The MasterBlog: What Resource Curse? - By Charles Kenny | Foreign Policy
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Friday, December 10, 2010

What Resource Curse? - By Charles Kenny | Foreign Policy

What Resource Curse?

Is it really true that underground riches lead to above-ground woes? No, not really.


Bad news: Mozambique has just discovered between 6 trillion and 8 trillion cubic feet of gas sitting off its shoreline -- quite enough for commercial production. This on top of a recent coal-mining boom is destined to make the country a major natural resource exporter. Joining the East African country in recent misfortune is Papua New Guinea, scheduled to start exporting $30 billion worth of natural gas, and Afghanistan -- particularly blighted by the discovery of iron, copper, cobalt, gold, and lithium deposits with a combined value over $1 trillion. Oh, lackaday. Whatever chance they had of sustaining a stable, economically robust democracy is surely down the pit latrine now.
How so? Enter the resource curse -- the idea that the more stuff dug out from on or under a country, the slower it will grow and the higher the risk it will descend into civil war. Versions of the curse have been around for some time. Back in the 1970s, economists worried about "Dutch disease." Countries that exported a lot of gas or oil would see their exchange rates go up as a result. This, in turn, could make their manufacturing exports uncompetitive. But the idea really picked up steam in the mid-1990s, when Jeffrey Sachs and Andrew Warner, then both at Harvard University, found that countries that exported more agricultural products, minerals, and fuels saw slower economic growth.
Sachs and Warner highlighted Dutch disease and its knock-on effects as the likely cause. But other researchers looking at the same data argued that the link might be through empowering kleptocratic leaders with resource rents or the destabilizing political impact of easy money. In a matter of a few years, resource exports were charged with a host of ill effects -- not least, low education spending, unstable government, civil war, corruption, and poor governance.
The curse is the type of counterintuitive idea that makes for a great newspaper op-ed. Nonetheless, the curse is also the kind of counterintuitive idea where intuition may have been right to begin with. In 1997, the World Bank produced some measures of total natural resource wealth -- including agricultural land, mineral and oil resources, and protected areas. The richest countries in terms of resources per citizen were Australia, Canada, New Zealand, and Norway. Their average income per head in 2008 was $24,430. Jordan and Malawi were at the bottom of the list. Jordan has a per capita income of $5,702; Malawi's is $744. Looking at mineral wealth alone, Venezuela and Norway were at the top, while Belgium, Benin, Ghana (before the recent oil discoveries), and Nepal were at the bottom. While Ghana's oil discovery suggests one problem with the rankings -- rich countries have been better explored for mineral deposits -- nonetheless, the list hardly suggests that resource scarcity is the secret to rapid growth.
Looking at recent growth across countries, Swiss economist Christa Brunnschweiler concludes that economies with greater resource wealth actually grew faster between 1970 and 2000 than resource-poor countries. She also finds no evidence that greater resource wealth is associated with weaker institutions, a finding repeated by Daron Acemoglu at the Massachusetts Institute of Technology.
Together with her colleague Erwin Bulte, Brunnschweiler also looked at the link between natural resources and civil disorder. They found that countries with more natural resource wealth were less likely to descend into civil war in the first place. The same result held whether they were using a broad measure of resource wealth or focused only on minerals or oil. Elsewhere, Stephen Haber and Victor Menaldo of Stanford University and the University of Washington, respectively, studied the relationship between oil revenues and democracy over time across countries. They found that democracies were actually made more resilient by growing oil revenues -- while they couldn't find an impact one way or another when it came to autocracies. Sure, there are cases where oil revenues and autocracy increased together. It is just that there are at least as many cases where that didn't happen -- and more cases where democracy strengthened as revenues went up.
How to reconcile these results with all the papers and articles that find a curse? Earlier studies looked at the importance of natural resource exports at a particular moment in time. There, the relationship holds -- high dependence on resource exports is associated with lower growth and risk of civil war. But that's a strange way to measure "the curse of resources." According to the usual story, the curse involves the misfortune of sitting atop an oil field or diamond-bearing rocks. It's a story of abundance -- as examined by Bulte and Brunnschweiler -- not dependence.
And dependence has got to do with a lot of other things besides mineral reserves. It is true that many countries that rely heavily on natural resource exports are poor and unstable. That's because poor and unstable countries are rarely globally competitive in banking or computer design (it's hard to develop a flourishing microchip industry as the bullets fly). Natural resources are pretty much the only thing such countries have a comparative advantage in trading. Again, countries don't get rich if all they do is produce crops and dig stuff out of the ground. Getting rich takes a vibrant services sector and at least some manufacturing. So countries where digging stuff out of the ground is an especially large part of what goes on in the economy are in trouble. But they are in trouble because they've failed so miserably to create an environment where services and manufacturing can flourish -- not because they happen to have a diamond deposit.
Do kleptocratic regimes exploit natural resources to pad their bank accounts, buy off opponents, and purchase weapons to cow holdouts? Of course they do. Exploiting, padding, bribing, and bullying are what kleptocrats do best. But they are equal-opportunity exploiters. If natural resource rents aren't available, they'll find something else -- and maybe do something worse to get it. For every Gen. Sani Abacha skimming billions off Nigeria's oil wealth, there is a Field Marshal Idi Amin massacring Ugandans by the thousands without the aid or incentive of significant mineral resources.
Happily for those countries stuck atop piles of diamonds or lakes of oil, then, it turns out the resource curse must have been enchanted by a pretty feeble witch. Once you look at the evidence more carefully, the usual argument is turned on its head. Countries that rely on natural resources for a large part of their output are indeed cursed -- by poor quality government and an institutional environment that stifles the growth of manufacturing and services. That's the good news for Afghanistan, Mozambique, and Papua New Guinea: They won't necessarily get any poorer or more unstable thanks to their massive mineral reserves. But bad news follows, too: Given the comparatively weak state of their current institutions, the countries are unlikely to use the money generated to become the next Norway, either.
That's why the most heralded talisman against the resource curse -- improving institutions through greater transparency and oversight -- makes sense regardless. In fact, because so much of the revenues from extractive industries flow through governments, improved oversight might be a particular help after a mineral find. The Extractive Industries Transparency Initiative, for example, publishes audited statements regarding payments from industry to government in royalties and taxes. Another approach, championed by Todd Moss at the Center for Global Development, is to pass on oil revenues directly to citizens -- a model adopted in Alaska. These are good ideas, and it is great news that Mozambique and Afghanistan have signed up to the Transparency Initiative.
But at heart, they are good ideas because all governments should be more transparent and increase the flow of resources to communities, no matter what's under their land. Blaming oil wealth for poverty, though, is like blaming treasure for the existence of pirates.
Charles Kenny is a senior fellow at the Center for Global Development and a Schwartz fellow at the New America Foundation.

What Resource Curse? - By Charles Kenny | Foreign Policy

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