BUSINESS IN EMERGING MARKETS
Introduction
The theory of natural resource curse can be founded back from the 1970s. Resource curse has been an important topic for researchers since two subsequent decades; multiple research efforts have proposed the association between the production of resources, numerous socio-political ills, and, economic underperformance. The role of natural resources in the growth of the economy has been a question of immense debate. If the role of natural resources is considered in common sense, then economic growth theories propose that natural resources are the gift and economies through building their capital can grow economies. However, if the revenue spending and management of many natural resource wealthy countries is considered then the recent history has confirmed the far more complicated association between economic development and natural resources. Ossowski and Gonzalez (2012) in their study proved the resource curse exists; based on their findings and research outcomes of many other examiners; it is hypnotized that “the resource curse exists”. The paper aims to analyze the facts of the existence of resource curse for diverse aspects and prove the existence of resource curse through presenting the results of different studies and recent facts.
The term resource course is also recognized as the paradox of plenty. It refers to the contradiction that countries that have an abundance of natural resources more specifically non-renewable resources such as oil, fuel, gas, and minerals; has less democracy, economic growth, and worst results of development as compared to the countries that have fewer natural resources. In other words, resource curse is a concept that countries with an abundance of natural resources do not perform well neither economically nor politically (Siegle, 2008). Countries having greater natural resources have to face more corruption, greater volatility, lower economic growth and in some extreme case the devastating civil wars (Humphreys, 2005).
According to political scientists when the spending of governments is reliant on taxation of citizens, governments are more likely to transit to democracy and more responsive to their national residents. In contrast, when they collect their large sum of revenue from natural resources they are not dependent on citizens’ taxes and feel that citizens make less investment in national budgets. Therefore, they feel less tied to residents’ demands and their requests (Natural Resource Governance Institute, 2015; Von Haldenwang, 2012).
Similarly, when economies have natural resources in excess they focus on expanding their economy through making exports of natural resources. This behavior hurt the other sectors of the economy, more specifically export based built-up, by causing exchange rate appreciation, inflation, and through transferring capital and labor to resource sector from the non-resource sector (Natural Resource Governance Institute, 2015; Von Haldenwang, 2012).
Analysis of the Natural Resource Curse Both from Political and Economic Perspective
As it has been defined that the resource endowment affects the countries on both political and economic level, hence it is essential that both of the sectors are considered in term of the resource curse. Frankel (2012) in his research concluded that countries with the wealth of natural resources such as mineral, oil and other have not been able to show the economic growth as compared to the countries that are not natural resource rich countries. For example, in 2000, the per capita gross domestic products (GDP) has been 30 percent lower as compared to 1965, despite the fact that the oil revenue reached $350 billion. The second example of resource curse is Venezuela; the trade of the country on a yearly basis from 1970 to 1990 grew 13.7 percent due to the export of oil, but on year basis the output per capita fell by the rate of 1.4 percent. In 1999, the GDP per capita of Saudi Arabia was lower as compared to the 1970s, when the prices of oil were on the increase. Sachs and Warner (2001) through having cross-country research found the evidence of resource curse. Authors related the primary product’s importance to the growth of per capita earning in the country of exports that they took to mean as the abundance of natural resource controlling investment to GDP ratio, openness to trade, and initial income. They clearly found the negative and substantial effect of resource abundance. They found that in the result of deviation the one standard that increases in exports shares reduces the predicted rate of growth of the country by 0.6 to 1.5 points percentage. They elaborate the Dutch disease phenomenon as an explanation of market based theory for the elaboration of the poor performance of the economy of Netherlands by following the detection of sea oil of North.
Resource Curse from the Perspective of Economy
Multiple researches have proved the fact of resource curse and discussed the pessimistic relation that exists between the economic development and natural resources. Researchers have declared with proves that natural resource wealth lead countries to poor economic development. In early stages, the work that was conducted in this regard suggests the association between the abundance of natural resources and economic performance was naturally economic. Countries with natural resources abundance have to face a decline in trade over time. The issue is that the international market of a commodity is intrinsically unstable and that instability can be transferred to the local economies easily, that in result affect the foreign exchange supplies and government revenue’s reliability that radically enhances the risk for private investors. However, some researchers suggest that the issue is the enclave nature of activities and rather reinvesting the profit multinational tend to repatriate the profits to their home countries that make the economic development difficult. One more reason that cause resource curse is the Dutch disease. Dutch disease is a condition in which the boom in resources lead economies towards the appreciation of real exchange rate that in result damage tradable sectors including manufacturing (Rosser, 2006).
