Resource Curse

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The "Resource Curse" (sometimes termed the "paradox of plenty") refers to the theory that natural resource wealth and a high degree of dependency on natural resources can sometimes paradoxically create negative development outcomes in producing countries, due to weakened governmental institutions, neglect of other key sectors of the economy, corruption, high income inequality and other factors.[1]

Contents

Evidence and Research

The idea that natural resources can result in poor development outcomes has been in play since the 1950s, when it was hotly contested by the ideological camps of the Left and Right. Empirical data began to accumulate to support the idea over time. In the 1970s Gobind Nankani, a vice-president at the World Bank, showed that a group of mineral exporting countries grew on average by 1.5 percent per year over the period 1960 to 1976, about half the growth in a control group of non resource-rich countries.[2] In 1988, a study commissioned by the World Bank examined the windfalls accruing to six oil-rich countries during the boom of the 1970s and concluded that those states had performed less well than other, resource-poor countries.[3]

At the end of the 1990s Jeffrey Sachs and Andrew Warner's publication "Natural Resource Abundance and Economic Growth" examined 97 countries over a period of 18 years (1971 - 1989) and found that states with a high abundance of natural resource exports had abnormally slow economic growth in general, relative to other countries. The study became the basis of a growing recognition of the need to address the problems that natural resource abundance can create in developing societies.[4]

Opponents of the Term

Some economists have resisted the term "resource curse" because they claim it sounds fatalistic.[5] Oxford professor Paul Collier suggests that the term poses the problem the wrong way round, since he estimates there are more natural resources in developed countries than in developing ones. The dominance of natural resource industries in some developing countries' economies is simply, he states, due to the fact that they have had few other options for economic development, which in turn is due to a whole host of political and social factors. Collier argues that for the world's "Bottom Billion" - the poorest billion people on the planet - a greater problem is rather that their natural resources have not been discovered or developed enough.[6]

Others have resisted the idea that the phenomenon is inevitable, arguing that any resource curse must be contingent. Paul Collier cites the case of Botswana, for example, which has experienced rapid growth since the discovery of diamonds.[7]

Attitudes of Major Institutions

International Institutions

The International Monetary Fund has published papers discussing how to address the resource curse in Nigeria[8] and Botswana.[9] For its part, the World Bank uses the term "resource curse"[10][11] while arguing that it is not inevitable and can be avoided by good governance.

Oil Companies

The attitude of private oil companies towards acceptance of the term varies, however in a 2004 speech Nick Butler, BP's Vice-President for Strategy and Policy Development, made the following comment in acknowledgment of the phenomenon: "The reality of the problems which have afflicted a number of different countries as a result of natural resource development is undeniable. I am convinced that there are things we can do to mitigate many of the problems but it would be quite wrong to start from a position of denial."[12]

On the other hand, in an advertisement from 2006, US major ExxonMobil rejected use of the term Resource Curse, but said it supported the Extractive Industries Transparency Initiative (EITI) process because it acknowledges that good governance is necessary to deliver benefits from oil production, and that transparency is a part of that. The advertisement made the point that "disparaging the resource itself is not the answer."[13]

Economic Symptoms

Dutch Disease

So-called "Dutch disease" is the effect on a country's economy when it earns a lot of revenues from exporting a natural resource. It was named after the period in the Netherlands when a decline in the manufacturing sector was witnessed during the 1960s following the discovery of a major natural gas field. The theory goes that oil exports result in large inflows of foreign currency, which in turn tends to lead to the appreciation of the local currency and makes exports from other sectors uncompetitive. Simultaneously the earning power of the oil sector draws in labor and capital, adversely affecting other sectors of the economy, whether they are export-oriented or not.[14]

Oil and Debt

Economists have long noted the link between oil revenues and higher fiscal spending. Overspending during a commodity boom, thanks to access to cheap credit in international capital matters, can lead to accumulation of high levels of debt, leading to high interest rate spreads during periods of lower natural resource prices. Some have attributed the "resource curse" in oil-rich countries to the "debt overhang" which occurred in the 1970s when these countries used commodities as collateral to take on excessive debt when oil prices were high. However a collapse in oil prices in the 1980s left these countries with no ability to service their debts.[15]

