Is the resource curse real?

Materials World magazine
,
1 Oct 2017

Is it true that countries with an abundance of natural resources have less economic growth, less democracy and worse development outcomes than countries with fewer natural resources? Rhiannon Garth Jones investigates the 'resource curse'. 

The resource curse is a well-used phrase to describe countries rich with natural resources showing surprisingly low levels of economic growth, democracy and development. The decline of Venezuela (see Materials World, September 2016) in recent years has reignited discussion about the causes and possible solutions. 

However, a number of resource-rich countries do not fit this pattern, such as Australia, Botswana, Canada and Chile. The first country to stir comment on the issue was the Netherlands, which exhibited very different symptoms to those now commonly cited as proof of the theory. Peter Kaznacheev, Lead Economist at Khaznah Strategies, has argued against the resource curse hypothesis, stating that, ‘The quality of [economic and political] institutions is what essentially determines whether natural resource abundance is a blessing or a curse’. So, is the resource curse real or do its proponents confuse correlation with causation? 

Patient Zero

In 1959, a 2.8tln cubic metres field of natural gas — the largest gas field in Europe — was discovered in the Netherlands. This resource windfall was assumed to be good news for the Dutch economy but, by the 1970s, high gas prices globally led to a sharp inflow of foreign currency, which raised the value of the guilder (the country’s pre-Euro currency) by around a sixth. This currency appreciation reduced the competitiveness of Dutch manufacturing and services. By 1977, The Economist described the situation as a Dutch disease and it has been used as a warning scenario for the danger of a sudden increase in exports since.

The Netherlands in the 1970s did not see a marked decline in democratic institutions or development, nor was it the first instance of sudden growth in one economic sector creating a decline in others. However, it did serve as a clear example to other countries that discovered their own resource wealth. For instance, in 1990, the Norwegian legislature decided to use the surplus wealth from its petroleum industry to create a sovereign wealth fund for the future. Initially named The Petroleum Fund, Norway’s Government Pension Fund Global was worth US$958bn in June 2017 and constituted 2.33% of European stocks. It was established to counter the effects of any future decline in income from petroleum and to smooth over the impact of highly fluctuating oil prices. Its use remains the topic of much debate in Norway, but it is widely considered to be an effective method to counter the economic impacts of a resource boom and avoid Dutch disease.

The experience of the Netherlands in the 1970s is a clear example of the possible negative consequences of a major natural resource discovery, while the Norwegian approach shows how those negative consequences can be avoided. However, both cases focus on an economic problem and solution. The resource curse is more commonly used in reference to nations that also demonstrate poor development and democratic outcomes. The USA, UK, Australia and Canada have displayed no serious political symptoms of the resource curse, despite significant natural resource wealth. Conversely, ‘there are 23 countries in the world that derive at least 60% of their exports from oil and gas and not a single one is a real democracy,’ according to Larry Diamond, Senior Fellow and Co-ordinator of the Centre on Democracy, Development and the Rule of Law (CDDRL) at Stanford University, USA. In recent years, there have been major civil conflicts in countries of substantial mineral and petroleum resources, including Nigeria, Angola, Burma, Papua New Guinea, Chad, Pakistan (Balochistan) and Sudan. Some of the most corrupt countries in the world, according to the Corruption Perceptions Index 2014, include Angola, Iraq, Libya and South Sudan – all countries with large, proven reserves of petroleum.

Location, location, location

In 2013, McKinsey, the global consultancy firm, calculated that 64% of people living in extreme poverty do so in countries where natural resources play a dominant role in the economy. In Nigeria, the largest oil and gas producer in Africa, 68% of the population live in extreme poverty. In Angola, the continent’s second largest oil and gas producer, it is 43%. The three longest serving rulers in the world – Teodoro Obiang Nguema Mbasogo in Equatorial Guinea, Robert Mugabe in Zimbabwe and Paul Biya in Cameroon – preside over African states rich in natural resources. A fourth, José Eduardo dos Santos in Angola, retired in August this year after 38 years in power but (at the time of going to press) remained leader of the governing party, the MPLA, while his daughter continued as Chairwoman of Sonangal, the state-owned oil company, and his son retained his position in charge of the country’s sovereign wealth fund.  

