The Resource Curse, which is also called the paradox of plenty, refers to the observation that countries that are rich in natural resources, usually non-renewable natural resources like metals, minerals, oil etc. tend to see lower rates of economic growth, problematic experience with authoritarian governments, and generally poor development indicators when compared with countries that have lesser or none of the natural resource (Venables, 2016). This resource curse is not a rule or law, but rather a struggle to explain why resource rich countries (the most common under analysis being oil-rich ones) that possess all the financial and economic means to reach a fully developed status and sustain complex democratic systems, not do so?
The discussions over resource curse are typically wide ranging – from questions over cultural propensities, to whether government and governance depend on economic well-being at all. In this essay, I consider the institutional approach to Resource Curse – that the existence of robust institutions determines the difference between countries. I also discuss the sequence of institutions and wealth emerging in a country, by looking at successful examples of resource-lifted countries with robust institutions. I also look at the potential variety in institutions across cultures, whether they can fulfil development outcomes, and whether development means global convergence in terms of values and systems.
Resource Curse: The Ideas and Theories
The case for resource curse is not a cast iron theory – for instance, during commodity boom periods like the rise in oil prices during the 2000s, the resource rich states can inflate per capita GDP and welfare spending via heightened revenues. However, not only is this resource dividend not sustainable in itself, past experience has shown that it is not invested in a prudent manner that will allow an escape for the country from commodity market dependency. Other indicators which highlight resource curse are observations of mendemic corruption, authoritarian regimes, internal conflict and a general lack of individual and press freedoms in such countries. As Sachs and Warner (2001) observe:
“Many resource-rich countries have been resource rich for a long time. If natural resources really do help development, why do not we see a positive correlation today between natural wealth and other kinds of economic wealth? the fnding in repeated regressions using growth data from the post-war period is that high resource intensity tends to correlate with slow growth. This finding is not easily explained by other variables, since this empirical result survives the introduction of a long list of control variables.”
Models of endogenous economic growth have often theorized that natural resources (endowments) might play an important role in economic development. The resource curse hypothesis appears to contradict this. It is important to note that the resource curse can’t be regarded as a rule, as there are examples where countries have been able to leverage resources to emerge into fully developed state, and indeed continue to do so. Further, it is possible that any country with resources could, any time, begin using them (the revenues from them) more constructively to create long lasting development. So when we say resource curse, we are analyzing a current situation only, and the drivers for that situation.
There are several proposed explanations for the resource curse. One explanation for it is that economistic reasons of trade and prices are to blame. In this argument, the fact that resource economies tend to be high priced (in terms of labour and other factor costs) is the deciding factor why they are unable to escape the resource cycle and move to manufacturing and service economies (Rosser, 2006). This viewpoint assumes that price competition is the key to building a robust multi-sector economy, however it is far from understood that historical development has anything to do with cross national price differences. Moreover, seeking purely economic reasons would not explain the political strife, authoritarianism and other repressive elements that form part of the resource curse picture.
Another idea is the Rational Actors Theory. According to this, natural resources are ideal for rent seeking behavior, and thus are immediately exploited by those who have control over them to maximize revenues and further, to keep the maximum share of revenues for themselves rather than for general purposes (Rosser, 2006). In this view, political elites have bad incentives to exploit natural resources through a kind of systemic corruption, maximize gains during boom periods, and minimize losses during trough periods. The general public would not see any dividend from the resources at all. A variation on this is the idea of the Rent Seeking State. In this view, individuals are not to blame, but the state as a whole is complacent thanks to the security of resource revenues. Such a “rentier state” would not need to stimulate additional activity for economic sustenance, and thus faces similar negative incentives to be inactive, corrupt and apathetic (Brunnschweiler and Bulte, 2007).
