Resource curse

The resource curse, also known as the paradox of plenty, refers to the paradox that countries and regions with an abundance of natural resources, specifically point-source non-renewable resources like minerals and fuels, tend to have less economic growth and worse development outcomes than countries with fewer natural resources. This is hypothesized to happen for many different reasons, including a decline in the competitiveness of other economic sectors (caused by appreciation of the real exchange rate as resource revenues enter an economy, a phenomenon known as Dutch disease), volatility of revenues from the natural resource sector due to exposure to global commodity market swings, government mismanagement of resources, or weak, ineffectual, unstable or corrupt institutions (possibly due to the easily diverted actual or anticipated revenue stream from extractive activities). The resource curse may not be universal for all countries with an abundance of natural resources, but on average, economies with abundant natural resources have tended to grow more slowly than natural-resource-scarce economies.

Resource curse thesis

The idea that natural resources might be more an economic curse than a blessing began to emerge in the 1980s. The term resource curse thesis was first used by Richard Auty in 1993 to describe how countries rich in natural resources were unable to use that wealth to boost their economies and how, counter-intuitively, these countries had lower economic growth than countries without an abundance of natural resources. Numerous studies, including one by Jeffrey Sachs and Andrew Warner, have shown a link between natural resource abundance and poor economic growth. This disconnect between natural resource wealth and economic growth can be seen by looking at an example from the petroleum-producing countries. From 1965 to 1998, in the OPEC countries, gross national product per capita decreased on average by 1.3% per year, while in the rest of the developing world, it grew by an average of 2.2% per year. Djankov et al. argue that financial flows from foreign aid can provoke effects that are similar to the resource curse. Abundance of financial resources in absence of sufficient innovation effort in the corporate sector may also lead to the problem of "resource curse."

Economic effects

Dutch disease

Main article: Dutch disease

Dutch disease makes tradable sectors less competitive in world markets. Absent currency manipulation or a currency peg, appreciation of the currency can damage other sectors, leading to a compensating unfavorable balance of trade. As imports become cheaper, internal employment suffers and with it the skill infrastructure and manufacturing capabilities of the nation. This problem has historically influenced the domestic economics of large empires including Rome during its transition from a Republic, and England during the height of its colonial empire. To compensate for the loss of local employment opportunities, government resources are used to artificially create employment. The increasing national revenue will often also result in higher government spending on health, welfare, military, and public infrastructure, and if this is done corruptly or inefficiently it can be a burden on the economy. (If it is done efficiently this can boost economic competitiveness - effectively acting as a wage subsidy). While the decrease in the sectors exposed to international competition and consequently even greater dependence on natural resource revenue leaves the economy vulnerable to price changes in the natural resource, this can be managed by an active and effective use of hedge instruments such as forwards, futures, options and swaps, however if it is managed inefficiently or corruptly this can lead to disastrous results. Also, since productivity generally increases faster in the manufacturing sector, the economy will lose out on some of those productivity gains. Dutch Disease first became apparent after the Dutch discovered a massive natural gas field in Groningen in 1959. The Netherlands sought to tap this resource in an attempt to export the gas for profit. However, when the gas began to flow out of the country so too did its ability to compete against other countries' exports. With the Netherlands' focus primarily on the new gas exports, the Dutch currency grew at a very quick rate which harmed the country's ability to export other products. With the growing gas market and the shrinking export economy, the Netherlands began to experience a recession. This process has been witnessed in multiple countries around the world including but not limited to Venezuela (oil), Angola (diamonds, oil), the Democratic Republic of the Congo (diamonds), and various other nations. All of these resources are considered "resource-cursed".

The Dutch disease is contrasted by the Norwegian paradox.

Revenue volatility

Prices for some natural resources are subject to wide fluctuation: for example crude oil prices rose from around $3 per barrel to $12/bbl in 1974 following the 1973 oil crisis and fell from $27/bbl to below $10/bbl during the 1986 glut. In the decade from 1998 to 2008, it rose from $10/bbl to $145/bbl, before falling by more than half to $60/bbl over a few months. When government revenues are dominated by inflows from natural resources (for example, 99.3% of Angola's exports came from just oil and diamonds in 2005), this volatility can play havoc with government planning and debt service. Abrupt changes in economic realities that result from this often provoke widespread breaking of contracts or curtailment of social programs, eroding the rule of law and popular support. Responsible use of financial hedges can mitigate this risk to some extent

Susceptibility to this volatility can be increased where governments chose to borrow heavily in foreign currency. Real exchange rate increases, through capital inflows or the "Dutch disease" can make this appear an attractive option by lowering the cost interest payments on the foreign debt, and they may be considered more creditworthy due to the existence of natural resources. If the resource prices fall, however, their capacity to meet debt repayments will be reduced, and as an likely additional consequence is a fall in the real exchange rate, it may increase the government's debt burden even as their income for making repayments falls. For example, many oil-rich countries like Nigeria and Venezuela saw rapid expansions of their debt burdens during the 1970s oil boom; however, when oil prices fell in the 1980s, bankers stopped lending to them and many of them fell into arrears, triggering penalty interest charges that made their debts grow even more.

Enclave effects

Economic diversification may be neglected by authorities or delayed in the light of the temporary high profitability of the limited natural resources. The attempts at diversification that do occur are often grand public works projects which may be misguided or mismanaged. However, even if the authorities try to diversify the economy, this is made difficult because the resource extraction is vastly more lucrative and out-competes other industries. Successful natural-resource-exporting countries often become more dependent on extractive industries over time. The abundance of revenue from natural resources discourages long-term investment in infrastructure which would support a more diverse economy, increasing the negative impact of sudden resource-price drops. While the resource sectors tend to provide large financial revenues, they often provide few jobs, and tend to operate as enclaves with few forward and backward connections to the rest of the economy.

Human resources

In many poor countries, Natural Resource industries tend to pay far higher salaries than what would be available elsewhere in the economy. This tends to attract the best talent from both private and government sectors, damaging these sectors by depriving them of their best skilled personnel. Another possible effect of the resource curse is the crowding out of human capital; countries that rely on natural resource exports may tend to neglect education because they see no immediate need for it. Resource-poor economies like Singapore, Taiwan or South Korea, by contrast, spent enormous efforts on education, and this contributed in part to their economic success (see East Asian Tigers). Other researchers, however, dispute this conclusion; they argue that natural resources generate easily taxable rents that more often than not result in increased spending on education.

Political effects

Natural resources are a source of economic rent which can generate large revenues for those controlling them even in the absence of political stability and wider economic growth. Their existence is a potential source of conflict between factions fighting for a share of the revenue, which may take the form of armed separatist conflicts in regions where the resources are produced or internal conflict between different government ministries or departments for access to budgetary allocations. This tends to erode governments' abilities to function effectively.

Even when politically stable, countries whose economies are dominated by resource extraction industries tend to be more repressive, corrupt and badly managed. Rentier states deriving substantial revenues from control over resource extraction have comparatively little incentive to promote wider economic participation and growth to improve tax revenues, and may find it easier to maintain authority through allocating resources to favoured constituents.

Armed conflict

According to one academic study, a country that is otherwise typical but has primary commodity exports around 5% of GDP has a 6% risk of conflict, but when exports are 25% of GDP the chance of conflict rises to 33%.

There are several factors behind the relationship between natural resources and armed conflicts. Other resource curse effects may increase the vulnerability of countries to conflicts by undermining the quality of governance and economic performance, (the 'resource curse' argument). Secondly, conflicts can occur over the control and exploitation of resources and the allocation of their revenues (the 'resource war' argument). Thirdly, access to resource revenues by belligerents can prolong conflicts (the 'conflict resource' argument). One study finds the mere discovery (as opposed to just the exploitation) of petroleum resources increases the risk of conflict, as oil revenues have the potential to alter the balance of power between regimes and their opponents, rendering bargains in the present obsolete in the future.

Jeff Colgan observed that oil-rich states have a propensity to instigate international conflicts as well as to be the targets of them, which he referred to as "petro-aggression". Arguable examples include Iraq’s invasion of Iran and Kuwait; Libya’s repeated incursions into Chad in the 1970s and 1980s; Iran’s long-standing suspicion of Western powers; USA's relations with Iraq and Iran. It is not clear whether the pattern of petro-aggression found in oil-rich countries also applies to other natural resources besides oil.

The emergence of the Sicilian Mafia has been attributed to the resource curse. Early Mafia activity is strongly linked to Sicilian municipalities abundant in sulphur, Sicily's most valuable export commodity.

One study suggests that the rise in mineral prices over the period 1997-2010 contributed to up to 21 percent of the average country-level violence in Africa.

Rentier states

See also: Rentier state

A resource-rich country's government and elites may adopt a dismissive or even hostile attitude towards the general population because they do not rely on the general public for tax revenues. In many economies that are not resource-dependent, governments tax citizens, who demand efficient and responsive government in return. This bargain establishes a political relationship between rulers and subjects. In countries whose economies are dominated by natural resources, however, rulers don't need to tax their citizens because they have a guaranteed source of income from natural resources. Because the country's citizens aren't being taxed, they have less incentive to be watchful with how government spends its money. In addition, those benefiting from mineral resource wealth may perceive an effective and watchful civil service and civil society as a threat to the benefits that they enjoy, and they may take steps to thwart them. As a result, citizens are often poorly served by their rulers, and if the citizens complain, money from the natural resources enables governments to pay for armed forces to keep the citizens in check. It has been argued rises and falls in the price of petroleum correlate with rises and falls in the implementation of human rights in major oil-producing countries.

Corrupt members of national governments may collude with resource extraction companies to override their own laws and ignore objections made by indigenous inhabitants. The United States Senate Foreign Relations Committee report entitled "Petroleum and Poverty Paradox" states that "too often, oil money that should go to a nation’s poor ends up in the pockets of the rich, or it may be squandered on grand palaces and massive showcase projects instead of being invested productively".

Research shows that oil wealth lowers levels of democracy and strengthens autocratic rule.

The Center for Global Development argues governance in resource rich states would be improved by the government making universal, transparent, and regular payments of oil revenues to citizens, and then attempting to reclaim it through the tax system, which they argue will fuel public demand for the government to be transparent and accountable in its management of natural resource revenues and in the delivery of public services.

One study finds that "oil producing states dependent on exports to the USA exhibit lower human rights performance than those exporting to China". The authors argue that this stems from the fact that US relationships with oil producers were formed decades ago, before human rights became part of its foreign policy agenda.

Gender inequality

Research links gender inequality in the Middle East to resource wealth. A study on the US finds similar results: resource wealth leads to lower levels of female labor force participation, lower turnout and less seats held by women in legislatures.

International cooperation

Research finds that the more that states depend on oil exports, the less cooperative they become: they grow less likely to join intergovernmental organizations, to accept the compulsory jurisdiction of international judicial bodies, and to agree to binding arbitration for investment disputes.

Criticisms

A 2008 study argues that the curse vanishes when looking not at the relative importance of resource exports in the economy but rather at a different measure: the relative abundance of natural resources in the ground. Using that variable to compare countries, it reports that resource wealth in the ground correlates with slightly higher economic growth and slightly fewer armed conflicts. That a high dependency on resource exports correlates with bad policies and effects is not caused by the large degree of resource exportation. The causation goes in the opposite direction: conflicts and bad policies created the heavy dependence on exports of natural resources. When a country's chaos and economic policies scare off foreign investors and send local entrepreneurs abroad to look for better opportunities, the economy becomes skewed. Factories may close and businesses may flee, but petroleum and precious metals remain for the taking. Resource extraction becomes the "default sector" that still functions after other industries have come to a halt.

A 2011 article that examines the long-term relationship between natural resource reliance and regime type across the world from 1800 to 2006 demonstrates that increases in natural resource reliance do not induce authoritarianism. With a focus on alleviating the methodological biases of earlier studies, the authors find evidence which suggests that increasing reliance on natural resources promotes democratization, the opposite of what the Resource curse theory suggests. The researchers provide qualitative evidence for this fact across several countries both here, and in another article; as well as evidence that there is no relationship between resource reliance and authoritarianism in Latin America. The main methodological bias of earlier studies, the authors claim, is the assumption of random effects: "Numerous sources of bias may be driving the results [of earlier studies on the resource curse], the most serious of which is omitted variable bias induced by unobserved country-specific and time-invariant heterogeneity." In other words, this means that countries might have specific, enduring traits that gets left out of the model, which could increase the explanation power of the argument. The authors claim that the chances of this happening is larger when assuming random effects, an assumption that does not allow for what the authors call "unobserved country-specific heterogeneity".

A 2011 study argues that previous assumptions that oil abundance is a curse were based on methodologies which failed to take into account cross-country differences and dependencies arising from global shocks, such as changes in technology and the price of oil. The researchers studied data from the World Bank over the period 1980 to 2006 for 53 countries, covering 85% of world GDP and 81% of world proven oil reserves. They found that oil abundance positively affected both short-term growth and long-term income levels. In a companion paper, using data on 118 countries over the period 1970-2007, they show that it is the volatility in commodity prices, rather than abundance per se, that drives the resource curse paradox.

See also

• High-level equilibrium trap, esp. subsections The high-level equilibrium trap and Contrast with Britain
• Passive income
  • Rent seeking
• Political corruption
  • Bribery
• Public choice theory
• Freight equalization policy in India

External links

• Oxford economist Paul Collier shows an alternative to plunder resource-rich countries in the magazine D+C Development and Cooperation
• Brunnschweiler, C. N.; Bulte, E. H. Linking Natural Resources to Slow Growth and More Conflict. // Science, 5/2/2008, Vol. 320 Issue 5876, p616-617, 2p
• Dunning, Thad. 2008. Crude Democracy: Natural Resource Wealth and Political Regimes (Cambridge Studies in Comparative Politics)
• Conference Documentation: Transforming Authoritarian Rentier Economies and Protectorates
• Institutions and the Resource Curse, by Halvor Mehlum, Karl Moene and Ragnar Torvik, The Economic Journal 2006
• Curing the Resource Curse by Saleem H. Ali
• Alayli, M. A. (2005). Resource Rich Countries and Weak Institutions: The Resource Curse Effect
• Piram, K. "Impact of Oil on Ideologies: Islamism, Nationalism and Socialism in the Middle East and North Africa". Centre Thucydide, 2010 (in French)