Resource curse

The resource curse (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), 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).

Resource curse thesis

Ten years from now, twenty years from now, you will see: oil will bring us ruin … Oil is the Devil’s excrement.

—Venezuelan politician Juan Pablo Pérez Alfonzo, one of the founders of OPEC^[1]

The idea that natural resources might be more an economic curse than a blessing began to emerge in the 1980s. In this light, 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.^[2] Numerous studies, including one by Jeffrey Sachs and Andrew Warner, have shown a link between natural resource abundance and poor economic growth.^[3] This disconnect between natural resource wealth and economic growth can be seen by looking at an example from the petroleum-producing countries. From 1965–98, in the OPEC countries, gross national product per capita growth decreased on average by 1.3%, while in the rest of the developing world, per capita growth was on average 2.2%.^[4] Some argue that financial flows from foreign aid can provoke effects that are similar to the resource curse.^[5]

Negative effects and causes

Tug of war between people and government

The ambitions of the people and the government conflict, due to the large amount of resources and money a country's government amass for their own luxuries rather than for the people. Thus natural resources serve as a curse for the people, who then have a lower standard of living.

Conflict

Natural resources can, and often do, provoke conflicts within societies (Collier 2007), as different groups and factions fight for their share. Sometimes these emerge openly as separatist conflicts in regions where the resources are produced (such as in Angola's oil-rich Cabinda province) but often the conflicts occur in more hidden forms, such as fights between different government ministries or departments for access to budgetary allocations. This tends to erode governments' abilities to function effectively^{[citation needed]}. There are several main types of relationships between natural resources and armed conflicts. First, resource curse effects can undermine the quality of governance and economic performances,^[6] thereby increasing the vulnerability of countries to conflicts (the 'resource curse' argument). Second, conflicts can occur over the control and exploitation of resources and the allocation of their revenues (the 'resource war' argument). Third, access to resource revenues by belligerents can prolong conflicts (the 'conflict resource' argument).^[7] According to one academic study, a country that is otherwise typical but has primary commodity exports around 25% of GDP has a 33% risk of conflict, but when exports are 5% of GDP the chance of conflict drops to 6%.^[8][9]

International pressure

There is often international pressure on resource-rich countries of the Third World to avoid reinvesting resource revenues in social investment purposes, or even in developmental efforts towards economic diversification. It is alleged that this pressure comes from powerful states such as the United States and other leading western countries as well as pro-liberalization institutions such as the World Trade Organization and the International Monetary Fund.^{[citation needed]} In Venezuela, for example, Hugo Chavez has stated that an explicit goal of his is to rectify the mass amounts of poverty that have existed despite the country's rich amount of oil resources (allegedly due to revenue hoarding by corrupt elites). His aims to do this by means of social investment fueled by nationalized oil resources, have been met with sharp political and economic hostility by the United States. The mainstream position on Chavez among the business and political communities of the United States is that those levels of social investment and development are not the proper uses of oil revenues; rather, according to US observers, oil revenues should be reinvested in the national oil company.^[10] Furthermore, the US has criticized Chavez for the purging of previous oil executives (who he had singled out as corrupt) after their alleged sponsorship of a coup attempt against him; the US business community had enjoyed good relations with the purged officers of PDVSA and generally views the replacement officials (who are more amenable to social investment) as Marxist "cronies" of Chavez who are hostile to the market.^[11]

The use of nationalized resources under Chavez have held national economic "formation" as a macroeconomic goal, to the extent that oil revenues can provide for a growth of sectors related to energy, through technology transfer and the emphasis on indigenous refinery and petrochemical operation. As with earlier attempts by Fidel Castro to modernize Cuba's agribusiness by using nationalized sugar and tobacco revenues to import superior farming equipment, the United States has been very much opposed to this approach.^[12] This relates also to the issue of "lack of diversification" discussed below.

