The resource curse, also known as the paradox of plenty, refers to the paradox that countries and regions with an abundance of natural resources, specifically point-source non-renewable resources like minerals and fuels, tend to have less economic growth and worse development outcomes than countries with fewer natural resources. This is hypothesized to 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, a phenomenon known as Dutch disease), volatility of revenues from the natural resource sector due to exposure to global commodity market swings, government mismanagement of resources, or weak, ineffectual, unstable or corrupt institutions (possibly due to the easily diverted actual or anticipated revenue stream from extractive activities).
- 1 Resource curse thesis
- 2 Negative effects and causes
- 3 Criticisms
- 4 See also
- 5 References
- 6 Further reading
- 7 External links
Resource curse thesis
The idea that natural resources might be more an economic curse than a blessing began to emerge in the 1980s. 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. Numerous studies, including one by Jeffrey Sachs and Andrew Warner, have shown a link between natural resource abundance and poor economic growth. This disconnect between natural resource wealth and economic growth can be seen by looking at an example from the petroleum-producing countries. From 1965 to 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%. Some argue that financial flows from foreign aid can provoke effects that are similar to the resource curse. Abundance of financial resources in absence of sufficient innovation effort in the corporate sector may also lead to the problem of "resource curse."
Negative effects and causes
Tug of war between people and government
The ambitions of the people and the government conflict, due to the large amount of resources and money a country's government amass for their own luxuries rather than for the people. Thus natural resources serve as a curse for the people, who then have a lower relative standard of living. This may also be caused by the relative greed of the government as they seek to finance their own lives not considering the rest of the people bound to benefit from the resources.
Natural resources can, and often do, provoke conflicts within societies (Collier 2007), 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. 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). 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%.
International war and conflict
The term "petro-aggression" has been used to describe the tendency of oil-rich states to instigate international conflicts, or to be the targets thereof. There are many examples including: Iraq’s invasion of Iran and Kuwait; Libya’s repeated incursions into Chad in the 1970s and 1980s; Iran’s long-standing suspicion of Western powers; USA's relations with Iraq and Iran.
It is not clear whether the pattern of petro-aggression found in oil-rich countries also applies to other natural resources besides oil.
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. Because the country's citizens aren't being taxed, they have less incentive to be watchful with how government spends its money. In addition, 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, and if the citizens complain, money from the natural resources enables governments to pay for armed forces to keep the citizens in check. Countries whose economies are dominated by resource extraction industries tend to be more repressive, corrupt and badly managed.
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. Absent currency manipulation or a currency peg, appreciation of the currency can damage other sectors, leading to a compensating unfavorable balance of trade. As imports become cheaper, internal employment suffers and with it the skill infrastructure and manufacturing capabilities of the nation. This problem has historically influenced the domestic economics of large empires including Rome during its transition from a Republic, and England during the height of its colonial empire. To compensate for the loss of local employment opportunities, government resources are used to artificially create employment. The increasing national revenue will often also result in higher government spending on health, welfare, military, and public infrastructure, and if this is done corruptly or inefficiently it can be a burden on the economy. (If it is done efficiently this can boost economic competitiveness - effectively acting as a wage subsidy). While the decrease in the sectors exposed to international competition and consequently even greater dependence on natural resource revenue leaves the economy vulnerable to price changes in the natural resource, this can be managed by an active and effective use of hedge instruments such as forwards, futures, options and swaps, however if it is managed inefficiently or corruptly this can lead to disastrous results. Also, since productivity generally increases faster in the manufacturing sector, the economy will lose out on some of those productivity gains. Dutch Disease first became apparent after the Dutch discovered a massive natural gas field in Groningen in 1959. The Netherlands sought to tap this resource in an attempt to export the gas for profit. However when the gas began to flow out of the country so too did its ability to compete against other countries' exports. With the Netherlands' focus primarily on the new gas exports, the Dutch currency grew at a very quick rate which harmed the country's ability to export other products. With the growing gas market and the shrinking export economy, the Netherlands began to experience a recession. This process has been witnessed in multiple countries around the world including but not limited to Venezuela (oil), Angola (diamonds, oil), the Democratic Republic of the Congo (diamonds), and various other nations. All of these resources are considered "resource-cursed".
The Dutch disease is contrasted by the Norwegian paradox.
Prices for some natural resources are subject to wide fluctuation: for example crude oil prices rose from around $3 per barrel to $12/bbl in 1974 following the 1973 oil crisis and fell from $27/bbl to below $10/bbl during the 1986 glut. In the decade from 1998 to 2008, it rose from $10/bbl to $145/bbl, before falling by more than half to $60/bbl over a few months. When government revenues are dominated by inflows from natural resources (for example, 99.3% of Angola's exports came from just oil and diamonds in 2005), this volatility can play havoc with government planning and debt service. Abrupt changes in economic realities that result from this often provoke widespread breaking of contracts or curtailment of social programs, eroding the rule of law and popular support. Management of this risk is the basis for responsible use of financial hedges.
