Introduction
Resource curse has been one of the most debated economic issues for the past four to five decades. Indeed, it refers to a theoretical approach that connects certain indicators of a country’s economic growth to its reliance on natural resources such as oil, gas, and minerals. According to a general belief (termed as ‘resource curse’), the countries that are rich in natural and non-renewable resource are characterized by lower levels of democracy, economic growth, and development as compared to the countries with less or no reliance on these resources (Sachs, and Wartner, 2001).
On the basis of the insight gained from the existing literature dealing with the subject matter in hand, the writer is encouraged to hypothesize that despite all the criticism, especially on the part of modern critics, ‘existence of resource curse is a fact’. Current paper sets out to investigate into the reality of the resource curse from every critical angle in the light of critical studies made on this issue in every possible dimension in order to reach the most appropriate and justifiable verdict.
What is Resource Curse?
Before jumping to the central consideration i.e. whether or not resource curse exists, it is wise to establish basic understanding to that. As discussed above, resource curse is a theory or hypothesis according to which the abundance of natural resource is not good for the economic development and political stability of any country. Hence, the underlying hypothesis extends into two dimensions including economic and political (Arezki et al., 2011).
In economic terms, it is held that when a country is rich in natural resources, its economy will largely depend on the export of these resources or the export of raw material. It will create an environment wherein other economic activities (other than extractive activities) cannot receive proper attention. Hence, sole reliance on the export of minerals or fossil fuels will form weak and unreliable economic structure (Haldenwang, 2012).
Same is true for the political dimension of resource curse and it is hypothesized that the ruling political party in a country characterized by abundance of natural resources will not strive to promote economic activities unrelated to extractive sector due to its main reliance on that. Hence, it will not be accustomed to planning, management, and risk mitigation. Therefore, such countries remain deprived of good governance (Mehlum et al., 2006; Deacon, 2011; Rosser & Institute of Development Studies (Brighton, England), 2006).
The Reality of the Resource Curse
The concept of natural curse originated in the latter half of twentieth century, due to its criticality, had always been the center of controversial debate on it. Writers, scholars, analysts, etc. belonging to different schools of thought have treated the matter from their own specific perspectives. In certain situations, critics have questioned the viability of the underlying concept in the light of certain findings going against its main positions.
However, its implication on general level is evident even in the modern age and the writer is referring to some of the most critical findings in this regard covered in the following part of the essay.
Political Scenario in the Light of Resource Curse
As discussed, there are two basic parts of the theory under discussion. One of these two parts deal with the impact of a country’s heavily relying on non-renewable resources on its political structure. Now the question arises how natural course can lead to weak and unreliable government setup.
Relationship between natural curse and governance of a country is based on two factors. Firstly, the society or nation in a resource rich country or state fetches huge revenues in terms of rent relating to resource sector. Hence, their earnings involve no or minimum of their own efforts. It is detrimental in two ways, as on one hand, it causes monitoring authorities operating in an institutional setup to lose their strength.
Then, it also creates a tendency of consistent inactivity among governing bodies, as their earnings are mostly independent of their personal efforts (Dunning, 2008; Haldenwang, 2012; Robinson, Torvik, Verdier, & Centre for Economic Policy Research (Great Britain), 2002).
Secondly, the revenue generated in form of rent or any other sources relating to extractive activities is supposed to be distributed to state. It is very likely to use this revenue in high risk profitable activities other than those relating to public sector. Therefore, the countries and states with abundant resources are usually characterized by weak administrative structure.
On the basis of these factors, resource rich countries are not able to enjoy democracy and their per capita income is also lower than the countries lacking non-renewable resources (Gelʹman & Marganii︠a︡, 2010; Barrington, 2009).
In addition to this, there is no absolute solution to the political outcomes of the resource curse discussed above. And, what possible solution can there be? It is hard for government to ensure the fair distribution of the revenue generated and proper utilization of that revenue. Then, it is not possible either to remove all the uncertainties associating to that, because prices of oil, gas and all other natural resources are subject to critical fluctuations.
