Resource curse

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The resource curse (also the paradox of plenty) refers to the paradox that countries with an abundance of natural resources tend to have less economic growth than countries without these natural resources. This may 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, government mismanagement, or political corruption (provoked by the inflows of easy windfalls from the resource sector).

Contents 1 Resource curse thesis 2 Negative effects and causes 2.1 Conflict 2.2 Taxation 2.3 Dutch disease 2.4 Revenue volatility 2.5 Excessive borrowing 2.6 Corruption 2.7 Lack of diversification and enclave effects 2.8 Human resources 2.9 Liberty and democracy 3 Criticism 3.1 Economic Growth 3.2 Civil Conflict 3.3 Democracy 4 Notes 5 External links and further reading 6 See also

[edit] Resource curse thesis

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.^[1] Numerous studies, including one by Jeffrey Sachs and Andrew Warner, have shown a link between natural resource abundance and poor economic growth.^[2] This disconnect between natural resource wealth and economic growth can be seen by looking at an example from the oil-producing countries. From 1965-1998, 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%.^[3] Some argue that financial flows from Foreign Aid can provoke effects that are similar to the Resource Curse.^[4]

[edit] Negative effects and causes

[edit] Conflict

Natural resources can, and often do, provoke conflicts within societies^{[citation needed]}, 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, 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).^[5] 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%.^[6][7]

[edit] 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 ^[8] So this relationship between rulers and subjects breaks down. More insidiously^{[neutrality disputed]}, 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 ^[9], and if the citizens complain, money from the natural resources enables governments to pay for armed forces to keep the citizens in check^{[citation needed]}. Countries whose economies are dominated by resource extraction industries tend to be more repressive, corrupt and badly-managed^{[citation needed]}.

[edit] Dutch disease

For more details on this topic, see 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 extremely vulnerable to price changes in the natural resource^{[citation needed]}. Also, since productivity generally increases faster in the manufacturing sector, the economy will lose out on some of those productivity gains.

[edit] 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 $100/barrel in 2008. When government revenues are dominated by inflows from natural resources (for example, oil and diamonds accounted for 99.3%^[10] 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.

[edit] 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 relatively 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 back 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.

[edit] 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.^[11]. The presence of offshore tax havens provide widespread opportunities for corrupt politicians to hide their wealth.

[edit] Lack of diversification and enclave effects

This article's section called "Lack of diversification and enclave effects" does not cite any references or sources. (January 2008) Please help improve this article by adding citations to reliable sources. Unverifiable material may be challenged and removed.

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. While the resource sectors tend to provide large financial revenues, they often provide relatively few jobs, and tend to operate as enclaves with few forward and backward connections to the rest of the economy.

[edit] 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, so 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 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.^[12]

[edit] Liberty and democracy

It has also been argued that one can correlate rises and falls in the price of oil with rises and falls in the pace of freedom in major oil producing countries.^[13]

[edit] Criticism

[edit] Economic Growth

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 polices 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.^[14]

[edit] Civil Conflict

A 2008 working paper finds that oil discoveries actually lower the odds of civil war, inclusive of war aim. This surprising result is driven by the strong, negative relationship between oil and secessionist war.^[15]

[edit] Democracy

A 2007 working paper looks at the long run relationship between oil and regime type, arguing that a big problem with the existing approach is that researchers compare fundamentally different countries to each other across a short time period, typically between the 1970s and 2000. The authors argue that most resource-reliant nations had already become economically reliant on their resources by then. Therefore, it's nearly impossible to know if it was their resources, rather than some other variable, such as geography, culture, or history, which underwrote both their resource reliance and their regime types. To address this problem, the authors take a longer view. They first investigated what happened to countries after they became resource dependent by comparing their political system in the pre-resource era to the post-resource era. They do this for ten countries: Mexico, Venezuela, Ecuador, Chile, Norway, Nigeria, Iran, Syria, Algeria, Yemen, Oman, Iran, and Libya. These are all oil-rich countries except for Chile, the world's largest copper exporter.

The authors found no evidence that a growing reliance by the government on rents from natural resources undermined democracy. In other words, countries that were democratic remained democratic after finding natural resources. And most countries that were authoritarian before discovering natural resources remained authoritarian -- although many actually transitioned to democracy at some point after discovering resources. The authors next investigated what happened to resource-poor countries in the same region as the resource-rich countries. As reliance on natural resources in countries like Iran, Chile, or Nigeria increased over time, did their political system become more authoritarian than that of the resource-poor countries in their region? For example, did Nigeria's political trajectory diverge from the average experience of resource-poor countries in Sub-Saharan Africa? If so, then one could perhaps conclude that oil and mineral wealth prevents democratization. The authors found no evidence that this was the case.

Of course, it could be the case that resource reliance may not undermine or prevent democracy, but could nonetheless slow the pace of a transition to democracy. For example, Chile and Mexico became democracies long after discovering copper and oil, respectively. Could these resource-rich countries have transitioned to democracy sooner if they had never found natural resources? To test this hypothesis, the researchers identified resource-poor countries that had societies, economies and political institutions that were very similar to those possessed by the resource-rich nations on the eve of the discovery of natural resources. Specifically, they matched Venezuela with Colombia, Ecuador with Peru, Mexico with Brazil, Nigeria with Tanzania, and Chile with Argentina. Did democracy between each paired country diverge after natural resources were discovered? The authors uncovered no evidence for this hypothesis. In fact, some resource-rich countries, such as Ecuador and Nigeria, became more democratic than their resource-poor pairs.

In short, the paper finds no evidence for a universal law of "Petro-Politics", as Thomas Friedman and others have claimed. Indeed, the authors identify some countries in which resources were a blessing rather than a curse, in that oil and mineral reliance seem to have helped consolidate democracy.^[16]

[edit] Notes

This section uses citations that are either broken or outdated. This section uses citations that link to broken or outdated sources, and are deemed unreliable. Please improve the article or discuss this issue on the talk page. Help on using footnotes is available. This article has been tagged since January 2008.

[edit] External links and further reading

The references in this article would be clearer with a different or consistent style of citation, footnoting, or external linking.

• The Paradox of Plenty, by Terry Lynn Karl
• Escaping the Resource Curse, edited by Macartan Humphreys, Jeffrey D. Sachs, and Joseph E. Stiglitz (Columbia University Press, 2007)
• Poisoned Wells: the Dirty Politics of African Oil, by Nicholas Shaxson (Palgrave MacMillan, 2007)
• Oil Wars, Edited by Mary Kaldor, Terry Lynn Karl and Yahya Said (Pluto Press, 2007)
• Sachs, Jeffrey D., Warner, Andrew M. (1995). Natural resource abundance and economic growth. NBER Working Paper 5398
• Oil and Politics in the Gulf of Guinea, by Ricardo Soares de Oliveira
• Michael Dauderstädt / Arne Schildberg (Eds.): Dead Ends of Transition. Rentier Economies and Protectorates. Frankfurt 2006.
• Hodges, Tony. Angola: Anatomy of an Oil State. James Currey (2004).
• Conference Documentation: Transforming Authoritarian Rentier Economies and Protectorates
• Resource Curse, by Leif Wenar, (Policy Innovations, Spring (2007)
• Institutions and the Resource Curse by Halvor Mehlum, Karl Moene and Ragnar Torvik, The Economic Journal 2006.

[edit] See also

• Rent seeking