Navigating the Natural Resource Curse

When oil was discovered in 2007 off the shores of small, sturdy Ghana, the country’s government officials called the discovery “perhaps the greatest managerial challenge” the country had faced since independence. John Kufuor, Ghana’s president at the time, warned that “instead of a being a blessing, oil sometimes proves the undoing of many … nations who come by this precious commodity.”

Ghana’s reaction no doubt surprised oil-starved observers in developed countries, but the Ghanaian officials were referring to the “resource curse” that has wreaked havoc in other resource-rich, developing countries. Natural-resource wealth not only increases civil violence but, in a bizarre development paradox, is linked to lower economic growth.

In The Bottom Billion, the economist Paul Collier cites three reasons why resource wealth results in low levels of economic growth. First, the discovery and extraction of natural resources can lead to the crowding out of other sectors, otherwise known as “Dutch Disease.” The booming natural resource sector draws labor and capital away from other areas, and the natural-resource revenues result in a stronger exchange rate, reducing the competitiveness of non-resource exports.

Second, commodity price volatility enables boom and bust spending cycles characterized by poor investments and irresponsible spending. Collier writes that during an asset-price bubble in Kenya, “one ministry raised its proposed budget thirteenfold and refused to prioritize.”

Finally, Collier argues that resource revenues can cause deterioration in governance and public institutions through a variety of channels. Bribery becomes a more efficient means of obtaining votes than the delivery of public services. Citizens paying low taxes thanks to resource revenues are less likely to scrutinize their leaders.

Last week, the Natural Resource Charter was launched in Oslo. Developed by a group of economists including Collier and Nobel Laureate Mike Spence, the charter is “a set of economic principles for governments and societies on how to use the opportunities created by natural resources effectively for development.” Essentially, the charter tells countries how to avoid the resource trap.

Will a charter actually do anything? There might be some lessons gleaned from the experience of the Extractive Industries Transparency Initiative (EITI), which was proposed by the British government in 2002 and is now widely supported by governments and industries.

Resource-rich governments that commit to the EITI agree to implement increased transparency measures. The EITI board announced this week that Albania, Burkina Faso, Mozambique, and Zambia will join the 26 candidate countries already committed to implementing the EITI protocols. The jury is still out on the effectiveness of the EITI in candidate countries, but preliminary results are encouraging.

Perhaps more importantly, the EITI is already shifting attitudes in resource-rich developing countries. Collier writes of sitting in a meeting of West African ministers as they discussed resource-revenue governance. The EITI served as a concrete rallying point for both reformist countries and for reformers in reluctant countries. Collier writes, “An international charter gives people something very concrete to demand: either the government adopts it or it must explain why it won’t.”

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  1. Michael Story says:

    Financial necessity is often the driving force behind political changes which lead to benefits in many other areas, but with regular oil revenues a government can keep itself in power almost indefinitely, regardless of how badly it mismanages home affairs. The Soviet union limped along for an extra decade thanks to the 70s oil shock, and oil revenues are a large part of the stunted political and cultural development of the Middle East. What country other than one with massive oil reserves could afford to shoulder the cost of forbidding women to drive (as does Saudi Arabia)

    The other factor not considered here is the security risk of having natural resources. A country whose economy is based on free markets, rule of law, free press and property rights is not vulnerable to economically motivated attack, since these things are destroyed in an invasion.
    it is far easier to invade somewhere and take military control of an oilfield.

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  2. frankenduf says:

    no paradox here- the colonial process is to outsource control of the natural resource (the code word is to “privatize” control), then funnel capital out of the country- of course, the process of “privatizing” natural resources is often via the military/coup seizing the resources from the public, as Michael Story alludes to- this explains the pattern: natural resources + freedom of development = wealthy country; natural resources + colonization = poor country

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  3. Meg says:

    What’s great about this is that Ghana is going into oil production with eyes wide open about the pitfalls of having this kind of commodity. President Mills has promised to invest the oil revenue in infrastructure and human capital to help build up other sectors of the country’s economy, so that manufacturing and agriculture don’t stagnate while everyone is focused on oil extraction. I’m optimistic about this; the best way to make the most of an oil find is to use it to develop the whole economy and make sure growth is broad-based. If the government sticks to this promise and maintains a transparent process, Ghana could be as much of a success story for natural resources as they have been for democracy in Africa.

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  4. Anthony says:

    to me, the resource curse theory has always been ridiculous. Countries with few exploitable natural resources are also plagued by civil strife, corruption and low economic growth ie. Afghanistan, Somalia, Western Sahara, Haiti, East Timor. In my opinion the resources are just fuel to the underlying causes of ethnic or religious conflict in countries like Nigeria and Angola where conflict would probably be bound to exist even without resources. In places where there are not free democratic outlets for political frustrations between groups, corruption and nepotism are institutional, that were before discovering resources plagued with authoritarianism and strife, where well managed free market policies and property rights are and have always been non-existent etc..you get absurdly rich gulf petro-states and civil strife over profits in ridiculously poor countries. I don’t think natural resources are the curse, but rather unfortunately being poor and undeveloped is.

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  5. Anand Bala says:

    I can see this theory being played out in parts of India that are rich in mineral resources. They are also the poorest parts of the country. Violence is becoming a way of life and insurgency is taking root.

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  6. n. cade says:

    # 4 , Anthony ; your comment seems correct to me.

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  7. Alex Cranberg says:

    For many years the United States was the largest oil producer in the world. Why didn’t oil become a curse instead of a blessing for US? Oil investment didnt “crowd out” other sectors apparently: oil wealth funded other sectors. I doubt that the very low taxes in the nineteenth century made our citizens feel reluctant to criticize the government! But of course the government didn’t even get the oil money…Hmmm! I wonder if that had something to do with our fortunate distinction of being an oil state that prospered…

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  8. chris says:

    Elite and/or capitalizing forces in any nation will go to any means to seize control of an abundant natural resource. Thus, splitting the constituencies along cultural/tribal/religious lines in an otherwise poverty-bound nation, thereby fomenting violence and unrest, seems a natural outgrowth of such fortune. Power corrupts. Natural resource dominance is power. Ergo…

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