The resource curse phenomenon revisited

The resource curse phenomenon revisited

Joseph E. Stiglitz, Project Syndicate

There is a curious phenomenon that economists call the
resource curse -- so named because, on average, countries with
large endowments of natural resources perform worse than
countries that are less well endowed. Yet some countries with
abundant natural resources do perform better than others, and
some have done well. Why is the spell of the resource curse cast
so unequally?

Thirty years ago, Indonesia and Nigeria -- both dependent on
oil -- had comparable per capita incomes. Today, Indonesia's per
capita income is four times that of Nigeria. Indeed, Nigeria's
per capita income (as measured in constant dollars circa 1995)
has fallen.

A similar pattern holds true in Sierra Leone and Botswana.
Both are rich in diamonds. Yet Botswana averaged 8.7 percent
annual economic growth over the past thirty years, while Sierra
Leone plunged into civil strife. The failures in the oil-rich
Middle East are legion.

Economists put forward three reasons for the dismal
performance of some richly endowed countries:

o First, the prospect of riches orients official efforts to
seizing a larger share of the pie, rather than creating a larger
pie. The result of this wealth grab is often war. At other times
simple rent-seeking behavior by officials, aided and abetted by
outsiders, is the outcome. It is cheaper to bribe a government to
provide resources at below-market prices than to invest and
develop an industry, so it is no surprise that some firms succumb
to this temptation.

o Second, natural resource prices are volatile, and managing
this volatility is hard. Lenders provide money when times are
good, but want their money back when, say, energy prices plummet.
(As the old adage has it, banks only like to lend to those who do
not need money.) Economic activity is thus even more volatile
than commodity prices, and much of the gains made in a boom
unravels in the bust that follows.

o Third, oil and other natural resources, while perhaps a
source of wealth, do not create jobs by themselves, and
unfortunately, they often crowd out other economic sectors. For
example, an inflow of oil money often leads to currency
appreciation -- a phenomenon called the Dutch Disease.

The Netherlands, after its discovery of North Sea gas and oil,
found itself plagued with growing unemployment and workforce
disability (many of those who could not get jobs found disability
benefits to be more generous than unemployment benefits.) When
the exchange rate soars as a result of resource booms, countries
cannot export manufactured or agriculture goods, and domestic
producers cannot compete with an onslaught of imports.

So abundant natural wealth often creates rich countries with
poor people. Two thirds of the people in Venezuela, the Latin
American country with the largest oil deposits, live in poverty.
No wonder that they are demanding that the small group of those
who benefit from the country's wealth start to share it.

Fortunately, as we have become aware of these problems, we
have learned much about what can be done about them. