The Paradox of Plenty: How Rich are the 'Natural Resources Rich' Countries?

The paradox of plenty has been a widely debated theory that continues to befuddle political scientists and economists alike. Coined by Richard Auty in 1994, it postulates the relative poverty of countries with plentiful resources. The theory questions why African countries, which account for almost 30% of the worlds’s oil and mineral deposits, are struggling with shocking poverty and unemployment rates. Why would it be that Venezuela, once one of the richest countries in South America on account of its large oil supply, now finds itself in the middle of a social, political and economic crisis?

To understand why the resource curse is innately paradoxical in nature, it is important to note the thread of economic principles emergent circa 1960. It was generally believed that an abundance of natural resources gives a nation significant advantage over others. Most evident in the ‘capital fundamentalism’ aspect of the Harrod-Domar model, physical capital accumulation was seen as the primary determinant of a country’s economic growth. This also worked in tandem with the notion of ‘comparative advantage’, which stated that in a global trade economy, each country should leverage a commodity which they can either produce better or in larger numbers than the others. Hence, a country which is well-placed to produce automobiles should focus its resources on this industry to raise its position in the global economy. This will lead to overall prosperity for the country and its international buyers.

However, by the late 1990s, a study of 95 countries showed that those such as Sierra Leone and Nigeria, with expansive industries built around copious (yet exhaustive) supplies of natural resources were some of the lowest performing economies around the world. In contrast, supposedly resource poor countries such as South Korea and Hong Kong were doing incredibly well in development terms.

The Economic Problem or The Dutch Disease

In 1959, the Groningen gas field was found in the North Sea. This gave an incredible opportunity to the Netherlands and gave rise to a phenomenon that would be called the ‘Dutch Disease’ (The Economist 1977).

The theory, made into a core model by economists W. Max Corden and J. Peter Neary, explores the repercussions of a boom in the ‘tradable goods’ sector (in this case, natural gas that was going to be exported around the world) on the ‘non-tradable’ commodities (goods and services made for domestic consumption only, assumed to be all goods except natural gas).

The immediate consequences of such a boom are two effects, the first of which is called The Resource Movement Effect. In developing countries, the booming industry is believed to be of particular importance for economic growth. All funds, materials and manpower are shifted to the key resource sector, resulting in the under-development of most other industries, particularly manufacturing. The second effect is the Spending Effect. Value of the domestic currency rises sharply owing to demand for the natural resource and its export which brings in more foreign exchange. Domestic goods now become more expensive in foreign currency. As exports of non-tradables cease, manufacturing slows further. Moreover, as foreign goods become cheaper, more imports start coming in, increasing the competition in the domestic markets.

Meanwhile, wages rise because of high demand and comparatively less supply in the non-tradable sector because of labor shift to the natural resource industry. With fewer exports, stiffer competition at home and increased cost of production, the non-tradable manufacturing sector becomes all but completely decrepit.

The Dutch Disease outlines the start of a long-term and multi-faceted problem. The natural resources industry is extremely vulnerable to it. First, the oil industry especially, is very volatile and with prices fluctuations, it is risky to hinge the entire economy on the revenue from this sector. Since these industries are also built on a source that is essentially non-renewable, the running out of the resource is a very real possibility. In countries facing the resource curse, price volatility and existential instability of the industry hits the population harder because no other sector is developed enough to generate required revenue. The moment the central natural resource industry sputters, unemployment ensues. In 2006, about 70% of the Nigerian population was living on less than $1 a day despite having had revenue of $340 billion made from its oil sector at its peak in the 1970s.

Secondly, because of a lack of foresight, governments sometimes start borrowing excessively from international sources as their credit rating suddenly shoots up. When not spent wisely, this leads to large fiscal deficits and often a dangerous inflation.

Furthermore, since wages are high in these countries and returns in the manufacturing sector, very low, more people choose to work instead of attempting to set up business ventures, which are comparatively riskier. The lack of entrepreneurship significantly contributes to economic slowdown.

The Political Problem or Appropriability

The failing of political institutions has been at the crux of the resource curse of many countries. A flawed institutional system with the primary revenue generating industry under its control, inevitably leads to disastrous outcomes. This combination is called the ‘appropriability’ of the resource. There is often misdirected spending and reduced accountability by the citizens in such countries. When a large portion of the government’s revenue comes from industries and not from common taxes, people are less likely to scrutinize the deployment of those funds, which are then unwisely spent. The case of Equatorial Guinea is a cautionary tale. The small island tapped into its bountiful natural resources with Dictator Teodoro Obiang Nguema at the helm. The President borrowed extensively and indulged in corrupt and self-serving practices. As a result, the country that had achieved 125% GDP growth in the 1990s, has today an average life expectancy of 49 years and an unemployment rate of over 30%, with negligible government spending on welfare, healthcare and education.

Empirical data also supports a theory of ‘petro-aggression’ which states that countries possessing ample natural resources tend to instigate or be targets of international conflict. Iraq’s invasion of Iran and Kuwait and the ongoing Syrian war are notable examples. A resource-rich country is twice as likely to encounter civil war as others.

While the resource curse has had multiple victims, it is not inevitable. Norway, for example, has robust oil and gas industries at the center of its national economy. Instead of opulent spending, the country used their revenue to create a fund currently worth $800 billion. It uses the funds to cushion drops in oil prices, to invest in other revenue generating infrastructure and uses not more than 4% on public projects. It is essential to maintain transparency in institutional operations and also to diversify from the central natural resource industry, as aptly demonstrated. Saudi Arabia also has similar plans after having successfully built a $2 trillion oil industry.

India, too, is making steady progress in the natural resource sector. While the country is already fourth on the list of global natural resource producers, an estimated 75% of its sedimentary basins are still unexplored. Would tapping into these resources be more harm than good? Perhaps, but maybe not. The resource curse is a fatal blow to a nation’s economic and political landscape, but for every lesson learnt from Nauku and Congo, there exists the Norway model or that of Botswana or Canada. Successful development of a natural resource industry, as these countries teach us, ultimately lies with its ethical and efficient application. Such is a lesson learned from a costly trial and error process but also one greatly needed.

By Treesha Lall (lalltrisha@gmail.com)

References:

1. The Resource Curse: The political and economic challenges of natural resource wealth; Natural Resource Governance institute NRGI reader 2015

2. The Resource Curse Revisited; Paul Stevens, Glada Lahn and Jaakko Kooroshy

3. Natural Resource Curse in Africa: Dutch Disease and Institutional Explanations; Richard Mulwa and Jane Mariara

4. Demystifying Dutch Disease; Naoko C. Kojo

5. The Resource Curse in Sub-Saharan Africa: A Reality Corroborated by Empirical Evidence; Petar Kurecic, Marija Seba

More things to check out

1. Philosophy Tube (youtube)

2. Spooksanddooks (youtube)

3. The Oil Curse: How petroleum shapes the development of nations; Michael L. Ross

4. Corruption, Natural Resources and Developement: From Resource Curse to Political Ecology