Stewart M. Patrick

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Exorcising the Resource Curse: Some Innovative Ideas

by Stewart M. Patrick
April 27, 2012

A man samples crude oil at the bank of a polluted river in Bidere community in Ogoniland in Nigeria's delta region on August 20, 2011.  (Akintunde Akinleye/Courtesy Reuters) A man samples crude oil at the bank of a polluted river in Bidere community in Ogoniland in Nigeria's delta region on August 20, 2011. (Akintunde Akinleye/Courtesy Reuters)

Among the many frustrations in development, perhaps none looms larger than the “resource curse.” Perversely, the worst development outcomes—measured in poverty, inequality, and deprivation—are often found in those countries with the greatest natural resource endowments. Rather than contributing to freedom, broadly shared growth, and social peace, rich deposits of oil and minerals have often brought tyranny, misery, and insecurity to these nations. Fortunately, as my colleague Terra Lawson-Remer points out in a new CFR memo, all is not lost. There are concrete steps the international community can take to help break this curse

First, a few facts. The correlation between energy dependence and authoritarianism is clear. “There are twenty-three countries in the world that derive at least 60 percent of their exports from oil and gas and not a single one is a real democracy,” observes Larry Diamond of Stanford University. There are numerous hypotheses to account for this correlation, as I note in my book, Weak Links: Fragile States Global Threats and International Security. Most obviously, easy resource revenues eliminate a critical link of accountability between government and citizens, by reducing incentives to tax other productive activity and use the revenue to deliver social services effectively. The same revenues also generate staggering wealth that facilitates corruption and patronage networks. Together, they consolidate the power of entrenched elites and regime supporters, sharpening income inequality and stifling political reform. The history of the oil-rich Arab Middle East has long been a case in point—with Saudi Arabia being exhibit A.

Natural resource revenues have also been linked to slow economic growth rates, inequality, and poverty. One culprit may be the so-called “Dutch disease,” whereby resource revenues raise a country’s exchange rate, hurting competitiveness in non-resource sectors. Other factors may include the volatility associated with commodity prices, which can have especially negative impacts on weak-state economies; and the underdevelopment of agricultural and manufacturing sectors during boom periods in resource-based economies. And even when oil abundance produces high growth, it often benefits only a few corrupt elites rather than translating into higher living standards for most of the population. Oil-rich Angola is a case in point. Despite having one of the world’s highest growth rates from 2005 to 2010, averaging some 17 percent annually, its score on the human development index remained a miserable 0.49, and its infant mortality rate was lower than the sub-Saharan African average.

Finally, the very presence of oil and gas resources within developing countries exacerbates the risk of violent conflict. The list of civil conflicts fought at least in part for control of oil and gas resources is long. A partial list would include Nigeria, Angola, Burma, Papua New Guinea (Bougainville), Chad, Pakistan (Balochistan), and of course Sudan. Econometric studies confirm that the risk of civil war greatly increases when countries depend on the export of primary commodities, particularly fossil fuels. At least three factors could explain this correlation. First, the prospect of resource rents may be an incentive to rebel or secede. Second, wealth from resources may enable rebel groups to finance their operations. Third, the high levels of corruption, extortion, and poor governance that accompany resource wealth often generate grievances leading to rebellion.

Given this sorry picture, can anything be done? In fact, the past decade has seen a raft of international initiatives designed to combat corruption and improve governance in resource-rich nations. The Extractive Industries Transparency Initiative works to improve revenue management in some thirty resource-rich countries. The Open Government Partnership co-chaired by the United States and Brazil, aims to fight corruption by securing concrete national action plans to fight corruption from governments. The Publish What You Pay and Publish What You Lend campaigns call on transnational corporations and banks to publicize their payments and loans to local authorities. The Equator Principles seek to ensure that private bank investments do not exacerbate environmental and social risks. The World Bank-sponsored Stolen Assets Recovery (StAR) Initiative assists successor governments in tracking down the wealth looted by deposed autocrats. Finally, the Dodd-Frank Act of 2011 mandates annual reports by U.S. extractive industry companies to the SEC disclosing payments to host governments.

While each of these steps is worthwhile, such a piecemeal, fragmented approach suffers from inherent limitations. These initiatives are largely voluntary, and thus unenforceable. They are not universal (and in many cases lack participation from critical emerging economies). And they are riddled with loopholes.

The secret to improving governance in resource rich countries, Lawson-Remer argues, is to improve cooperation among three groups: “capital-exporting countries, international financial institutions, and private sector companies.” To advance this overall goal, she calls on the United States to work with likeminded countries in major multilateral frameworks (including the Group of Eight, Group of Twenty, Organization for Economic Cooperation and Development (OECD), and the Financial Stability Board) to forge consensus on four priorities.

