Free Essay About A Resource Trap For Developing Countries

Resources are, by far, the sinews or the driving force of the economy. For centuries, countries have waged wars over lucrative resources that would give them a competitive advantage, improve the economy, trade, and help amass national wealth. Following that logic, resources should normally benefit whatever country has them at its disposal. However, it so happens that countries rich in oil, gas, and other mineral resources struggle to maintain economic stability. Their abundance attracts separatist groups or foreign intruders and produces poor and corrupt administrations that use resources as a means of building their own welfare. The conjuncture now is such that European counties that have far less nonrenewable resources have much higher living standards than resource-rich African, Asian and East European states do. Here lies a highly intriguing controversy that deserves particular scientific scrutiny and exemplification. The question now becomes: are natural resources a boon or a curse for developing countries?
Cao, Li, Ma, and Sun (1) note that plenty of societies experience income gap between wealthy regions with a ready access to advanced technologies and areas rich in natural resources, albeit poor in technological terms. In China, there is the possibility of a resource trap, wherein the economic inequalities between the privileged and the impoverished grow during socioeconomic development (Cao et al., 1). A number of reasons may rationalize the connection between resource abundance and poverty or slow economic growth. Patrick (n.p.) suggests that there is a clear, nay, incontestable interrelation between authoritarianism and energy dependence. As it stands currently, gas and oil constitute as many as 60% of exports in 23 countries, of which none is a genuine democracy, as suggested by Larry Diamond, the professor of political science and sociology.
In his book, Weak Links: Fragile States Global Threats and International Security, Stewart Patrick hypothesizes about the rationales behind such a paradoxical correlation. Firstly, resource revenues, which are easy to earn, liquidate an arch-important connection of accountability between the government and its people. The reason for it to be so is that such status quo decreases initiatives to tax other productive activities. Resources-related revenues produce overwhelming wealth that breeds or creates hothouse conditions for patronage networks and corruption. All of these consolidate the power of deep-seated elites as well as the supporters of such political regimes, widening the gap between income groups or social strata and halting the implementation of political reforms. To quote an example, the Arab Middle East, most notably, Saudi Arabia, rich in oil is a good case in point.
Patrick (n.p.) goes on to note that there is a connection between natural resource revenues and the slow pace of economic development, poverty, and the unequal distribution of wealth or inequality. Not only grabber-friendly or corrupt institutions, but also resource abundance results in low economic growth (Mehlum, Moene, and Torvik 16). Countries like Sierra Leone, Nigeria, Angola, Zambia, Venezuela, and Saudi Arabia have all showed the signs of a slowed growth despite their substantial resources. By contrast, such Asian tigers as Hong Kong, Korea, Taiwan, and Singapore do not enjoy resource abundance. According to Patrick (n.p.), resources may generate one issue known as Dutch Disease, by which the national exchange rate goes up, affecting the competitive ability of non-resource economy sectors. Countries may experience the volatility related to the prices of commodities, which hurts weak-state economies most, and the underdevelopment of the manufacturing and agricultural economy sectors in the course of boom periods in economies based on resources. Given the high growth showed by oil abundance, it is corrupt power elites that profit by such instead of improving people’s living standards. For example, Angola rich in oil showed a steady growth of 17% on an annual basis in the period between 2005 and 2010. Having said that, its human development index never went higher a depressing 0.49 (Patrick n.p.).
It should be borne in mind that abundant natural resources are reason enough for other countries and military forces to seize them. Over the centuries, resources have caused a good number of military clashes. If truth be told, one of the main reasons the USA invaded Iraq back in 2003 was oil wells needed for the consumption nation, such as America. Much the same can be said of the colonial era that saw France, Spain, and Britain fighting each other for years. Resource presence can provoke internal conflicts with all economic losses that they imply. Patrick (n.p.) notes that the availability of gas and oil resources in developing countries enhances the risk of violent conflicts. Angola, Nigeria, Chad, Pakistan, Burma, Papua New Guinea, Sudan and Pakistan are among the countries where conflicts erupted over gas and oil control.
