Resource curse
Encyclopedia
The resource curse refers to the paradox
Paradox
Similar to Circular reasoning, A paradox is a seemingly true statement or group of statements that lead to a contradiction or a situation which seems to defy logic or intuition...

 that countries and regions with an abundance of natural resource
Natural resource
Natural resources occur naturally within environments that exist relatively undisturbed by mankind, in a natural form. A natural resource is often characterized by amounts of biodiversity and geodiversity existent in various ecosystems....

s, specifically point-source non-renewable resources like mineral
Mineral
A mineral is a naturally occurring solid chemical substance formed through biogeochemical processes, having characteristic chemical composition, highly ordered atomic structure, and specific physical properties. By comparison, a rock is an aggregate of minerals and/or mineraloids and does not...

s and fuel
Fuel
Fuel is any material that stores energy that can later be extracted to perform mechanical work in a controlled manner. Most fuels used by humans undergo combustion, a redox reaction in which a combustible substance releases energy after it ignites and reacts with the oxygen in the air...

s, tend to have less economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...

 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), 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).

Resource curse thesis

The idea that natural resources might be more an economic curse than a blessing began to emerge in the 1980s. In this light, 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
Jeffrey Sachs
Jeffrey David Sachs is an American economist and Director of The Earth Institute at Columbia University. One of the youngest economics professors in the history of Harvard University, Sachs became known for his role as an adviser to Eastern European and developing country governments in the...

 and Andrew Warner, have shown a link between natural resource abundance and poor economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...

. This disconnect between natural resource wealth and economic growth can be seen by looking at an example from the petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...

-producing countries. From 1965–98, in the OPEC
OPEC
OPEC is an intergovernmental organization of twelve developing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular meetings...

 countries, gross national product per capita
Per capita
Per capita is a Latin prepositional phrase: per and capita . The phrase thus means "by heads" or "for each head", i.e. per individual or per person...

 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.

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 standard of living.

Conflict

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
Angola
Angola, officially the Republic of Angola , is a country in south-central Africa bordered by Namibia on the south, the Democratic Republic of the Congo on the north, and Zambia on the east; its west coast is on the Atlantic Ocean with Luanda as its capital city...

's oil-rich Cabinda
Cabinda (province)
Cabinda is an exclave and province of Angola, a status that has been disputed by many political organizations in the territory. The capital city is also called Cabinda. The province is divided into four municipalities - Belize, Buco Zau, Cabinda and Cacongo.Modern Cabinda is the result of a fusion...

 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
Conflict resource
Conflict resources are natural resources extracted in a conflict zone and sold to perpetuate the fighting. There is both anecdotal and statistical evidence that belligerent accessibility to precious commodities can prolong conflicts ....

' 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 pressure

There is often international pressure on resource-rich countries of the Third World to avoid reinvesting resource revenues in social investment purposes, or even in developmental efforts towards economic diversification. It is alleged that this pressure comes from powerful states such as the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 and other leading western countries as well as pro-liberalization institutions such as the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...

 and the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

. In Venezuela, for example, Hugo Chavez
Hugo Chávez
Hugo Rafael Chávez Frías is the 56th and current President of Venezuela, having held that position since 1999. He was formerly the leader of the Fifth Republic Movement political party from its foundation in 1997 until 2007, when he became the leader of the United Socialist Party of Venezuela...

 has stated that an explicit goal of his is to rectify the mass amounts of poverty that have existed despite the country's rich amount of oil resources (allegedly due to revenue hoarding by corrupt elites). His aims to do this by means of social investment fueled by nationalized oil resources, have been met with sharp political and economic hostility by the United States. The mainstream position on Chavez among the business and political communities of the United States is that those levels of social investment and development are not the proper uses of oil revenues; rather, according to US observers, oil revenues should be reinvested in the national oil company. Furthermore, the US has criticized Chavez for the purging of previous oil executives (who he had singled out as corrupt) after their alleged sponsorship of a coup attempt against him; the US business community had enjoyed good relations with the purged officers of PDVSA and generally views the replacement officials (who are more amenable to social investment) as Marxist "cronies" of Chavez who are hostile to the market.

The use of nationalized resources under Chavez have held national economic "formation" as a macroeconomic goal, to the extent that oil revenues can provide for a growth of sectors related to energy, through technology transfer and the emphasis on indigenous refinery and petrochemical operation. As with earlier attempts by Fidel Castro
Fidel Castro
Fidel Alejandro Castro Ruz is a Cuban revolutionary and politician, having held the position of Prime Minister of Cuba from 1959 to 1976, and then President from 1976 to 2008. He also served as the First Secretary of the Communist Party of Cuba from the party's foundation in 1961 until 2011...

 to modernize Cuba's agribusiness by using nationalized sugar and tobacco revenues to import superior farming equipment, the United States has been very much opposed to this approach. This relates also to the issue of "lack of diversification" discussed below.

