Resource curse

The resource curse or 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, and government mismanagement, or political corruption, provoked by the inflows of easy windfalls from the resource sector.

Resource Curse Thesis

The term 'resource curse thesis' was first used by Richard Auty in 1993 to describe how countries rich in natural resources were not able 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. However, the idea that natural resources might be more a curse than a blessing began to emerge in the 1980's. Numerous studies, including a notable 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 clearly 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%. Some argue that financial flows from Foreign Aid can provoke effects that are similar to the Resource Curse.

Negative Effects and Causes

Conflict

Natural resources can, and often do, provoke conflicts within societies, as different groups and factions fight for their share (Rent seeking). Sometimes these emerge openly as separatist conflicts in regions (such as in Angola's oil-rich Cabinda enclave) where the resources are produced; 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. According to one widely-publicised 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 only 5% of GDP the chance of conflict drops to 6%.

Taxation

In many "ordinary" societies that are not resource-dependent, governments tax citizens, who demand efficient and responsive government in return. This bargain establishes a healthy 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. So this healthy political relationship between rulers and subjects breaks down. More insidiously, 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

Further information: Dutch Disease

Dutch disease is an economic phenomenon in which the revenues from natural resource exports damages a nation's productive economic sectors by causing an increase of the real exchange rate and thus making tradable sectors, notably agriculture and manufacturing, less competitive in world markets. The decrease in these sectors and consequently even greater dependence on natural resource revenue leaves the economy extremely vulnerable to price changes in the natural resource. Also, since productivity generally increases faster in the manufacturing sector, the economy will lose out on some of those productivity gains.

Revenue Volatility

Natural resource prices tend to fluctuate wildly; for example crude oil prices rose from around $10/barrel in 1998/1999 to over $50/barrel in 2005. When government revenues are dominated by inflows from natural resources (for example, oil and diamonds accounted for 99.7% of Angola's exports in 2005, according to IMF data) 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.

Excessive Borrowing

Since governments expect more income in the future, they start accumlating debt, even though they are receiving oil revenues as well. This is encouraged, since, if the real exchange rate increases, through capital inflows or the Dutch disease, then 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 oil prices begin to fall, and if the real exchange rate falls, then 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.

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.

Lack of Diversification and Enclave Effects

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 Curse damages other sectors. So natural resource-dependent countries often become more resource-dependent 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.

Offshore

One of the greatest problems of all facing countries in the developing world is the presence of offshore tax havens (which, contrary to widespread perceptions, include financial centers such as New York and the City of London) which provide widespread opportunities for corrupt politicians to hide their wealth. This is a particular problem for resource-rich countries because of the scale of the wealth that is available to local politicians.

Human Resources

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, 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.

External links and suggested further reading

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)

Sachs, Jeffrey D., Warner, Andrew M. (1995). Natural resource abundance and economic growth. NBER Working Paper 5398

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

Video

• Documentary 52': The Curse of Oil
• Documentary 52': Le Sang de la terre