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THE RESOURCE CURSE

The resource curse, also known as the paradox of plenty, refers to the paradox that countries with an abundance of natural resources, specifically non-renewable resources like minerals and fuels, tend to have less economic growth, less democracy, and worse development outcomes than countries with fewer natural resources

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Resource curse

The resource curse, also known as the paradox of plenty, refers to the paradox that countries with an abundance of natural resources, specifically non-renewable resources like minerals and fuels, tend to have less economic growth, less democracy, and worse development outcomes than countries with fewer natural resources. This is hypothesized to happen for many different reasons, and there are many academic debates about when and why it occurs. Most experts believe the resource curse is not universal or inevitable, but affects certain types of countries or regions under certain conditions. [1][2]

The idea that resources might be more of an economic curse than a blessing began to emerge in debates in the 1950s and 1960s about the economic problems of low and middle-income countries. [3] The term resource curse was first used by Richard Auty in 1993 to describe how countries rich in mineral 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. An influential study by Jeffrey Sachs and Andrew Warner found a strong correlation between natural resource abundance and poor economic growth. [4] Hundreds of studies have now evaluated the effects of resource wealth on a wide range of economic outcomes, and offered many explanations for how, why, and when a resource curse is likely to occur. [1][5]

While “the lottery analogy has value but also has shortcomings”, [6] many observers have likened the resource curse to the difficulties that befall lottery winners who struggle to manage the complex side-effects of newfound wealth. [7][8][9][10]

The IMF classifies 51 countries as “resource-rich.” These are countries which derive at least 20% of exports or 20% of fiscal revenue from nonrenewable natural resources. 29 of these countries are low- and lower-middle-income. Common characteristics of these 29 countries include (i) extreme dependence on resource wealth for fiscal revenues, export sales, or both; (ii) low saving rates; (iii) poor growth performance; and (iv) highly volatile resource revenues. [1]

Dutch disease

Main article: Dutch disease

Dutch disease makes tradable goods 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 in all sectors, 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 the United Kingdom 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 began to appreciate, 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 countries are considered “resource-cursed”. [11]

Revenue volatility

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), [12] 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. Responsible use of financial hedges can mitigate this risk to some extent.

Susceptibility to this volatility can be increased where governments chose to borrow heavily in foreign currency. Real exchange rate increases, through capital inflows or the “Dutch disease” can make this appear an attractive option by lowering the cost of interest payments on the foreign debt, and they may be considered more creditworthy due to the existence of natural resources. If the resource prices fall, however, the governments’ capacity to meet debt repayments will be reduced. 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. As Venezuelan oil minister and OPEC co-founder Juan Pablo Pérez Alfonzo presciently warned in 1976: “Ten years from now, twenty years from now, you will see, oil will bring us ruin… It is the devil’s excrement.” [13]

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 extraction is vastly more lucrative and out-competes other industries. 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.

Human resources

In many poor countries, natural resource industries tend to pay far higher salaries than what would be available elsewhere in the economy. [citation needed] 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. [14]

Incomes and employment

A study on coal mining in Appalachia “suggest that the presence of coal in the Appalachian region has played a significant part in its slow pace of economic development. Our best estimates indicate that an increase of 0.5 units in the ratio of coal revenues to personal income in a county is associated with a 0.7 percentage point decrease in income growth rates. No doubt, coal mining provides opportunities for relatively high-wage employment in the region, but its effect on prosperity appears to be negative in the longer run.” [15]

Another example was the Spanish Empire which obtained enormous wealth from its resource-rich colonies in South America in the sixteenth century. The large cash inflows from silver reduced incentives for industrial development in Spain. Innovation and investment in education were therefore neglected, so that the prerequisites for successful future development were given up. Thus, Spain soon lost its economic strength in comparison to other Western countries. [16]

A study of US oil booms finds positive effects on local employment and income during booms but “that incomes per capita decreased and unemployment compensation payments increased relative to what they would have been if the boom had not occurred.” [17]

Natural resources are a source of economic rent which can generate large revenues for those controlling them even in the absence of political stability and wider economic growth. Their existence is a potential source of conflict between factions fighting for a share of the revenue, which may take the form of armed separatist conflicts in regions where the resources are produced or internal conflict between different government ministries or departments for access to budgetary allocations. This tends to erode governments’ abilities to function effectively. [18][19]

Even when politically stable, countries whose economies are dominated by resource extraction industries tend to be less democratic and more corrupt. [20][21]

Armed conflict

According to one academic study, a country that is otherwise typical but has primary commodity exports around 5% of GDP has a 6% risk of conflict, but when exports are 25% of GDP the chance of conflict rises to 33%. [22]

Ethno-political groups are more likely to resort to rebellion rather than using nonviolent means or becoming terrorists when representing regions rich in oil. [23]

There are several factors behind the relationship between natural resources and armed conflicts. [2] Resource wealth may increase the vulnerability of countries to conflicts by undermining the quality of governance and economic performance, [24] (the ‘resource curse’ argument). Secondly, conflicts can occur over the control and exploitation of resources and the allocation of their revenues (the ‘resource war’ argument). Thirdly, access to resource revenues by belligerents can prolong conflicts (the ‘conflict resource’ argument). [25]