This phenomenon aroused for the discovery of natural gas from Netherlands that consequence in its manufacturing sector decline in 1959. The discovery of natural gas led the country towards the shift of prices in non-gas industries and of the exchange rate, due to which prior competitive exporters lost their market shares and their exports decreased. Due to the rise in the export of natural gas, the exchange rate of Netherlands increased against the currencies of other countries that in result enhanced the wages of the natural gas sector more rapidly as compared to the productivity of non-gas sector. Such appreciations put the other sectors of the economy towards decline (Barbier, 2003). Murshed (2004) also conducted research with the aim of finding out that when natural resource abundance leads countries towards resource curse. He found that countries with natural resource abundance have to suffer from poor economic growth, and he confirmed that the Dutch disease is the cause that leads natural resource rich countries towards bad economic performance.
Later both political scientists and economists have to make consensus on the fact that the immediate cause of bad economic performance in the resource rich countries is the poor management of the economy. The broad consensus on the argument has been extracted that the poor management of economies of the resource rich countries has been the major cause of the bad performance of resource abundance countries (Anderson, 1998; Ascher, 1999; Karl, 1997).
It is difficult to manage the surge of natural resources that lead the resource abundance countries towards the challenge of maintaining economic growth. The Sub Saharan of Africa has been a classic example of the phenomenon of resource curse characterized by low economic development, natural resources abundance, and miss utilization of natural resources. Continuous development of economies demands careful investments of revenues of resources. Moreover, the weak involvement of institutions in revenues and corruption in the revenues gathered from resources pose significant challenges to economic growth (Kabemba et al., 2008). Corruption is an important factor that contributes in resource curse; such activities increase the cost of investment and divert resources from productive activities that consequently reduce the growth of economies.
The elaboration of such factors by diverse researchers proved that the phenomenon of natural resource curse is true. Demissie (2014) in his research found out all these factors by considering the case of Sub Saharan Africa, he accepted the existence of natural resource curse and found out that multiple reasons exist behind this curse that leads countries to poor economic growth.
Resource Curse from the Perspective of Politics
After having a discussion on economic perspective of the resource curse, the second important perspective from which the discussion of resource curse is essential is political perspective. It has been determined that when the resources are concentrated, then the abundance of resources is most likely to be a curse. When the political institutions of the host countries are weak initially, it results in low economic growth. Gelb (1988) in his research provided the evidence of six oil exporters who hinted that the conventional economic enhance could not explain the growth of those economies fully and the growth of those countries lagged. Politics and the government had to play an important role in these consequences, as to the national government 80 percent of windfalls accrued and for public infrastructure, there was large oil financed investments. In other words, the decision-making by the government is an important factor that plays an immense role in resource curse.
A feature that separates government is the monopoly of the government on authorized coercion. Either the government can use this monopoly power for enhancing the welfare of the community or the government can utilize this authority for enriching the particular individuals who are liable to control the actions of government. The power of the government can only benefit the society in the case when it is used to resolve the issue of coordination or to organize the public favor provision collectively. In the separation of these steps, the government can benefit some particular people through transferring the wealth to those who control the actions of government. The behavior of government has multiple dimensions. However, the focus has been given only two alternatives that include the public good provision and transfer to elites. The resource curse argument is build on the theory that for having control over government a potential leader have to capture more political power as compared to rival (Deacon, 2011).
Politically powerful groups transfer the private wealth to themselves such transfers are intuitive. The private industry stock of capital is effectively an ordinary pool, the appropriation of wealth decrease the benefit of accumulated capital that in result lowers the growth rate of the economy that offers the value utility as compared to the first best outcome. When the productivity is high, and the response of this increased productivity is negative to the growth is known as resource curse.