Since governments expect more income in the future, they start accumulating debt, 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 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 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.
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. The presence of offshore tax havens provide widespread opportunities for corrupt politicians to hide their wealth.
Many extractive operations are illegal and encouraged by corrupt multi-national corporations in collusion with national governments. Objections made by indigenous inhabitants are usually ignored. Ed Ayres of Worldwatch Institute reported on these collusive operations in many parts of the world.
The United States Senate Foreign Relations Committee report entitled "Petroleum and Poverty Paradox" states that "too often, oil money that should go to a nation’s poor ends up in the pockets of the rich, or it may be squandered on grand palaces and massive showcase projects instead of being invested productively".
In effort to combat resource revenue corruption, a recent report by the Center for Global Development advocates direct distribution of revenues. Under this proposal, a government would transfer some or all of the revenue from natural resource extraction to citizens in a universal, transparent, and regular payment. Having put this money in the hands of its citizens, the state would treat it like normal income and tax it accordingly—thus forcing the state to collect taxes and fueling public demand for the government to be transparent and accountable in its management of natural resource revenues and in the delivery of public services.
Lack of diversification and enclave effects
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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. The abundance of revenue from natural resources discourages long-term investment in infrastructure which would support a more diverse economy, increasing the negative impact of sudden resource-price drops. While the resource sectors tend to provide large financial revenues, they often provide few jobs, and tend to operate as enclaves with few forward and backward connections to the rest of the economy.
In many poor countries, Natural Resource industries tend to pay far higher salaries than what would be available elsewhere in the economy. This tends to attract the best talent from both private and government sectors, 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 Singapore, 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.
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It has also been argued that one can correlate rises and falls in the price of petroleum with rises and falls in the implementation of human rights in major oil-producing countries. Human rights throughout resource-cursed countries are dismal or completely lacking. Most normally resource-cursed countries are ruled by either authoritarian or other types of highly repressive regimes. These regimes are kept in power by a select elite such as high-ranking politicians and military leaders. As long as the existing government keeps these few happy they can rule without fear of consequence. This system is set up so that the common folk those most in need of the protection are left to fend for themselves. In places like the Democratic Republic of the Congo human life has almost no value and slave labor is common. Venezuela demonstrated the resource curse because of its abundance of oil. The country which saw the easy wealth of the oil did not need to expand into other markets due to comparative advantage. The comparative advantage states that if Venezuela can produce oil better than other exports then it should produce the oil. However since Venezuela's oil company is nationally owned it has been criticized as inefficient and backwards. The resource curse is also evident in Venezuela because of the enormous gap between the rich and the poor. Venezuela has a history of oil profits going to wealthy elites with little to none trickling down to the lower socioeconomic classes. The resource curse can cause a country's government to turn volatile towards their people because they do not need them for taxation. The Democratic Republic of the Congo is perhaps one of the most volatile places on the planet, suffering from disease, civil war, and the resource curse. The resource curse of the Congo takes the form of diamonds. While no true government exists each faction exploits the people they rule to harvest diamonds and other rare minerals. The DRC has a unique type of the resource curse because the added factor of its political instability. Instead of fueling a wealthy elite, like many resource-cursed countries, the Congo's diamonds are used to fund the ongoing civil war.
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 policies 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.
A 2010 working essay that examines the long-term relationship between natural resource reliance and regime type across the world from 1800 to 2006 demonstrates that increases in natural resource reliance do not induce authoritarianism. On the contrary, the authors find evidence that suggests that increasing reliance on natural resources promotes democratization. These researchers also provide qualitative evidence for this fact across several countries in another article; as well as evidence that there is no relationship between resource reliance and authoritarianism in Latin America.
A 2011 study argues that previous assumptions that oil abundance is a curse were based on methodologies which failed to take into account cross-country differences and dependencies arising from global shocks, such as changes in technology and the price of oil. The researchers studied data from the World Bank over the period 1980 to 2006 for 53 countries, covering 85% of world GDP and 81% of world proven oil reserves. They found that oil abundance positively affected both short-term growth and long-term income levels. In a companion paper, using data on 118 countries over the period 1970-2007, they show that it is the volatility in commodity prices, rather than abundance per se, that drives the resource curse paradox.
- Passive income
- Political corruption
- Public choice theory
- Rent seeking
- Freight equalization policy in India
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