A 2004 literature review finds that oil makes the on-set of war more likely and that lootable resources lengthen existing conflicts. [26] One study finds the mere discovery (as opposed to just the exploitation) of petroleum resources increases the risk of conflict, as oil revenues have the potential to alter the balance of power between regimes and their opponents, rendering bargains in the present obsolete in the future. [27]

One study suggests that the rise in mineral prices over the period 1997-2010 contributed to up to 21 percent of the average country-level violence in Africa. [28] Research shows that declining oil prices make oil-rich states less bellicose. [29] Jeff Colgan observed that oil-rich states have a propensity to instigate international conflicts as well as to be the targets of them, which he referred to as “petro-aggression”. [30]

Arguable examples include 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. A 2016 study finds that “oil production, oil reserves, oil dependence, and oil exports are associated with a higher risk of initiating conflict while countries enjoying large oil reserves are more frequently the target of military actions.” [31]

The emergence of the Sicilian Mafia has been attributed to the resource curse. Early Mafia activity is strongly linked to Sicilian municipalities abundant in sulphur, Sicily’s most valuable export commodity. [32]

Authoritarian rule

See also: Rentier state

Research shows that oil wealth lowers levels of democracy and strengthens autocratic rule. [20][33][34][35][36][37]

According to Michael Ross, “only one type of resource has been consistently correlated with less democracy and worse institutions: petroleum, which is the key variable in the vast majority of the studies that identify some type of curse.” [2] A 2014 meta-analysis confirms the negative impact of oil wealth on democratization. [38] A 2016 study challenges the conventional academic wisdom on the relationship between oil and authoritarianism. [39]

Another 2016 study finds that resource windfalls have no political impact on democracies and deeply entrenched authoritarian regimes, but significantly exacerbate the autocratic nature of moderately authoritarian regimes. [40]

There are two ways that oil wealth might negatively affect democratization. The first is that oil strengthens authoritarian regimes, making transitions to democracy less likely. The second is that oil wealth weakens democracies. Research generally supports the first theory but is mixed on the second. [2]

Both pathways might result from the ability of oil-rich states to provide citizens with a combination of generous benefits and low taxes. 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. [41][42] Because the country’s citizens aren’t being taxed, they have less incentive to be watchful with how government spends its money. [43] 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. [20] As a result, citizens are often poorly served by their rulers, [44] and if the citizens complain, money from the natural resources enables governments to pay for armed forces to keep the citizens in check. It has been argued rises and falls in the price of petroleum correlate with rises and falls in the implementation of human rights in major oil-producing countries. [45][46]

Corrupt members of national governments may collude with resource extraction companies to override their own laws and ignore objections made by indigenous inhabitants. [47] 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”. [48]

The Center for Global Development argues governance in resource rich states would be improved by the government making universal, transparent, and regular payments of oil revenues to citizens, and then attempting to reclaim it through the tax system, which they argue will fuel public demand for the government to be transparent and accountable in its management of natural resource revenues and in the delivery of public services. [49]

One study finds that “oil producing states dependent on exports to the USA exhibit lower human rights performance than those exporting to China”. The authors argue that this stems from the fact that US relationships with oil producers were formed decades ago, before human rights became part of its foreign policy agenda. [50]

Gender inequality

Research links gender inequality in the Middle East to resource wealth. [51] A study in the US finds similar results: resource wealth leads to lower levels of female labor force participation, lower turnout and fewer seats held by women in legislatures. [52]

International cooperation

Research finds that the more that states depend on oil exports, the less cooperative they become: they grow less likely to join intergovernmental organizations, to accept the compulsory jurisdiction of international judicial bodies, and to agree to binding arbitration for investment disputes. [53]

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. [54][55]

A 2011 article that examines the long-term relationship between natural resource reliance and regime type across the world from 1800 to 2006 reports that increases in natural resource reliance do not induce authoritarianism. With a focus on alleviating the methodological biases of earlier studies, the authors find evidence which suggests that increasing reliance on natural resources promotes democratization, the opposite of what the Resource curse theory suggests. [56] The researchers provide qualitative evidence for this fact across several countries both here, and in another article; [57] as well as evidence that there is no relationship between resource reliance and authoritarianism in Latin America. [58] The main methodological bias of earlier studies, the authors claim, is the assumption of random effects: “Numerous sources of bias may be driving the results [of earlier studies on the resource curse], the most serious of which is omitted variable bias induced by unobserved country-specific and time-invariant heterogeneity.” [56] In other words, this means that countries might have specific, enduring traits that gets left out of the model, which could increase the explanation power of the argument. The authors claim that the chances of this happening is larger when assuming random effects, an assumption that does not allow for what the authors call “unobserved country-specific heterogeneity”. [56]

These criticism have themselves been subject to criticism. One study re-examined the Haber-Menaldo analysis, using Haber and Menaldo’s own data and statistical models. It reports that their conclusions are only valid for the period before the 1970s, but since about 1980, there has been a pronounced resource curse. Authors Andersen and Ross suggest that oil wealth only became a hindrance to democratic transitions after the transformative events of the 1970s, which enabled developing country governments to capture the oil rents that were previously siphoned off by foreign-owned firms.

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 1980–2006 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. [59]

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. [60][61]

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Last edited 8 hours ago by Natalia Maier

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