As per econometric studies, the possibility of civil war breakout is in direct proportion to the availability of export goods like fossil fuels in the country. The prospect of resource rent may be prerequisite to a secession of a resource-rich region. Profits derived from resources may serve as the source of funding for local rebels. Resource wealth may breed poor governance, corruption, and extortion (Patrick n.p.). Being on everyone’s lips, Eastern Ukraine is a hotbed of war between Russia-backed rebels reinforced by Russian soldiers and weaponry and the armed forces of the defending country. The region rich in coal, gas, and other mineral resources is looking to become a breakaway state based on Vladimir Putin’s covert designs. Grabber-friendly state power institutions and poor governance produced by the abundance of natural resources allowed creating an illusional picture of the encroachment on the rights of the Russian-speaking population. Hence, the country that has a massive resource potential that would help it rebuild its devastated economy had to forfeit the Crimea abounding with underwater shelves and has to fight to retain its Eastern coals basins it has all but lost. The country is likely to experience the shortage of staple natural resources sometime in the future. The potential loss of coalmines spells catastrophe for workers since the region has lost thousands of jobs. Apart from its home heating function and electricity generation potential, cleaned coal is the driver of steel and other industries. Putin’s idea is possibly for Ukraine to remain energy dependent and within the sphere of Russia, not the EU, much less NATO. The lack of energy security that may emerge can send the country sliding into dependence on its neighbor, which makes it prone to the economic blackmail. Thus, the resource wealth has become a real curse for the country due to resource-related power corruptibility and dangerous neighborhood.
When it comes to resource curse or trap, Russia is a good case in point, with oil and gas impeding economic progress and political reforms in the country. Now that sectoral sanctions have struck at the national economy, the overreliance on natural resources as one of staple revenue articles is sure to make itself felt by common citizens. The only reason for Europe not to have caused the economy of the Russian Federation to collapse during the escalating stages of its invasion of eastern Ukraine is the lack of energy security and energy carrier diversification. Russia is also the end market for the production of European states and a contracting party to a number of multilateral and multibillion treaties.
However, what does matter is that the Kremlin is a political clique run by a former KGB colonel Vladimir Putin accountable for creating a highly polarized society composed of two extremes, the rich and the poor who, though de jure being the owners of the national wealth have found themselves caught in the trap of political immaturity. According to Naim (94-95), a large amount of oil coupled with weak public institutions generate poverty, corruption and inequality, as is the case in Russia (qtd. in Treisman n.p.). New York Times columnist, Thomas Friedman (n.p.) notes that there is a correlation between the extent of liberty and world commodity prices in such resource-rich country as Russia. The higher the price of oil is in the country, the less freedom people will enjoy. The trend is to be observed in the period from Gorbachev to Putin (qtd. in Treisman n.p.).
Treisman (n.p.) notes that it stands to reason that gas and oil have remained central to the political economy of Russia for the past two decades. Petroleum prices went into a steep freefall in the 1980s precipitating the USSR into the economic crisis and an eventual politico-administrative decomposition. As of now, the key state-controlled gas and oil companies have come to serve as regime’s pet instruments for eating away at civic freedoms. Major media outlets critical of the political regime fell victim to the administrative muscles and business maneuvers of the gas monopoly Gazprom controlled by the Kremlin. Rosneft, an oil company owned by the state, took over the assets of the now released oligarch by the name of Mikhail Khodorkovsky known for bankrolling civil society groups and the political opposition of the current president (Treisman (n.p.). Hence, natural resources like gas have allowed Vladimir Putin to strip the Russians of their political freedoms, bring media under complete control, arrange for economic takeovers to have place, and take political opponents out of the game. The ones who might be wishing they never had rich natural resources are common people in Russia.
Speaking of the aforementioned Soviet retrospect, the sense of déjà vu must be overwhelming in Russia presently. If the leading media and economists are to be believed, Russia oil prices will reach a marginal 40 or 50 dollars per barrel in the future, which is threatening to the one-dimensional economy. The extractive industry is much more profitable for the Kremlin since it does not necessitate extensive cost sheets as much as social and other infrastructural projects do. Since oil and gas make up roughly half of the Russian budget, there are not so many alternatives left. In the time of oil price downfall ascribed by Pedersen (n.p.) to the recovery of Libya’ production capacity, USA’ gaining the status of one of major market players thanks to shale oil boom, the oil price war between the Kuwaitis and Saudis, OPEC members’ dissension, and other factors, Russia is bound to have hard times selling its staple commodity.
With no backup industries in a competitive state, the country may experience a sure budget deficit further aggravated by its status of a pariah state since arguably no lending country will issue a loan to Russia following sanctions. Thus, the lack of Russian government’s investment in other industries due to unwillingness to improve the welfare by rebuilding the middle class that could potentially demand that reforms be effected has already produced the one-dimensional economy now besieged by economic sanctions brought forth by the megalomaniac ambitions of the man at the helm. Putin is alleged to be monopolizing the economic sector by pocketing chief gas and oil extractors. What was showcased as national pride has become the biggest curse.
