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Perspectives on Natural Resource Curses

Geoff Riley

13th October 2012

My A2 students have been researching and writing about the economics of natural resource curses - some of their perspectives are provided below.

Tom Wrigglesworth

The resource curse is 'the belief or hypothesis that natural resource wealth and its exploitation hinder rather than help economic growth in developing countries' (Tilton, 2010). However it must be noted that not all developing countries suffer the natural resource curse, for example Botswana 'through good government policies, strong political leadership, and a sound long-term development plan' (Newshour).
As the world bank suggests 'strong economic growth in the past decade among African countries rich in oil and minerals has failed to make a significant dent on their poverty levels.' In countries where 'the control of the revenues from natural resources and their extraction process is concentrated in a few households, the abundance of natural resources could raise inequality in the income distribution.' (Alessandrini, 2009). The model which Allessandrini created was shows that 'countries displaying a higher level of ores and metals exports show also a higher level of income inequality.' (Alessandrini, 2009). As is suggested in the exert 'some countries, such as Angola, Congo-Brazzaville and Gabon' have let the natural resource trap 'increase the percentage of the population living in extreme poverty'.

The natural resource curse also occurs due to the links it often has with internal conflicts. Conflicts link to the natural resource trap are such because groups that are part of the conflict need money and they take it wherever they can find it which usually suggests the natural resources. As is suggested in Paul Collier's Bottom Billion the quality of a resource can influence the prosecution of a war. Collier references Angola in Bottom Billion where, the rebel organization UNITA drew its funding from sources from the trade in gold, timber, wild animals and diamonds. After the end of the Cold War, oil and diamonds came to dominate the war economy. The Angolan government had access to the major oilfields in the coastal region, while UNITA funded its war from the revenue from the diamond mines in the areas under its control. During the 26 years of civil war, both sides profited from unhindered access to the revenues from the extractive industries as the war progressed as Collier suggests as the success of the war matched the prices of oil and diamonds. (Stiftung)

From 1997 to 2010 there were the worst human casualties since World War II with over 4 million deaths. The armies and 'proxy militias' of six different countries as well as those of the Congolese government and 'numerous rebel groups plundered and looted the country's vast natural resource wealth, including coltan, gold, cassiterite, copper, cobalt, timber, diamonds and other precious stones.' (Stiftung). The countries surrounding the Democratic Republic of Congo also 'played an active role in the exploitation of the country's natural resources throughout the conflict.

Australia exports 26% of its natural resources to China and so is highly dependent on China's continued growth and development. This dependence combined with price volatility is another cause of the resource curse. With regard to export dependence countries are very susceptible to macro volatility these include: swings in the terms of trade; swings in the balance of trade and big swings in fiscal balance. As a result of all these variable factors it is very hard to determine a short run and long run plan. Evidence of the price volatility causing the natural resource curse can be found in 'emerging and developing countries, merchandise exports will likely shrink by around 7.0% in 2009, causing their annual real GDP growth to slow to 1.5% (from 6.0% in 2008).' (Hodgson, 2009).



The natural resource curse can also be caused by Dutch disease. Dutch disease is defined as 'the deindustrialization of a nation's economy that occurs when the discovery of a natural resource raises the value of that nation's currency, making manufactured goods less competitive with other nations, increasing imports and decreasing exports.' (Investor Words, 2012) Dutch disease does not only effect the poorest developing nations but also developed nations however the effects are more sincere in the former. Thanks to the discovery of oil in 1974 and 1979 in Indonesia the Indonesian Rupiah greatly increased in value pricing them out of the manufacturing market (McCawley, March 1980). Dutch disease as a result of making less manufactured goods causes deindustrialization effects which intern will lead to a decrease in jobs as companies will go out of business.

It has been suggested by economist Todd Moss that governments should give away the revenue that is made from natural resources. This is already being done with Alaskan oil money but only a proportion is being given away Moss is suggesting that it all be given away. He argues that you would not only in very short term get an 'immediate short term boost' (Joffe-Walt, 2010), due to the expectations of receiving this on a regular basis would cause an 'intense amount of public demand for accountability from the government' (Joffe-Walt, 2010). Arvind Subramanian agrees with Moss however he believes that tax revenue will be the biggest benefit and this will also help the government to maintain power because 'taxation is the glue that connects government and citizens'. Taxation also helps to increase the efficiency of spending because as Subramanian says nobody likes being taxed and so if the money is not being spent correctly they will be voted out in a democratic system. This will mean that the government will want to help the citizens rather than the mining companies.