A third concept is the Historical-structural view – namely that the interplay of social groups, such as tribes or religious communities, and their tendency to form along class lines of the more and less powerful, have had a profound influence on political outcomes (Rosser, 2006). Along with the rational approach of economics actors to act in narrow self-interest, these ideas form the core of the institutional approach to resource curse. Institutional economics studies the broad scope of social entities which govern and regulate behaviors, economic and otherwise and thus create and modify incentives for individual action. In this view, resource rich countries succeed or fail based on the strength of their institutions. Some institutional explanations for resource curse are:
Resource Dependence vs Resource Abundance: In this view, the institutions make the difference between a state being resource dependant (having only the key resource for revenue and sustenance) and simply having an abundance of resources. In this view, the resource rich state does have incentives to slip into dependant systems – the favourable balance of trade, presence of foreign currency flow, and the option of purchasing political stability. Institutions can intervene in this process – civil society groups, academia, or otherwise those viewpoints that favour using resource dividends to pay for longer term investments and more diverse economies. If such groups have voice and influence, resource wealth can be a boost to growth and development. In developed Norway, oil wealth has been used to sustain not only a large welfare state, but also the largest sovereign wealth fund in the world – thus transferring capital to a form that cn be useful across generations. In the absence of such institutions, the risk of misuse becomes significant. Short term maximization becomes the guiding paradigm.
Entrenched Social Groups and/or Class Conflict: In this approach, varying social institutions are the root cause of underdevelopment and political repression. For instance, the necessity of the House of Saud to rule Saudi Arabia in a position superior to other tribes can be thought of as the primary interest of the Saudi political system. In this view, the rational choice of the political elite would be to maintain a one-party state and deny control. Further, the repercussions of tribal laws and ethics may imply an extremely high cost to yielding power, making peaceful transfers of power difficult or impossible. Similar patterns are often seen in resource rich countries of Africa, where the fear of retribution and the prevalence of violence may act as incentives for dictatorships. Often, such authoritarian forms of government are supported by the international community, including many democracies, in the interests of stability. Such a view possibly well explains the political dimensions of the resource curse, but is perhaps non-committal on the economic aspects of it.
Institutional Evolution: In this view, the development of democratic and robust institutions is an evolutionary process, rather than being automatically present or borrowed from existing successful examples. Thinking in evolutionary terms, two possible options emerge: first, that the arrival of wealth through resource extraction has interrupted the natural process of development, which would have forced the development of diverse skills and perhaps seen more participative institutions; or, the second possibility is that the evolutionary path of resource rich countries is fundamentally different due to their different historical, religious, cultural or other elements. This is a difficult analysis, and some aspects of which can be controversial. However, both have some evidence to support them. For example, the prevalence of Dutch disease in resource rich economies creates incentive disruption towards the development of skills. Even in developed, democratic Australia, the minerals boom decimated the manufacturing base of the country by drawing away skilled workers to less skilful but more lucrative (in the short term) mineral industries. Restoring the industrial base however, is not as easy a task as moving workers to unskilled activity, and Australia would struggle to recreate it. For the second possibility, it may be that the impact of colonialism disrupted pre-existing stable institutions, but did not replace them with viable modern institutions.
Institutions, Resources and Development in the Past
The western approach to development can be called organic – in that it emerged as a result of multiple circumstances including the enlightenment, people’s movements, industrial revolution and many others. The end outcome of all of which are states which (comparatively at least) are egalitarian, technologically advanced, economically diverse, and have a disproportionately large (in terms of population) position in global intellectual and cultural life. Western institutions in particular displayed enormous evolution from feudal-monarchial systems to liberal democracies of today. Resources however, played a key role in development. It can be argued that the major impetus of colonialism was conquest for resources – natural such as gold and silver for the Spanish in Latin America, or for human resources as with the British seeking the markets of India for Lancashire manufactures.
The need for resources to fuel development activities (across the spectrum, not just welfare related) seems supported by history. At the same time, European domestic political turmoil, America’s bloody expansion westwards, and the global political rivalries of the colonial ere are by no means indicative of a smooth path to development. It may be that the emergence of institutions is a consequence of political stability and increasing confidence in robust instutitional capacity. There may therefore be many false steps on the way to maturity – such as the Arab Spring of 2011 may indicate. Demonstrators may have thought institutions were now robust enough to have peaceful transitions, objective authority in the judiciary and executive, and democratic freedoms. The failure of the uprisings may have put several countries decades behind on development, but perhaps this cyclical movement between attempts at reform and push-backs is the only way to actually achieve institutional change. Given than political upheavals across the West lasted for centuries before the modern cross-Atlantic consensus emerged, the resource curse can be thought of as part of the struggle to create more enlightened states. We normally think of resources as a leg up to building institutions, or alternatively that institutions are needed to guide resource extraction. But instead of the linear pattern, we can also think of the period under development as part of an organic evolution.
