Is the "Resource" Curse Keeping Many Developing Nations Poor?
The impact of resources on national development has puzzled economists and political scientists for decades. Economic literature has noted that resource-rich countries conventionally fail to transform natural advantages into material prosperity. In the field of economics, this development is known as the resource curse. It has been asserted that resource abundance degrades the quality of institutions by emboldening elites to devote resources to capturing rents. Others argue that by reducing the state’s dependence on taxes, resource windfalls erode political accountability.
The erosion of accountability is likely because windfalls minimize the need for tax revenues thereby diminishing the impetus to be accountable to citizens and implement reforms. Reliance on resources can also preclude economic diversification by crowding out manufacturing and the service sector. Another burden of the resource curse is that incentives are engendered for politicians to distribute privileges to major players in the economy at the expense of the broader economy.
A related problem is that resource windfalls cultivate a breeding ground for autocracies by bolstering the power of political elites. Several observers have concluded that oil wealth increases the durability of autocracies and impedes the transition to democracy. Furthermore, when autocrats exert control over economic resources, they also inherit the ability to use these resources to purchase support and consolidate their rule.
Michael L Ross in a detailed 2015 review of the resource curse published in the Annual Review of Political Science shows that during 1960-2008, there was an inverse association between democratic transitions and the level of a country’s oil income. Moreover, countries that transitioned early and retained democratic institutions like the Dominican Republic, Turkey, Portugal, and Spain had marginal or no oil. Though some countries with modest oil and gas managed to transition, no country with more reliance on oil and gas income than Mexico became democratic.
However, the best case studies of the resource curse have been provided by data-sets examining African countries. South Africa is featured prominently in the literature. In the 2013 article, “The forgotten Resource Curse: South Africa’s poor experience with mineral extraction,” Ainsley D Elbra opines that South Africa’s experience not only aligns with the resource curse literature but is amplified since the country is plagued by entrenched poverty and inequalities linked to a rentier state.
Indeed, the scenario identified in South Africa is typical for African countries. In Sub-Saharan Africa resource abundance is related to rampant corruption, low economic growth, and inefficient bureaucracies, according to research. Due to avenues for pilfering, politicians have a reduced incentive to inhibit corruption by enhancing the efficiency of government.
But there is no reason to believe that resources will forestall economic growth. Addisu Lashitew and Erik Werker in a 2020 paper using the examples of Canada and the Republic of Congo illustrate that equally endowed countries can pursue divergent paths. Despite similar levels of resource endowment, the contribution of resources to GDP is substantially larger in Congo (42.3 percent), in comparison to Canada (2.3 percent). The adverse effects of resources are more pervasive in the Congo considering that its economy is dependent on resources, whereas Canada’s economy is diverse, notwithstanding resource abundance. The authors contend that the channels through which resources hinder institutional change are likely to be weaker in diverse economies. When economies are diverse there is less scope for players in resource sectors to lobby for initiatives that block institutional innovations thus diminishing opportunities for rent-seeking.
The contrasting fortunes of Canada and Congo suggest that institutions are crucial in explaining income disparities across countries. Although the evidence indicates that resources induce perverse incentives - high quality institutions can tame the resource curse. One study finds that in Africa when countries are besotted by corruption, and limited institutional capacity, resources appear to be a curse, instead of a blessing. Yet as institutions upgrade, resources transition from a curse into a blessing. Essentially, increased accountability and constraints on the political class depress conditions for the emergence of a rentier state.
For example, Naazneen H Barma in a comparative study of countries affected by the resource-curse recounts how Timor-Leste adopted new practices to combat the resource curse: “Partly due to the extensive international state-building effort there, the Timorese government decided upon petroleum sector institutions and policies explicitly intended to mitigate the resource curse…The centrepiece of Timor-Leste's institutional architecture in the petroleum sector is its Petroleum Fund, to which all petroleum revenues are directed, without exception. The Petroleum Fund Law establishes the concept of Estimated Sustainable Income (ESI), a principle intended to ensure intergenerational saving of the country's windfall income stream.”
Additionally, relating the issue to an American context Justin Callais declares that unlike Texas, Louisiana is languishing from a regional resource curse as a result of differences in institutional quality. Texas has a high EFNA score, ranks ninth on the net entrepreneurial productivity index, and demands licenses for just 34 of 102 lower-income occupations. Callais similarly avers that Louisiana’s economy is inferior because “Texas provides its citizens with alternative opportunities, while Louisiana’s environment is such that it necessarily must be dependent on oil.”
He further attributes Louisiana’s subpar economic performance to the legacy of the civil law: “Civil law tends to concentrate power to a centralized government. In France, this was chosen as a tradeoff in favor of dictatorship as a means of lowering disorder… What this means for Louisiana, and other transplant areas more generally, is that centralized control lead to ineffective governance and corruption. Through corruption, more authoritarian regimes were able to take advantage of their resource abundance. This abundance was good for those in power, yet lowered opportunities for the economy as a whole to invest and produce in alternative industries.”
Based on the data explored, we conclude that resource abundance can either result in stagnation or prosperity. However, the pertinent fact is that the potential for resources to foster growth is contingent on the right interplay of institutions and policies. Lacking an appropriate institutional framework resource-abundance will lead to dismal economic outcomes