Are Resource-Rich Countries Doomed By The Resource Curse?

 

I’m not an expert on economics, but I like reading about how the mineral industry affects a country’s economy. As I was reading about mineral economics, I came across the intriguing concept of the “resource curse.” I’m glad to share it with you.

The idea behind the “resource curse” is that countries that are well endowed with non-renewable resources, especially minerals and fuel, tend to have slower economic growth than countries with fewer resources. [1]

A 2011 research paper by economist Dr. Frederick van der Ploeg of Oxford University contains a comprehensive analysis on the resource curse concept. [2]

The paper mentions several studies that show that the resource curse does exist. Many resource-rich countries remain poor until now.

However, the paper also argued that the resource curse is is not “set in stone.” Some resource-rich countries were able to effectively utilize their mineral and fuel resources to spur economic growth.

Dr. Frederick’s paper presented Nigeria as the most dramatic example of the effects of the resource curse. Oil production in Nigeria increased ten-fold from 1965 to 2000. However, its income per capita has not improved. Even worse, poverty rate went the other way – almost tripling during that time frame.

On the other hand, a country that managed to beat the resource curse is Botswana. This is despite being heavily dependent on diamond mining – more than twenty percent of Botswana’s GDP comes from diamonds. The paper mentions that Botswana spends one of the highest public expenditures on education as a fraction of the GNP. In addition to this, World Bank data from 1985 to 2009 shows that poverty rate in Botswana steadily decreased. [3]

Norway is another success story. Norway managed to sustain the growth of its manufacturing industry as well as its oil industry. Supported by well-developed social and economic institutions, Norway was ranked as the 5th least corrupt country in the world in terms of corruption perceptions index by Transparency International. [4]

In 2014, the oil production of United Arab Emirates amounted to 4% of the world oil production. [5] UAE’s income from oil was used to construct buildings, create jobs, increase life expectancy, [6] and ultimately improve quality of life. Dubai, for example, translated its earnings from oil into establishing and improving a diverse set of non-resource industries like manufacturing, telecommunications, and tourism.

Another country that became richer from mining is Chile. In 2014, around 13% of Chile’s GDP came from mining—mostly copper. [7] With the wealth generated by its mining industry, Chile was able to consistently reduce poverty rate and increase life expectancy. [8]

The paper also mentioned how, in the past, some countries were able to economically benefit from its natural resources.

From the 1800s to the 1900s, the United States successfully used its resources to improve its economy. The success of utilizing the mineral and oil wealth was partly due to the advancement of knowledge of mining engineering, metallurgical engineering, and geology, as well as the support of an accomodating legal environment. While becoming a leader in production of minerals and oil, the US managed to become a leader in manufacturing as well. Now the US is one of the richest countries in the world.

Germany and the United Kingdom also took advantage of their minerals in the late nineteenth century—maximizing the economic contributions of the wealth generated from their coal and iron deposits.

While there were countries that managed to use their natural resources to improve their wealth, still other countries were not as successful. The paper notes that, generally, countries that are more dependent on their mineral and fuel resources have fewer students enrollees in schools, expected years in schooling, and spending on education. This means that countries that are more dependent on these resources also have slower economic growth, since education is positively correlated with growth. We need to stress, though, that these are correlations, and not necessarily causations.

The paper also discussed a study that analyzed 135 countries from 1975 to 2007 that indicates that having abundant natural resources decreased non-resource exports by up to 70% and increased non-resource imports by up to 35%. These findings support the concept of the “Dutch disease,” which is the idea that an increase in mining or oil production will ultimately result in a decrease in exports and increase in imports.

The Dutch disease is commonly perceived as a problem because the export sector is often seen as the driver for economic growth. The export sector is thought to continuously improve slowly through small innovations and through experience—a process called “learning by doing.” Some researchers argue that an increase in mining output temporarily restrains growth of the export sector thus preventing them from “learning by doing.” A stunted export sector will hurt the economy in the long run.

The paper looks at corruption as another reason for the resource curse. Dr. Ploeg argued that corruption and not the Dutch disease is more likely to be the reason for poverty in Nigeria, “Natural resources also make it attractive for political elites to block technological and institutional improvements, since this can weaken their power.” These countries have weak institutions like dysfunctional legal systems and low transparency. In this case, shady dealings, corruption, and irresponsible resource extraction pervade the mineral industry. The examples of resource-rich countries with weak institutions that are mentioned in the paper include Angola, Nigeria, Sudan, Venezuala, Sierra Leone, and Congo.

On the other hand, in countries with strong institutions like high government transparency, effective legal systems, and fair mining policies, less people resort to “rent seeking”—exploiting the natural resources without giving benefits to society. Instead, people will engage in economy-contributing mining activities. As examples of resource-rich countries with strong institutions, the paper enumerated, Australia, Canada, US, New Zealand, Iceland, Norway, and Botswana. Countries that have strong institutions prevent rent seeking and encourage the transformation of mineral and fuel wealth to other sustainable industries like the manufacturing sector. They don’t experience the resource curse.

In the case of the Philippines, the Mining Act of 1995 (Republic Act 7942) includes provisions that ensure that mineral wealth is translated into social and economic benefits. The law requires mining companies in the country to pay taxes. These include corporate income tax and excise tax. The law also requires that mining companies allocate funds for environmental enhancement and protection programs and social development and management programs.

The resource curse is not inevitable as proven by countries like Botswana. The challenge for resource-rich countries is to turn the resource curse into a blessing by establishing strong government institutions, lowering corruption rates, and implementing fair mining policies. These will ensure that there is a balance of growth between the resource and non-resource industries, and that mineral and fuel wealth is maximized and transformed into other sustainable investments that will improve the economy in the long run.

 

References:

  1. Resource Curse Definition | Investopedia. Investopedia. 2011. Available at: http://www.investopedia.com/terms/r/resource-curse.asp. Accessed March 30, 2016.
  2. Ploeg F. Natural Resources: Curse or Blessing?. Journal of Economic Literature. 2011;49(2):366-420. doi:10.1257/jel.49.2.366.
  3. Botswana | Data. Dataworldbankorg. 2016. Available at: http://data.worldbank.org/country/botswana. Accessed March 30, 2016.
  4. Transparency International – Country Profiles. Transparencyorg. 2016. Available at: https://www.transparency.org/country/#NOR. Accessed March 30, 2016.
  5. International Energy Statistics. Eiagov. 2016. Available at: http://www.eia.gov/beta/international/rankings/#?prodact=53-1&cy=2014. Accessed March 30, 2016.
  6. United Arab Emirates | Data. Dataworldbankorg. 2016. Available at: http://data.worldbank.org/country/united-arab-emirates. Accessed March 30, 2016.
  7. Chile GDP Annual Growth Rate | 1987-2016 | Data | Chart | Calendar. Tradingeconomicscom. 2016. Available at: http://www.tradingeconomics.com/chile/gdp-growth-annual. Accessed March 30, 2016.
  8. Chile | Data. Dataworldbankorg. 2016. Available at: http://data.worldbank.org/country/chile. Accessed March 30, 2016.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s