However there are two issues arising from Moss and Subramanian suggestion, as was indicated when they visited Ghana and Nigeria The first issue was a matter of logistics: in Ghana there is no way of knowing 'who is and is not from Ghana' and if there is no sound financial system it can be hard to split up billions of $ worth of revenue. The second issue was indicated to Subramanian in Nigeria where it was suggested that if a government wished to stay in power then they had to retain the revenue because as he says 'money is power'. Put simply "If the current guy in power does not want to give up power, my idea has no hope of succeeding".

Joseph Stiglitz in the Guardian points out that 'countries must do more to ensure that their citizens get the full value of the resources' (Stiglitz, 2012). He suggests that this is conflict of interests which are usually foreign, between 'natural-resource companies and host countries: the former want to minimise what they pay, while the latter need to maximise it'. Often it is the host country that dictates proceedings and so with more transparency and fairly auctioned off contracts the citizens of the natural resource country are likely to benefit.

Again there is the matter of transparency when it comes to using the money that has been gained, presuming the option above is not taken. This money 'must be used to promote development' (Stiglitz, 2012). As many countries that have natural resources suffer from Dutch disease it is worth investing money improving infrastructure because the country need to be 'getting the resources out of the country at as low a price as possible,' because they will not 'process the resources in the country, let alone to develop local industries based on them.' However as Stiglitz points out the way to achieve real development is through training local workers, developing SME's (small- and medium-size enterprises) and 'providing inputs for mining operations and oil and gas companies, domestic processing, and integrating the natural resources into the country's economic structure.'

However there are two issues surrounding this. Firstly with corruption being high in many developing countries it is difficult to create a transparent system for the government to operate with. Secondly there is the issue that many countries have already signed bad contracts that give a disproportionate share of the resources' value to private foreign companies. However Botswana's renegotiations of such contracts laid the foundations of its remarkable growth for the last four decades is an indication that it can succeed.

Finally with regard to possible solutions for the resource curse is the need to 'move more deliberately' because 'companies will tell Ghana, Uganda, Tanzania, and Mozambique to act quickly' (Stiglitz, 2012) because of the company's profit motive and the countries many of whom have deficits and corrupt officials. However 'the resources will not disappear, and commodity prices have been rising. In the meantime, these countries can put in place the institutions, policies, and laws needed to ensure that the resources benefit all of their citizens.' However the myopic state which both the country and the government reside in is harming their country from an economic and social perspective.

The problem with moving more deliberately in such volatile markets may result in a lower price being paid for the resource as price fluctuations are often unpredictable. Once again there is also the issue of corruption draining the money from infrastructure and other development projects which intern inhibits development.

Despite all of the research that has been undertaken there is still no silver bullet to cure the resource curse. However as has been indicated above minimising corruption and transparency in all aspects of dealing with natural resources are the most important factors to beating the curse. These are not easy to do but countries such as Botswana have succeeded in doing this.


Bibliography
Alessandrini, T. B. (2009). Natural Resources: a Blessing or a Curse?: The Role of Inequality. Centre for Financial & Management Studies.
Hodgson, A. (2009, September 17). Mapping Global Exports: Export dependence across the world. Retrieved Ocotber 12, 2012, from EuroMonitor International: http://blog.euromonitor.com/2009/09/mapping-global-exports-export-dependence-across-the-world.html
Investor Words. (2012). Dutch Disease. Retrieved October 12, 2012, from Investor Words: http://www.investorwords.com/1604/dutch_disease.html
Joffe-Walt, C. (2010, June 18). Resource Curse a solution: give away money.
McCawley, P. (March 1980). 'Indonesia's New Balance of Payments Problem: a Surplus to get rid of'.
Newshour, P. Analyzing The Natural Resource Curse. Washington DC: PBS News.
Stiftung, H. B. Natural Resources and Conflict. Berlin: The Green Political Foundation.
Stiglitz, J. (2012, August 6). Africa's natural resources can be a blessing, not an economic curse. Retrieved October 12, 2012, from Guardian: http://www.guardian.co.uk/business/economics-blog/2012/aug/06/africa-natural-resources-economic-curse
Tilton, J. E. (2010, May 15). The Resource Curse: Causes and Cures. Colorado School of Mines.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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