The Resource Curse

By Isaac Arnsdorf | Published Sept. 12, 2014

 

Source - Bloomberg ((http://www.bloomberg.com/quicktake/resource-curse/)

 

Striking gold or discovering oil would seem to guarantee instant fortune. Instead, they often lead to conflict, corruption and poverty. History is full of examples of countries whose natural-resource wealth led to less economic success. Revenue from extracting raw materials might be mismanaged or embezzled by government officials, or siphoned off by foreign corporations. The bonanza might crowd out investment in other parts of the economy and make goods and services more expensive. And the country’s fiscal and economic fate might hang on volatile global commodity prices, especially for smaller and less diverse economies. All told, local populations can be left with little to show for their resources except a degraded environment. Economists and social scientists call this phenomenon “the resource curse.” Many countries are trying to determine how to prevent or reverse it.

The Situation

Despite their abundance of oil, diamonds and other precious minerals, African countries including Angola, Nigeria and Sudan endure low average income and poor health indicators. While Middle East oil exports prop up extensive welfare spending, the region’s petrostates remain beholden to price swings and their people subject to undemocratic regimes. Though a superpower in resources as varied as iron ore, coffee and soybeans, Brazil continues to grapple with vast, dangerous slums. After centuries of plundering, Indonesia is trying to keep more wealth at home by restricting exports and investing in manufacturing. Critics such as the World Bank say the policies could deter investment and reduce tax revenue, yet international momentum is building behind efforts to improve resource management through more disclosures from governments and industries. Twenty-nine countries follow a voluntary international system of auditing company payments for commodities to make sure they match government revenues, and 17 more are applying to join the group. The U.S. and European Union are also implementing new rules for mining and energy companies to disclose payments.

                                               

The Background

The British economist Richard Auty coined the term “resource curse” in a 1993 book investigating why resource-rich countries underperformed other developing economies. A 1995 study found that economies with high commodities exports grew slower from 1971 to 1989, even after controlling for variables such as initial per-capita income and investment rates. Notwithstanding a few success stories (such as Botswana), the negative correlation between raw-material exports and economic growth suggests that resource wealth at least doesn’t help. The most commonly suspected causes include underinvestment in other industries (such as manufacturing), exposure to price swings, and concentration of wealth that discourages the development of rule of law and other conditions needed for a vibrant economy. The resource curse is sometimes lumped with the Dutch Disease, when a commodity boom makes a country’s currency more expensive and its other goods less competitive, named for the Netherlands’ 1960s crisis after discovering natural gas in the North Sea.

 

The Argument

Later researchers have questioned the existence of a resource curse, suggesting that resource wealth helps growth after all. Others have suggested that what matters isn’t resource abundance but dependence, or the strength of a country’s institutions. Initiatives to lift the curse have become a source of friction between developed and developing countries in intergovernmental bodies and in the international energy and mining industries. Experiments with controlling prices, blocking foreign direct investment and capping exports sparked controversy and backlash. The risk is always that the measures might kill the proverbial golden goose. Countries have had better luck with rules to moderate government spending, sovereign wealth funds, and lump-sum per-capita rebates. The newest discoveries, such as Ghana‘s 2007 oil find, are almost inevitably accompanied by discussion of what can be learned from the mistakes of the past.