Taxation

See also: Rentier state

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.^[13] 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,^[14] and if the citizens complain, money from the natural resources enables governments to pay for armed forces to keep the citizens in check. Countries whose economies are dominated by resource extraction industries tend to be more repressive, corrupt and badly-managed.^[15]

Dutch disease

Main article: Dutch disease

Dutch disease is an economic phenomenon in which the revenues from natural resource exports damage a nation's productive economic sectors by causing an increase of the real exchange rate and wage increase. This makes tradable sectors, notably agriculture and manufacturing, less competitive in world markets. The increasing national revenue will often result in higher government spending (health, welfare, military) that increases the real exchange rate and raises wages. 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. 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 when the Dutch discovered a massive nature gas field in the north sea 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 resources.^[16][17]

Revenue volatility

Prices for some natural resources are subject to wide fluctuation; for example crude oil prices rose from around $10/barrel in 1998/1999 to over $140/barrel in 2008. When government revenues are dominated by inflows from natural resources (for example, oil and diamonds accounted for 99.3%^[18] of Angola's exports in 2005), this volatility can play havoc with government planning. Abrupt changes in economic realities that result from this often provoke widespread breaking of contracts, and this erodes the rule of law.

Excessive borrowing

Since governments expect more income in the future, they start accumulating debt^{[citation needed]}, even though they are receiving natural resource revenues as well. This is encouraged, since, if the real exchange rate increases, through capital inflows or the Dutch disease, this makes the interest payments on the debt cheaper. In addition, the country's natural resources act as collateral leading to more credit. However, if the natural resources' prices begin to fall, and if the real exchange rate falls, a government would have less money with which to pay a more expensive debt. 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.

Corruption

In resource-rich countries, it is often easier to maintain authority through allocating resources to favoured constituents than through growth-oriented economic policies and a level, well-regulated playing field. Huge flows of money from natural resources fuel this political corruption. The government has less need to build up the institutional infrastructure to regulate and tax a productive economy outside the resource sector, so the economy may remain undeveloped.^[19] The presence of offshore tax havens provide widespread opportunities for corrupt politicians to hide their wealth.

Many extractive operations are illegal and encouraged by corrupt multi-national corporations in collusion with national governments. Objections made by indigenous inhabitants are usually ignored. Ed Ayres of Worldwatch Institute reported on these collusive operations in many parts of the world.^[20]

In effort to combat resource revenue corruption, a recent report by the Center for Global Development advocates direct distribution of revenues. Under this proposal, a government would transfer some or all of the revenue from natural resource extraction to citizens in a universal, transparent, and regular payment. Having put this money in the hands of its citizens, the state would treat it like normal income and tax it accordingly—thus forcing the state to collect taxes and fueling public demand for the government to be transparent and accountable in its management of natural resource revenues and in the delivery of public services.^[21]

Lack of diversification and 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 industry. 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.^{[citation needed]} 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.^[22]

Human rights

It has also been argued that one can correlate rises and falls in the price of petroleum with rises and falls in the implementation of human rights in major oil-producing countries.^[23] Human rights throughout resource cursed countries are dismal or completely lacking. Most normally resource cursed countries are ruled by either Authoritarian or other types of highly repressive regimes. These regimes are kept in power by a select elite such as high ranking politicians and military leaders. As long as the existing government keeps these few happy they can rule without fear of consequence. This system is set up so that the common folk those most in need of the protection are left to fend for themselves. In places like the Democratic Republic of the Congo human life has almost no value and slave labor is common. Venezuela demonstrated the resource curse because of its abundance of oil. The country which saw the easy wealth of the oil did not need to expand into other markets due to comparative advantage. The comparative advantage states that if Venezuela can produce oil better than other exports then it should produce the oil. However since Venezuela's oil company is nationally owned it has been criticized as inefficient and backwards. The resource curse is also evident in Venezuela because of the enormous gap between the rich and the poor. In Venezuela all the profits go directly to the state and the Authoritarian government with little to none trickling down to the lower socioeconomic classes. The resource curse can cause a countries government to turn volatile towards their people because they do not need them for taxation.^[24] > The Democratic Republic of the Congo is perhaps one of the volatile places on the planet, suffering from disease, civil war, and the resource curse. The resource curse of the Congo takes the form of diamonds.^[25] While no true government exists each faction exploits the people they rule to harvest diamonds and other rare minerals. The DRC has a unique type of the resource curse because the added factor of its political instability. Instead of fueling a wealthy elite like many resource cursed countries the Congo's diamonds are used to fund the ongoing civil war.