First, the donor community should extend the International Finance Corporation’s recently updated transparency requirements for extractive industries to all bilateral development finance. Second, the international community should work to build demand for accountability in resource-rich countries by providing grants to local civil society actors, so that they are in a position to monitor revenue flows. Third, major financial centers should agree to harmonize transparency requirements for extractive industries in the biggest stock exchanges, building on the Dodd-Frank legislation. Finally, the financial institutions that subscribe to the Equator Principles should “establish independent monitoring mechanisms” to ensure that their membership is actually living by these standards, rather than paying them mere lip service.

This basket of initiatives, if implemented, could give developing countries a fighting chance to ward off the resource curse. The fate of such proposals, like so much in global economic governance today, will depend on whether they can win support from governments and corporations not only in the OECD world, but also within the dynamic emerging economies that are driving today’s global growth. Finally, given the difficulty of winning global endorsement for all of these initiatives separately, the United States should push them as a package.

Post a Comment 4 Comments

  • Posted by Seth Kaplan

    Good post Stewart.

    All these initiatives are very worthwhile, but they miss a key point: the natural resource curse is a product of dysfunctional domestic sociopolitical dynamics and none of them attempt to address these. Little aid is focused on the structural causes of state fragility either, which suggests that external attempts to reduce the curse will have very limited effect (especially given the rise of non Western buyers of natural resources).

    In fact, I would argue that there is no “natural resource curse,” but only a “diversity curse” in weakly institutionalized states. Cohesive developing countries — such as Botswana, Chile, and the Gulf emirate states — have generally managed their natural resource income well. Even Saudi Arabia (which is relatively cohesive) has done an admirable job (even if it is not too democratic); at least its people have high HDI scores. All the other countries you mention — Nigeria, Angola, Burma, Papua New Guinea, Chad, Pakistan, and Sudan — are highly divided countries. Elites in such places are unlikely to see helping the poor as in their own interests–and will continue to resist attempts to force them to do so.

  • Posted by Dr. Abdoulaye Niang

    The author of “GLOBALIZATION: THE KEY TO PROSPERITY AND PEACE FOR AFRICA” (2008) argues that globalization is characterized by the movement of capital, industries, managers, engineers and qualified and unqualified workers to help generate a regional co-enterprise in mining or agriculture, as in the case of Africa, in localities rich in wealth and employment creation capacities. A regional co-enterprise contributes to the creation of global economic growth, registered as for the Nation, but the wealth generated is global and is the sum of the wealth of all partners to its creation.
    This confusion was entertained to see Africa as union of States with high economic performance in face of an Africa as union of States of lowest Human Development Index. The 2Africas exist because of odious Wealth Retention Rules of the Nation with inadequate wealth and employment retention capacity of households whose wealth and employment capacities are being developed.
    Niang defined Wealth Retention Rules of the Nation to make globalization the Key to Prosperity, Stability, Peace and Security. The Group JOKO and MAAYA and the Centre Sene are using the Social Crisis and Mali to help harness collective will and promote a shared determination to adopt Norm for Co-enterprise and Standard in localities with wealth and employment creation capacities (see abdoulaye@niangfoundation.org for documentation).

  • Posted by Philip D.

    Your recommendations are solid, but your premise is based on a fallacy: Natural resource exports as share of total exports is endogenously determined by a host of domestic factors, and is not even correlated with actual resource abundance. By any measure of resource abundance, there is no curse. Not a single study which employs estimates of actual resource abundance find any correlation. In fact, most studies find a slightly positive relationship between resource abundance per capita and income.

    The resource curse you describe is the curse of resource dependence. Of course, a government that must extract and export resources from the ground to fund its nefarious activities are also going to be very poor, autocratic, and maintain socially extractive. But these countries are not poor because of the abundance of natural resources.

    That said, your recommendations would put pressure of governments to democratize and build legitimate institutions, which, in turn, would allow the economy to develop beyond resource exports.

  • Posted by Philip A

    In each country, internationalism must be balanced with nationalism. I think excessive internationalism is a main culprit in generating these perverse outcomes. Nigeria provides a good case study. Categorization of Nigeria’s economy as comprising a formal and informal sector belies this excessive internationalism. Note that the so-called formal sector is dominated by the same Lawson-Remer’s trio (capital exporters, international financial institutions and private sector firms). Private sector firms in Nigeria is equally dominated by foreign companies operating to extract either natural resources or profit while our high-profile public agencies spend inordinate amount of their time serving the so-called formal sector to the detriment of the so-called informal sector where most Nigerians eek out a living. It should be clear that states such as Nigeria need to reposition themselves strategically in the global playing field so as to achieve competitive advantage. Further, these states need to restructure their internal politics and institutional arrangement while placing the domestic currency at the center of all economic activities within their territory.

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