Furthermore, it is also impossible for the government to encourage the rapid consumption of the natural resource on mass scale, so all the resources can be consumed by current generation. And, the coming generation may not be faced by the situation of abundance of natural resources or resource curse.
Economic Dimension of Resource Curse
Same as in case of political association of resource curse. It is also critically attached to the mechanism of economic growth and development of any country. To say differently and in a more straightforward way, the economic growth of a resource rich country is mainly guided by nature and current status of its natural resources.
On the basis of a large number of studies, it is established that natural resources prove to be hindrance for instead of being booster to economic growth of a country. In other words, the abundance of natural resources reduces the pace of economic development.
For example, it is found that during 1970, the Sub-Saharan African countries that were rich in minerals enjoyed higher level of economic growth as compared to those lacking these minerals (Wheeler, 1984).
The research work of these researchers covers vast time period consisting of around 20 years (i.e. 1970 to 1989). It stamps the reliability of the findings of both these authors according to which resource-poor countries, in the given time-period, showed better performance in terms of economic growth as compared to resource rich countries.
Leite and Weidmann (1999), also support the above finding, and it is important to note that their results were based on large datasets. Auty (2004), has also made handsome contribution in this regard by collecting and conducting comparative analysis of the records of incomes from 1960 to 1990.
The researcher is of the view that per capita income in resource rich countries during the said time pried is two or three times lower than that in resource poor countries. It shows that abundance of resources is in inverse relation with per capita income in any particular region.
Then, there are also scholars that attempted to dig into the factors at the bottom of poor economic growth in resource rich countries. They try to find out the actual ways in which the abundance of resources hiders the way of economic development of any country. Wood and Berge (1997), has significantly pointed out that the countries with abundant economic resources have very low chances of producing and/exporting manufactured products.
Then, Atkinson and Hamilton (2003), found that resource rich countries are never good at savings, which also contributes to their inability to give solid and competitive economic performance. Ross (2003), is significantly of the view that the wealth accumulated through export of oil or mineral is indicative of bad consequences for poor, as it enhances the gulf between rich and poor. Leite and Weidmann (1999), have pointed out some critical ethical issues present in the society of resource rich countries; and, to them, the biggest of those issues is corruption.
In the light of these weighty evidences, it is hard to deny the existence and importance of resource curse and its impact on a country’s economic growth. From this, it can be established that the natural resources create an atmosphere of inactivity.
And, the capital that is generated from extractive sector is restricted to specific community and is not distributed fairly. Hence, the economy of such countries is characterized by feudalism that provides base for the division of society into social classes by increasing the gap between rich and poor.
The economy mainly relies on the export of raw material in form of minerals and non-renewable resources of energy. The revenue generated through these exports accounts for the highest percentage in the total growth of GDP. Due to this fact, manufacturing sector in resource rich countries does not have potential contribution in the total gross domestic production.
This over-reliance on natural resource itself makes the economic structure of these countries unreliable. For example, they are left with no proper solution in case of any big setback encountered as a result of falling demand of these resources. Current scenario of oil and gas prices further supports these findings.
For example, crude oil prices, within past couple of years have undergone sharp decline. As a result of it, oil exporting nations are faced by a confusing situation though they have not stopped oil production, which is even broadening the gap between demand and supply and causing the oil prices to come down further. The underlying downtrend is there with long lasting positive outlook (i.e. oil prices are not expected to rise in near future, at least).
The impact of this drop in oil prices can clearly be observed on the economy of oil producing nations, as their economies are struggling in attempt to come back on the track of growth. Better idea of it can be gathered from the example of Saudi Arabia only the stock exchange of which is consistently declining. The Saudi Arabian government has already announced the deficit of around $100 billion in budget. Some other countries i.e. Iran, Qatar, Iraq, Bahrain, Kuwait, Yemen, etc. are also faced by similar kind of situation (BBC, 2016).
Therefore, economic aspect of resource curse also has the proof of its existence that is backed by such huge burden of evidences that cannot be denied or overlooked easily.
