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.”


Michael Story

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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frankenduf

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

Meg

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.

Anthony

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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Anand Bala

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.

n. cade

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

Alex Cranberg

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...

chris

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...

Sgt Lucifer

Great article Ms. Gunn. Now, if only we can get it in the hands of the corrupt officials of these very impoverished resource-rich countries.

Johnny E

Several years ago I saw an oil industry analyst being interviewed on TV. He said that Norway was the only oil producing country whose government didn't get corrupted by the wealth produced by the oil industry. I suppose it was the egalitarian values of a Viking culture that saved them. The president of their state oil company is a philsopher and he helps decide how the income is distributed. The Norwegians know it's a finite resource and are planning for the future without that income. I'm not surprised the conference was in Oslo.

Wonks Anonymous

I would argue that we can see the economic development of the last 30 years in the US as an example of a resource curse.

Sometime in the 1980's we discovered that we could sell dollars, "as good as gold", and IOUs to the rest of the world for goods.

We developed a huge financial sector to mine the debt and package it for sale abroad and a large retail sector to distribute the loot. Everything else withered.

http://wonksanonymous.com/2008/09/27/the-american-disease.aspx

Of course we are a civilized nation and never experienced the corruption that happens in countries like Ghana.

BenK

The problem is very easily described: people who see a treasure chest spend all their time scrabbling at the locks until they finally get it open, and then they find they cannot eat gold.

Societies plagued by legal gambling, legal prostitution, drugs and all sorts of shortcuts to pleasure are in a similar state as those plagued by oil, diamonds or other extractive resource industries. The equivalent is a society that has a wealthy government with seemingly unlimited borrowing potential. When the people finally spring the lock on welfare and all sorts of other handouts, money flows through the fingers of corrupt officials... and nothing good comes of it.

Edu

The resource curse could also be applied to the financial sector in the last 15 years. It has (a) crowded out other sectors, (b) created boom and bust cycles due to poor investments and irresponsible spending and (c) caused deterioration in governance and public institutions.

How smug. While we sit and analyze the Third World we are unable to see what is immediately around us.

hadarmen

Resource Curse, it looks logical. many assertetations are looks realistic. examples are all around us.

But why on earth in the world, scientist in every type telling deep core truth.

Curse is the population of world. Corruption, political exhaustion, going nowhere but staying same with rich natural resources are real because of population.

Today's world is not worse than yesterday world,but surely more corrupted. Our conciousness simply not enough to cover this weakness

Tom

#4 nails it.

Matthew R.

Perhaps this is analogous to children of rich people who grow up with wealth, and become wastrels. Wealth can function like a narcotic, and wealth can be toxic. It isn't inevitable, but it is common. Haven't we all seen articles about lottery winners who find themselves with a worse life after their win than before? Money doesn't necessarily make things better; only if it's used wisely.

From what I've read, Botswana is a good example of a nation that has managed their resource wealth with foresight and wisdom.

Brad Hicks

No country in its right mind would ever export natural resources; that NEVER works.

Over the course of the early 20th century, both the United States and Saudi Arabia invested heavily in oil exploration and drilling. The United States built refineries, built petrochemical companies, built manufacturing facilities near those petrochemical factories to make plastic manufactured goods, built automobile factories. The Saudis built a few refineries, no factories. For a while there, in the 1970s and 1980s, it looked like the joke was on us, because we ran out of oil first. But look at our two countries now, now that they're starting to hit the limits of their oil: when the oil is gone, we'll have a lot of factories and an educated middle class workforce, and they'll have ... sand.

If Ghana had any sense, they wouldn't be selling oil, they'd be using that oil to build their own petrochemical and manufacturing sectors and selling the resulting manufactured goods, not the oil. (Assuming, of course, that some neocolonial power wouldn't respond by fomenting a coup d'etat to install a resource-extraction oriented government. After Evo Morales decided that Bolivia would export batteries and electric cars, not lithium, I doubt he sleeps well, over just this worry.)

Of course, the joke's on us. We shut down most of our factories. And we're exporting unprocessed raw materials like coal to China and raw timber to Japan, because we've gotten stupid that way. We're going to find out what happens to every country that shuts down their manufacturing sector, whether to concentrate on finance or on resource extraction: down that road lies total corruption and even more total ruin.

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trampervn

Interesting and very useful article. Right now, in Vietnam, there is a public discussion about bauxite extraction. According to some analysis, the growth model of Vietnam in past period is export-oriented. Some advantages based on natural resource extraction and labor force intensified

Owinok

Nice summary on the phenomenon of the Resource Curse. However, Collier's use of Kenyan example does not mention an asset bubble but rather that during a price boom ( I presume coffee boom of mid 70s), the tendency to inflate expenditures was extreme.

I was not too sure about that assertion from Collier either because Kenya does not register much income from traditional natural resources rather than agricultural commodities. And yet the fact that revenues that do not come from taxation of diverse economic activities is a curse where the country lacks proper institutional foundations.

Bill

I say let poor nations starve and not use their natural resources so we can feel better about our developed societies!
I just can't stand the elitiest attitude. Development never comes in a perfectly wrapped package.