Taxation

In many economies that are not resource-dependent, governments tax citizens, who demand efficient and responsive government
Implied level of government service
The implied level of government service is the value of government benefits and services provided a person, partnership, corporation, or other legal entity over a given period of time, including the proportional value of general governmental expenses and social welfare costs.The implied level of...

 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

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. The increasing national revenue will often result in higher government spending (health, welfare, military) that increases the real exchange rate and raises wages. 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. 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 when the Dutch discovered a massive natural gas field in the north sea 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 resources.

Revenue volatility

Prices for some natural resources are subject to wide fluctuation; for example crude oil prices rose from around $10/barrel in 1998/1999 to over $140/barrel in 2008. When government revenues are dominated by inflows from natural resources (for example, oil and diamonds accounted for 99.3% of Angola
Angola
Angola, officially the Republic of Angola , is a country in south-central Africa bordered by Namibia on the south, the Democratic Republic of the Congo on the north, and Zambia on the east; its west coast is on the Atlantic Ocean with Luanda as its capital city...

's exports in 2005), 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 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
Nigeria
Nigeria , officially the Federal Republic of Nigeria, is a federal constitutional republic comprising 36 states and its Federal Capital Territory, Abuja. The country is located in West Africa and shares land borders with the Republic of Benin in the west, Chad and Cameroon in the east, and Niger in...

 and Venezuela
Venezuela
Venezuela , officially called the Bolivarian Republic of Venezuela , is a tropical country on the northern coast of South America. It borders Colombia to the west, Guyana to the east, and Brazil to the south...

 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.

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
Political corruption
Political corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...

. 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 haven
Tax haven
A tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate....

s 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
Worldwatch Institute
The Worldwatch Institute is a globally focused environmental research organization based in Washington, D.C. Worldwatch was named as one of the top ten sustainable development research organizations by Globescan Survey of Sustainability Experts.-Mission:...

 reported on these collusive operations in many parts of the world.

In effort to combat resource revenue corruption, a recent report by the Center for Global Development
Center for Global Development
The Center for Global Development is a non-profit think tank based in Washington, D.C. that focuses on international development. It was founded in November 2001 by former senior U.S. official Edward W. Scott, director of the Peterson Institute for International Economics, C. Fred Bergsten, and...

 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

Economic diversification
Diversification
Diversification may refer to:* Diversification involves spreading investments* Diversification is a corporate strategy to increase market penetration...

 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
Public works
Public works are a broad category of projects, financed and constructed by the government, for recreational, employment, and health and safety uses in the greater community...

 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.

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, 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
Human capital
Human capitalis the stock of competencies, knowledge and personality attributes embodied in the ability to perform labor so as to produce economic value. It is the attributes gained by a worker through education and experience...

; 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
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...

, Taiwan
Taiwan
Taiwan , also known, especially in the past, as Formosa , is the largest island of the same-named island group of East Asia in the western Pacific Ocean and located off the southeastern coast of mainland China. The island forms over 99% of the current territory of the Republic of China following...

 or South Korea
South Korea
The Republic of Korea , , is a sovereign state in East Asia, located on the southern portion of the Korean Peninsula. It is neighbored by the People's Republic of China to the west, Japan to the east, North Korea to the north, and the East China Sea and Republic of China to the south...

, by contrast, spent enormous efforts on education, and this contributed in part to their economic success (see East Asian Tigers
East Asian Tigers
The Four Asian Tigers or Asian Dragons is a term used in reference to the highly developed economies of Hong Kong, Singapore, South Korea and Taiwan. These nations and areas were notable for maintaining exceptionally high growth rates and rapid industrialization between the early 1960s and 1990s...

). 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.

Human rights

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
Human rights
Human rights are "commonly understood as inalienable fundamental rights to which a person is inherently entitled simply because she or he is a human being." Human rights are thus conceived as universal and egalitarian . These rights may exist as natural rights or as legal rights, in both national...

 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. In Venezuela all the profits go directly to the state and the Authoritarian government with little to none trickling down to the lower socioeconomic classes. The resource curse can cause a countries 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 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.

Criticism

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 paper 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.

See also

  • Bribery
    Bribery
    Bribery, a form of corruption, is an act implying money or gift giving that alters the behavior of the recipient. Bribery constitutes a crime and is defined by Black's Law Dictionary as the offering, giving, receiving, or soliciting of any item of value to influence the actions of an official or...

  • Passive income
    Passive income
    Passive income is an income received on a regular basis, with little effort required to maintain it.The American Internal Revenue Service categorizes income into three broad types, active income, passive income, and portfolio income...

  • Political corruption
    Political corruption
    Political corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...

  • Rent seeking
    Rent seeking
    In economics, rent-seeking is an attempt to derive economic rent by manipulating the social or political environment in which economic activities occur, rather than by adding value...

  • Public choice theory
    Public choice theory
    In economics, public choice theory is the use of modern economic tools to study problems that traditionally are in the province of political science...

  • Strategic misrepresentation
    Strategic misrepresentation
    "Strategic misrepresentation is the planned, systematic distortion or misstatement of fact—lying—in response to incentives in the budget process...


External links

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