A 2005 study by the Institute for Public Policy Reform analysed data from 101 countries for the period 1991 to 2002 and concluded there was a statistical correlation between increased oil production and exports, and public debt in the producing country.[16] The case of Venezuela during the 1970s oil boom displays the symptoms detailed above, where President Carlos Andres Perez increased public spending dramatically, leading to high levels of debt and ensuing management problems through commodity price cycles.[17]

Political Symptoms

Weakening of Institutions

Many political scientists have outlined a "resource curse" which both makes rulers in a state less accountable, and state institutions weaker. They are less accountable because the presence of resource revenues means a state is not under the same pressure to raise taxes in order to provide welfare and public services (to a greater or lesser extent depending on the degree of their resource wealth). State institutions become weaker because they do not develop the same degree of discipline, through meritocracy and against measured goals and results. The most notable exponent of this theory has been Professor Terry Lynn Karl, who studied the cases of Venezuela, Nigeria, Algeria and Iran for her analysis.[18]

Conflict

Analysts of the resource curse point to many cases where natural resource wealth creates or exacerbates conflicts, either between states or within them. Notable cases include:

Avoiding the Resource Curse

Mechanisms and policies which have been proposed to avoid the "resource curse" include: simply leaving the oil in the ground (one of the more extreme proposed solutions that allows an economy and society time to adjust before inflows arrive, but opposed by the private sector); economic diversification (to develop other sources of value and reduce dependency on mineral exports); "revenue sterilisation" (to neutralise the impact of windfall revenues by resisting spending pressures); and stabilisation funds (set up to invest revenues outside the domestic economy and guard against fluctuating commodity prices).[20]

References

  1. "Exploring Oil Data", OpenOil, 2012.
  2. Nankani, Gobind "Developmental Problems of Mineral Exporting Countries" World Bank, 1979.
  3. "Oil Windfalls, Blessing or Curse?" Alan Gelb and Associates, 1988.
  4. Sachs, Jeffrey and Warner, Andrew "Natural Resource Abundance and Economic Growth", Center for International Development and Harvard Institute for International Development, November 1997.
  5. "Resource Curse, or Resource Trap?" Thinking Out Aloud, 23 February 2010.
  6. Collier, Paul "The Plundered Planet: Why We Must--and How We Can--Manage Nature for Global Prosperity", Oxford University Press, 2011.
  7. "Laws and Codes for the ‘Resource Curse’" Oxford University, September 2007.
  8. "Addressing the Natural Resource Curse: An Illustration from Nigeria", IMF, July 2003.
  9. "Escaping from the Resource Curse: Evidence from Botswana and the Rest of the World" IMF, 2007.
  10. "Property Rights and the Resource Curse" World Bank, 5 April 2007.
  11. "‘Contributing to development’? Q&A with World Bank Group director", Critical Resource, January 2010.
  12. "Escaping the Resource Curse: Managing Natural-Resource Revenues in Low-Income Countries", BP, 26 February 2004.
  13. Garsten, Christina and Lindh de Montoya, Monica "Transparency in a New Global Order", Edward Elgar Publishing, 2008.
  14. "Mineral-Rich Countries and Dutch Disease", World Bank", 2008.
  15. Coutinho, Leonor "The Resource Curse and Fiscal Policy", Cyprus Economic Policy Review, 2011.
  16. "Drilling into Debt" Institute of Public Policy Research, 2005.
  17. Hausmann, Ricardo and Rodriguez, Francisco "Venezuela: Anatomy of a collapse", 2006.
  18. Karl, Terry Lynn, "The Paradox of Plenty: Oil Booms and Petro States", University of California Press, 1997.
  19. "The Natural Resource Curse: A Survey", Harvard Kennedy School, February 2010.
  20. "Resource Impact - Curse or Blessing?", University of Dundee, 25 March 2003.
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