Natural Resources and Civil Wars
Civil war is one of the major side effects of natural resources that also reinforce the validity of ‘resource curse’ as a theory. The countries with abundance of natural resources have higher chances to be victim of foreign imperialism if they have weak military power.
Resource rich countries are targeted for civil war due to their being rich in resources and intruders hope to fetch part of their resources by asserting their possession on their enormous reservoirs as they conquer these countries. These wars or threat of war also does not let the confidence of investors build in such countries and they remain deprived of stable and certain long term economic growth (Mitchell & Thies, 2012; ed. Humphreys, Sachs, & Stiglitz, 2007).
Threat of war is certainly critical for any country, because in situation of war all the economic activities in affected region almost come to a halt. Investors lose their confidence that becomes the major cause for stock market to crash.
Furthermore, GDP consistently declines and unemployment prevails. In the wake of this, several social evils also have dominant impact. In other words, the whole socio-economic setup suffer disruption as a result of which, it is hard for such country to maintain its competitive strength. This factor also serves as evidence of the existence of resource curse.
Examples from the Real Word
There are several text book empirical evidences when it comes to the application of resource curse to the real world. Countries like KSA, Iran, and Algeria are some of the most evident examples in this context. These countries are immensely rich in oil and some other natural resources. And, oil reservoirs are great source of revenue for these economies the better idea of which can be gathered from the fact that more than 60% to 70% of their GDP comes from export of oil and gas. It is no exaggeration to state that they extract money directly from the ground (Surowiecki, 2001).
Now the question arises if they are able to generate huge income through natural resources, how can it be a ‘curse’ for them? The answer lies in very simple facts about these nations. For example, labor cost is critically high in oil rich countries, which means that it is not viably profitable to invest in private sector over there. Not only will it cause huge upfront cost, but also massive long term expenses (especially compensation of staff) in case of opening a factory or manufacturing plant in such countries.
That is why these countries have never been able to capitalize truly on the emerging trends of globalization. And that is why western countries mostly prefer resource poor countries like China for their manufacturing purposes.
For example, a US based company, Apple Inc. has set up its production plant in China considering it a low labor cost country (Blodget, 2012). Hence, resource rich countries are also deprived of the inflow of technology and foreign investment.
So there is minimal and uncompetitive technological growth in the countries mentioned above. As a matter of fact, benefits of technology tend to increase, while natural resources are subject to depletion. Furthermore, they do not have any backup to support their economy in the event of the demand for natural resources to come down.
Currently, almost all oil exporting nations including ones mentioned above are facing this situation, as their stock markets are severely down and the exports revenue has badly shrunk due to which all of them are suffering huge budget deficits (Surowiecki, 2001). Similarly, the countries like Iraq, Syria, and some other countries have become subject to foreign imperialism and it is hindering their economic growth and political stability quite badly (Carlisle & Bowman, 2007).
Exceptions
No doubt shadows the fact that the theory of resource curse has its existence, which goes beyond academic level. Resource rich countries have historically been victim of this curse and the scenario is not much different even today. However, it is hard to assess whether it could also be applied to resource poor countries if they ever happen to discover natural resources on mass scale. Still, there is no evidence of it and the existing literature also fails in giving coverage to this probable assumption from critical angles.
However, the writer holds that developed countries like USA, Russia, and others can avoid the side-effects of resource curse (if they ever become resource rich) partly because of lessons learned from already resource rich countries and partly due to their existing infrastructure and mechanism of economic growth. However, scenario can be different for underdeveloped or developed countries.
Conclusion and Recommendations
Criticism targeting theoretical application of resource curse is not backed by rationale. In a specific given time or in case of a specific country, some hostile arguments can stand true, but they lose logic when it comes to truth on large scale. As discussed, there is no hard and fast solution to the underlying issue.
However, the writer is of the view that the government can play important role in this scenario and overcome or mitigate (at least) some of the potential threats of resource curse. And, it can do so by managing the revenue generated through exports in efficient manner.
Furthermore, it should also make fair and transparent distribution and usage of this capital possible. Government’s spending and optimization of the decisions relating to extractive activities can also determine the destiny of a country both in terms of economic growth and political stability.
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