Tom Burgis, author of The Looting Machine and Investigations Correspondent at the Financial Times, states, ‘The resource curse is not unique to Africa but it is at its most virulent on the continent that is at once the world’s poorest and, arguably, its richest.' He points out that the continent is home to 15% of the world’s crude oil reserves, 40% of its gold and 80% of its platinum, not to mention uranium, copper, iron ore, bauxite, and so on. In 2013, Ecobank estimated that almost a third of global hydrocarbon and mineral wealth was held in Africa. 

The discrepancy between resource wealth and development stages in Africa and, to a lesser extent, Latin America, is regularly noted in discussions about the resource curse. Both continents are, as Burgis says, ‘disproportionately dependent’ on their natural resources – they make up 66% of Africa’s exports and 42% of Latin America’s. In contrast, natural resources make up 11% of European exports, 12% of Asia’s and 15% of North America’s. Burgis believes that ‘what is happening in Africa’s resource states is systematic looting’. He makes clear that ‘to mine is not necessarily to loot,’ and observes that a significant number of those in the extractive industry do their work ethically. He also acknowledges that the industry is fundamental to global GDP and often works to reduce poverty in those countries. Political corruption and corporate secrecy are the causes he ascribes to poor outcomes in resource-rich African countries. 

The resource blessing

However, two countries, one in Africa and one in Latin America, seem to have mostly benefited from their large natural resources – Botswana and Chile. Botswana is one of the most diamond-rich countries in the world and also has sizeable mineral deposits of copper, coal, nickel, silver and salt. It has experienced growth since independence in 1966. Although its growth rate of 14% GDP during the first years has now slowed to around 3%, it is still one of the fastest growing countries in Africa and growth is consistent with its resources. Paula Ximena Meijia and Vincent Castel, in a report for the African Development Bank in 2012, said, ‘Impressively, the growth of the country’s economy was accompanied by a transformation of its economic sector. Not only did the mineral and government sector experience growth but real growth was sustained even when the mineral and government sectors slackened.’ 

Meijia and Castel attribute Botswana’s success to a three-pronged approach. The first was economic diversification, which rendered the country less dependent on the mining sector. The second was the longstanding policy of de-linking expenditure from mining revenue and the third was investing surplus revenue for use by future generations.

Chile, meanwhile, is the world’s number one copper producer. It controls an estimated 20% of the world’s copper reserves and accounts for 11% of total global production. In addition, it currently produces 33% of the world's lithium, a commodity that is rapidly increasing in importance. Chile’s success is largely ascribed to similar factors as Botswana’s – the country has reduced the export share of ores and metals from nearly 90% in the early 1960s to 60% in the late 2000s. The government also introduced the Copper Stabilisation Fund in 1985 to balance the exchange rate and avoid fluctuations in government revenues associated with the boom-bust copper price cycle.

Additionally, Chile has a high degree of transparency. Its Finance Ministry regularly publishes information on operations, revenues, royalties, taxes, mining export values and production volumes. The Chilean Commission on Copper and the Mining Ministry also regularly publish information about environmental assessments and licensing petitions. 

A need for transparency

If commentators such as Burgis are correct that corruption and secrecy are substantive factors in the failures of so many states to translate their natural wealth into economic and democratic success, then transparency has a crucial role to play in the future of those states. Clare Short, former Chair of the Extractive Industries Transparency Initiative (EITI), has spoken to Materials World in the past about the possible impact of EITI (see Materials World, May 2016). She acknowledged that ‘the original reporting [did not lead] to much change,’ as reports often included ‘reams of figures that were not always completely reliable and gave little detail of what the figures meant, so that local citizens could make little sense of them’. However, those reports now contain ‘contextual information’, allowing interested citizens to understand the implications for themselves and their economies.

‘There is no magic in transparency,’ Short added, but it ‘can help to build a more informed national debate about the importance of the sector and how to manage it better’. In future, she hopes, the information could be used as leverage to achieve permanent reform in the governmental systems of resource-rich countries.

The countries that are regularly referred to as having avoided the resource curse and mentioned here – Botswana, Chile and Norway – have all, despite differing political situations, worked to diversify their economies, diverted some of their revenues to funds to mitigate future problems arising from the export of their resources and rank highly on global transparency indices. Others, such as the USA and the UK, do not have sovereign wealth funds but their economies are not reliant on their mineral and petroleum wealth. They also rank highly in transparency. 

A wealth of natural resources can clearly exacerbate problems in states with weak economic and political institutions but can generate economic growth and development in those with strong institutions and governments willing to act for the future. All resource-rich countries would be wise to consider the failures and successes of others. However, natural resources are not necessarily a curse.