However, we should recognize the fact that there are some changes. While much of the minerals sector still lacks adequate security and armed groups remain active, conditions in some of the areas are improving. The recent progress in Congo and in the region towards a conflict-free mineral business could be perceived as a unique opportunity for investors and will create a more sustainable environment (Enough Project, 2014, p. 5). A multi-stakeholder group has validated 112 mines in Congo as “conflict-free and 21 companies are now sourcing from 16 of them” (Enough Project, 2014).

For Ballentine and Nitzschke (2005), “natural resources predation and criminal economic activities can also have strong regional linkages with cross-border trading networks, regional kin and ethnic groups, and supportive neighboring regimes particularly where conflicts are embedded in regional formations” (p. 3). It is not only extractives industries which are involved according to UNSC (S/2010/596, 14), but a range of several actors: local provincial and national authorities both military and civilian. This implies that extractive industries are not a primary contributor to mineral conflicts in the Eastern Congo. However, they can profit from illegal situations to their benefit. The Congolese government should play its role of “police” by enforcing the existing laws to guide this vital sector.

5.2.            Positive Achievements of Extractive Industries: Banro

In the same areas where the role of extractive industries is controversial, we do find other extractive industries which responsibly invest in the eastern Congo. This section gives an overall picture of a “responsible” MNC in the mining sector.

Banro is a Canadian gold company which has exploitation activities in Twangiza, Namoya, Kamituga and Lugushwa (South Kivu and Maniema) since October 2004 (mining activities around 2011). The size of Twangiza-Namoya gold belt is 210 km long. It has two main branches: Banro Corporation (for Investment) and Banro Foundation (for Social Corporate Responsibility).

Banro Corporation deals with activities relating mostly to investment but also has a foundation to support local initiatives, builds the human capital and policy on environment for conflict prevention. The figures below provide with the way Banro combine investment and social responsibility.

Banro is involved in fostering alternative sustainable livelihood, investing in long-term community development in their areas of investment. Their 2014 report gives some interesting figures related to their areas of action including education, management of environment, developmental initiatives and protection of human rights. It is reported for example that, 3500 people profited from adult literacy and numeracy training, 7, 000 students are educated in schools built or rehabilitated by Banro Foundation and in each locality they have processed plant designs to reduce the effects of some chemical in the environment.

The involvement of Banro foundation on governance, conflict minerals and human rights has made Banro become a more reliable corporation. Their capability to respect the Congolese Mining Code, the Conflict Minerals and the Dodd-Franck- Act, World Gold Council Conflict-free gold standards, Extractives Industries Transparency Initiative is an added value to their investment.

Creating capacity-building jobs has also been the strength of Banro Corporation. As it is indicated by the figures below, Banro employed more Congolese than any other mining company investing in the Democratic Republic of Congo

6.      Challenges and Gaps

For Enough Project (2013, p. 10), investment in the minerals sector requires companies to attend to the core principles of peacebuilding: transparency, human rights, and environmental management. However, it is not easy in a volatile context where companies seek to gain rapidly the capital they have invested with a mentality that the situation may collapse anytime.

For the Africa Progress Panel (2013, p. 10), foreign investors can play a critical role in facilitating change by partnering with governments to strengthen transparency, supporting skills development, and by carefully assessing the social and environmental impacts of their operations; Banro have done much in this area.

The Congolese business climate is highly corrupted and that is why strengthening transparency in the mining sectors remains one of the challenges both on the side of the government and multinational corporations. Transparency is possible only if there is a clear definition of the terms of reference in the contracting procedures. In addition, the lack of resources for governance is the main challenge in the DRC mining sector. The Congolese government lacks the capacity to regulate and manage the use of natural resources and the redistribution of costs and revenues derived from these resources (Bonn International Center for Conversion, 2007).

In order to distinguish between the contributions of other parties in the mining sector, there is also a necessity to quantify the output of the local artisanal activities as a part of the national revenue. The UNSC S/2014/42, annexe 64 reported that in 2013, the Congolese government has lost approximately 418,355,329.50 (US from the artisanal gold production) and US$8,367.69 of taxes: 8,367,198.59 (US$). Often, artisanal activity fuels the eastern Congo conflict but surprisingly, all the blame goes to the big extractive industries.

The unsafe environment of doing business in the eastern Congo is among the main concerns of the mining companies. The security challenge weakens the government’s capability to monitor the extractive industries activities in the areas occupied by the rebel groups while MNCs easily cooperates with these groups. It appears that, the mining sector will work properly if the government manage to install its authority in the mining sectors that are occupied by the rebel groups so that mining companies will not request security from rebel groups in the region in return for concessions of any kind (UNSC(s/2010/596).

Conclusion

As any actors, MNCS are contributing actors to the national development of the host country in the sense that they offer employment to the populations and pay taxes that serve as revenues for the government to implement its national strategic plan. However, all these depend on the way the national norms are enforced to control those activities.

It should be clearly asserted that MNCs are not in charge of developing national economies but they remain key players in the global economy. We see them as contributing to the conflict in the eastern Congo; however the corrupted environment in the area suggests that extractives industries cannot do much if the legitimate authority is not willing to establish order in the same areas.

It is true that “the instabilities in zones of conflict present a conundrum because they are too risky for responsible investors, but offer greater rewards for other companies willing to accept risks” ( Tripathi, 2008) p. 83). This is not to say that they should contribute to violence rather that applies some ethic norms while investing. With the example of Banro which is struggling to operate on a volatile environment, other multinational corporations can make some efforts to respect the Congolese legal framework as well as international standards of investments in order to meet the expectations of the local population.

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Marius Mufuta, Political Economy of Civil War, March 26, 2015

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