The lack of freedom and democracy eat away at financial initiatives and the development of private entrepreneurship. Putin-initiated arrests of oligarchs often on framed charges do little to bring new investors in the country for want of a proper investment climate, with economic liberty serving as a benchmark for foreigners willing to acquire assets, become stakeholders, loan out money to Russia, or carry out other financial transactions. The annexation of the Crimea, the proxy war in Eastern Ukraine, and gas clashes with its Western neighbor have exposed Russia as an unreliable trade partner, which is already leading foreign businesspersons to reconsider their strategic partners and seek energy sources and consumer markets elsewhere. It looks certain that Europe will diversify their source of energy via green technologies, import from the USA and OPEC. Far from being a triumph, Putin’s geopolitical ambitions have alienated the number of oil-dependent countries once willing to trade with Russia. Hence, huge oil and gas deposits in the hands of corrupt officials has already resulted in Russia under-receiving petrodollars and being billions of dollars short in lost contracts.
Clearly, resource abundance begets tyranny that turns oil and gas into the tool of a political blackmail that runs counter to energy security doctrine prioritized by Europe. No way does Europe want to have a long-term partnership especially in the energy sector with an aggressor that needs pacifying through sanctions affecting the economic interests of consumer countries. Rather than value the current network of oil and gas consumer countries, Russia has done everything to ruin its status of a strategic partner. The country should have never put its geopolitical ambitions and hidden agenda on display, with OPEC, the USA, and other energy markets in place and ready to offer energy supply.
At this conjuncture, there is the possibility of Russia continuing to lose its international marketability. Treisman (n.p.) states there is a question of whether Russia is doomed to endure its current authoritarian government that has strengthened its grip around the state thanks to oil and gas. Unclear remains also if the country will morph into an oil-fueled autocracy reminding of the Persian Gulf states. What Senator John McCain referred to as a “gas station run by mafia masquerading as a country” is a clear mafia state that has misused their people’s resources and turned them into a genuine curse. The media and government may keep insisting on how Russia is a democratic state; however, it remains to be observed how and when the international pressure and the overreliance on abundant natural resources will cause irreversible economic outcomes.
Resources bring wars and conflicts to the countries that have them with respective economic damage that they entail. Angola, Nigeria, Chad, Pakistan, Burma, Papua New Guinea, Sudan and Pakistan are among the countries where conflicts erupted over gas and oil resource control. Fossil fuels and resource rent cause civil wars to erupt in developing countries for motives and reasons like secession, rebellion financing possibilities, poor governance, corruption, and extortion. Eastern Ukraine rich in coal, gas, and other resources has become the region where Russian separatist ideology found fertile ground, taking advantage of corruptibility and social wealth contrasts in part produced by resource abundance. Damage done to resources or the potential loss thereof inflicts economic detriment since coal is a job generator, a principal component in industries, a source of electricity and heating, and a guarantor of energy safety and subsequent immunity from the economic extortion practiced by Putin’s government all to often.
Speaking of resource curse, there is no better country to illustrate the validity of the statement than Russia itself. A large amount of oil coupled with weak public institutions generate poverty, corruption and inequality. Natural resources and extracting companies have allowed Vladimir Putin to strip the Russians of their political freedoms, bring media under complete control, arrange for economic takeovers to have place, and neutralize political opponents. The country with a near-one-dimensional economy that relies heavily on natural resources, such as oil and gas, has come near to having its economy tumble down following the economic sanctions imposed by Europe. In initiating the regional conflict in the Eastern Europe, Russia opened up the box of Pandora as sanctions coupled with the oil price downfall are on the point of hitting the budget replenished largely though petrodollars. By exposing itself as an unreliable aggressor country, Russia has compromised itself as a strategic trading partner in the eyes of Europe seeking energy security. Hence, Russian lavish natural resources has done it an ill favor by bringing corrupt political elites strengthening their grip on the population through repressive means. Overall, civil conflicts in African countries, the conflict in the Eastern Europe, Russia’s involvement, its corruption beget by resource abundance, and a history of gas wars all show resources may be more of a curse than an actual boon for developing countries.
Works Cited
Cao, Shixiong, Li, Shurong, Ma, Hua, and Yutong Sun. “Escaping the Resource Curse in China.” Royal Swedish Academy of Sciences. 2014. Web. 20 Oct. 2014.
Mehlum, Halvor, Moene, Karl, and Ragnar Torvik. “Institutions and the Resource Cruse.” The Economic Journal. 116 (2006): 1-20. Web. 20 Oct. 2014.
Patrick, Stewart M. “Why Natural Resources Are a Curse on Developing Countries and How to Fix It.” The Atlantic. 30 April 2012. n.p. Web. 20 Oct. 2014.
Pedersen, Chris. “5 Reasons Oil Prices Are Dropping.” OilPrice.com. 13 October 2014. n.p. Web. 20 Oct. 2014.
Treisman, Daniel. “Is Russia Cursed by Oil?” Columbia SIPA Journal of International Affairs. 63.2 (2010): n.p. Web. 20 Oct. 2014.