Several indicators show that in cultural and political terms, other countries may develop in different ways. Japan, for instance, has a culturally distinct form of development that is nonetheless at par with all the highest indicators of a developed nation. China has succeeded in the largest move of people out of poverty without any western political institutions or revolutions or citizens action (though if you consider Communism also as western invention, then it is an emulation without doubt). In resource rich countries as well, the emergence of trends as diverse as political Islam, pan-African unity, the independence movements of the 20th century and their successors in secular nationalism today, and many others show that institutional change is not only underway but has many local elements in each place and country.
Can these elements emergence and action lead to development? The first issue to acknowledge is that we have only one visible model of development – the one emerging in the west, and often shown globally to varying degrees of success by other countries. Yet the indicators of development on individual well-being and freedom can be largely agreed upon as the marker of development. I would say that there are strong indicators that development can be delivered by a variety of institutions. I would point to the political motivations of elites and institutions in resource rich countries – most prominently the acknowledgement that their populations need to be satisfied economically in order to keep their rule and systems stable. This is an indication that people are moving beyond cultural groupthink or tribal loyalty to a more materialist outlook – and in fact the drive to self-interest measured by material well-being is the basic microeconomic idea of rationality.
We can be optimistic, therefore that the resource curse may not be a permanent state of affairs, but a step in the phase of a natural political and economic evolution of the countries concerned. Not only that, but having viable resources after the emergence of solid institutions would probably lead to the accelerated growth that theorists expected (Mehlum, Moene and Torvik, 2002). Civil war and conflicts periodically set the region back, but a long-view does not take this as a barrier to development eventually. Developed nations such as Germany and Italy did not exist outside fragmented warring coalitions till not so long ago, and while the presence of resources can be thought of as disruptive to normal path of development (as in, following the ones already seen and known) it merely adds another dimension to the organic emergence of institutions in resource-rich countries.
Conclusion
In the near future, if genuine substitutes emerge for certain critical resources such as oil from the alternative movement, we will be able to observe the impact of resource loss on development. It seems doubtful to me that the economic loss of a resource would spur better or faster development in resource dependant countries, rather than economic collapse or chaos (as often follows a price collapse in commodities). Resource dependency is therefore as real as the resource curse.
In terms of resources’ impact on development, they do provide an easy way for bad institutions to survive and propagate, but there is institutional change happening, albeit in ways which are not easily predictable or visible. We know that differing institutions can have a positive impact on individual well-being. Therefore, we should not expect that all countries will converge to the same development outcomes on a system basis. We can also see that on an individual basis, there is emerging consciousness in resource rich underdeveloped countries to have more of the resource dividend shared amongst the people.
Thus the institutional fallacies we see in such nations have been seen before. The resources can act as a curse, but also a blessing. Change between these two states can be achieved gradually, through system and political transformation, and it does seem to be happening in fits and starts. In the future, this evolution may, on its own see the emergence of new different institutions that are capable of providing development to the masses.
References
Brunnschweiler, C., & Bulte, E. (2007). The Resource Curse Revisited and Revised: A Tale of Paradoxes and Red Herrings. CER-ETH Center of Economic Research at ETH Zurich. Retrieved March 26, 2016, from http://www.feem-web.it/ess/ess07/files/bulte7_ln.pdf
Mehlum,, H., Moene, K., & Torvik, R. (2002). Institutions and the resource curse. Memorandum, Department of Economics, University of Oslo, 29. Retrieved March 26, 2016, from http://www.econstor.eu/bitstream/10419/63059/1/354828169.pdf
Rosser, A. (2006). The Political Economy of the Resource Curse: A Literature Survey. IDS WORKING PAPER 268. Retrieved March 26, 2016, from http://www2.ids.ac.uk/futurestate/pdfs/wp268.pdf
Sachs, J. D., & Warner, A. M. (2001). The curse of natural resources. European Economic Review, 45, 827-838. Retrieved March 26, 2016, from http://earth.columbia.edu/sitefiles/file/about/director/pubs/EuroEconReview2001.pdf
Venables, A. (2016). "Using Natural Resources for Development: Why Has It Proven So Difficult?". Journal of Economic Perspectives 30 (1): 161–184. doi:10.1257/jep.30.1.161.