Lane and Tornell (1996) in their research found voracity effect. They found that the existence of powerful rent seeking groups and institutional restraints absences could result in resource curse. It has been realized that rent revenues are more rapidly used in risky activities, and countries with abundant natural resources have weak administrative structure due to which they are not able to take the advantage of democracy; as compared to the countries do not have many renewable resources, these resource rich countries face lower per capita income. In other words, when the redistribution of resources increases more than the proportional increase in the result of the increase rate of raw return, the growth rate falls. The voracity effect says that the positive shock to the productivity or in trade, lead economies to the growth rate reduction. The voracity effect occurs when the substitutions’ interpersonal elasticity is high enough and when there are few power groups that cannot cooperatively act.
Governments due to having revenue based on natural resources abundance have excess money to spend, and their income fluctuates with fluctuation in production and prices of commodities. Spending unpredictable and fluctuating revenues effectively is not an easy task. Governments often tend to spend on legacy projects because of their trap in boom and bust cycles. For example, when the revenues increase, the government spends on monuments and airports, and they have to make cuts in the result of revenue decline. Governments of resource rich countries have a tendency to pay high wages to government workers, large monuments, inefficient subsidies of fuel, and under-spend on education, social services, and health. Even governments of resource abundance countries most of the time overborrow because of their increase creditworthiness at the time of increased revenue. These sorts of behaviors with revenue decline lead countries towards the debt crisis (Natural Resource Governance Institute, 2015).
The above sections have proven the concepts of economic and political resource curse through the help of several existing researches and literature. It has been determined that the resource curse exists and its existence is visible in multiple resource rich countries. The fact of resource curse is backed by numerous researches that cannot be avoided.
Consequences of Natural Resources
The concept of resource curse has been discussed; it has been identified that what factors cause resource curse, now it is also pivotal to determine the impact of natural resources on other factors or to see the results of having natural resources abundance. Natural resources often provoke the internal conflicts because diverse groups use the natural resources for financial their fights or fight for having control over the natural resources. For example, it has been determined that since 1999, the oil producing countries have been likely to have civil war twice as compared to the countries that are not oil producing. Several political scientists point out the examples of Iraq, Nigeria, Angola, Libya, and Congo for illustrating this tendency. Through some cases, the tendency to instigate to be targeted of international conflicts by oil rich countries has been observed. For example, the invasion of Iraq on Kuwait and Iran are the clear examples of the consequences of natural resource abundance (Natural Resource Governance Institute, 2015). Iraq has proven oil reserves if 112 billion that represents the 10.8 percent of proven resources of the world, Iran has more potential but due to the civil war, both countries are not able to show the full potential of the reserves in term of economic growth (Palley, 2003).
When the risk of rebellion acts such as external threat increases, countries tend to spend more on their military for enhancing the security resources that lead countries to fewer investments in the development of the factors and therefore, low economic growth.
Plenty of natural resources lead countries to increased corruption and misappropriate use of these resource based revenues does not allow countries to be developed. For example, in Angola when an audit was conducted by the international monetary, fiscal fund the firm was unable of making account of oil revenues of hundreds of millions of dollars. Even in Nigeria, the Democratic Republic of Congo an oil rich country has failed to generate the development, and despite it, they created the deep-seated corruption that put the significant negative effects on growth of the country (Palley, 2003).
Another reason that does not allow resource rich countries to gain the full advantage and maximize economic growth is their high cost labor; resource rich countries are expensive in term of about due to which setting operations in such countries can be expensive that does not allow resource abundance countries to take the full advantage of globalization. For gaining the competitive advantage, companies most likely prefer to set their operations in cost effective countries and resource poor economies are in this term are more cost effective and therefore, in the position of enhancing the economic development as compared to resource rich countries.
Conclusion
Many authors presented the point in against of resource curse, but later multiple large incidents proved the fact that “resource curse exist”. It has been determined that there are several factors that lead countries towards resource curse and countries do not remain in the position of exploiting full advantage of their resources. Therefore, it is suggested to countries to pay attention to these underlying factors, governments through introducing appropriate policies and through appropriate governance can overcome the issue of the resource curse. It has been determined that governments due to their inability to utilize that revenue generated from the resources face resource curse. Hence, they must formulate policies that ensure the effective utilization of revenues. Resource rich countries should focus on the equal distribution of resources between the community and rather considering the society’s less contribution in country welfare should spend an appropriate amount of money on making the social lives, educational, and health sector better.
List of References
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