Criticism

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.^[26][27]

A 2010 working paper 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. On the contrary, the authors find evidence that suggests that increasing reliance on natural resources promotes democratization.^[28] These researchers also provide qualitative evidence for this fact across several countries in another article;^[29] as well as evidence that there is no relationship between resource reliance and authoritarianism in Latin America.^[30]

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.^[31] 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.^[32][33]

See also

• Bribery
• Passive income
• Political corruption
• Rent seeking
• Public choice theory
• Strategic misrepresentation

References

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3. ^ Sachs, Jeffrey D; Warner, Andrew M (1995-02-02), NBER Working Paper 5398: Natural resource abundance and economic growth, http://ideas.repec.org/p/nbr/nberwo/5398.html, retrieved 2009-06-29 
4. ^ Gylfason, T (2001), "Natural resources, education, and economic development", European Economic Review (Elsevier) 45 (4-6): 847–59, http://www.hi.is/~gylfason/pdf/dp2594.pdf 
5. ^ Djankov, S; Montalvo, J G; Reynal-Querol, M (2008), "The curse of aid", Journal of Economic Growth (Springer) 13 (3): 169–94, http://www.econ.upf.edu/docs/papers/downloads/870.pdf 
6. ^ Norman, C. S.. "Rule of Law and the Resource Curse". Environmental and Resource Economics 43 (2): 183–207. doi:10.1007/s10640-008-9231-y. 
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19. ^ [1]^{[dead link]}
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24. ^ O'Neil, Patrick (2004). Essentials of Comparative Politics. New York London: Norton and Company, Inc. pp. 147. 
25. ^ O'Neil, Patrick (2004). Essentials of Comparative Politics. New York London: Norton and Company. pp. 253. 
26. ^ Brunnschweiler, C. N. & Bulte, E. H. (2008). "Linking Natural Resources to Slow Growth and More Conflict". Science 320 (5876): 616–617. doi:10.1126/science.1154539. 
27. ^ Tierney, John (2008-05-05). "Rethinking the Oil Curse". Tierneylab.blogs.nytimes.com. http://tierneylab.blogs.nytimes.com/2008/05/05/rethinking-the-oil-curse/. Retrieved 2009-06-29. 
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33. ^ Leong, Weishu & Mohaddes, Kamiar (2011). "Institutions and the Volatility Curse". Cambridge Working Papers in Economics 1145. http://www.econ.cam.ac.uk/dae/repec/cam/pdf/cwpe1145.pdf. 

Further reading

• Ali, Saleem H. (2009). Treasures of the Earth: Need, Greed and a Sustainable Future. New Haven: Yale University Press. ISBN 9780300141610. 
• Bulte, E. H.; Damania, R.; Deacon, R. T. (2005). "Resource intensity, institutions, and development". World Development 33 (7): 1029–1044. doi:10.1016/j.worlddev.2005.04.004. 
• Dauderstädt, Michael; Schildberg, Arne, eds (2006). Dead Ends of Transition. Rentier Economies and Protectorates. Frankfurt: Campus Verlag. ISBN 3593381540. 
• Hodges, Tony (2004). Angola: Anatomy of an Oil State. Oxford: James Currey. ISBN 0852558759. 
• Humphreys, Macartan; Sachs, Jeffrey D.; Stiglitz, Joseph E., eds (2007). Escaping the Resource Curse. New York: Columbia University Press. ISBN 9780231141963. 
• Kaldor, Mary; Karl, Terry Lynn; Said, Yahia, eds (2007). Oil Wars. London: Pluto Press. ISBN 9780745324791. 
• Karl, Terry Lynn (1997). The Paradox of Plenty. Berkeley: University of California Press. ISBN 0520071689. 
• Ross, M. L. (1999). "The political economy of the resource curse". World Politics 51 (2): 297–322. doi:10.1353/wp.1999.0004. 
• Ross, Michael (2006). "A Closer Look at Oil, Diamonds, and Civil War". Annual Review of Political Science 9: 265–300. doi:10.1146/annurev.polisci.9.081304.161338. 
• Sachs, J.; Warner, A. (2001). "The curse of natural resources". European Economic Review 45 (4–6): 827–838. doi:10.1016/S0014-2921(01)00125-8. 
• Shaxson, Nicholas (2007). Poisoned Wells: the Dirty Politics of African Oil. New York: Palgrave MacMillan. ISBN 1403971943. 
• Stevens, P. (2003). "Resource impact: curse or blessing? A literature survey". Journal of Energy Literature 9 (1): 3–42. 
• Wenar, Leif (2008). "Property Rights and the Resource Curse". Philosophy & Public Affairs 36 (1): 2–32. doi:10.1111/j.1088-4963.2008.00122.x. 

External links

• 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)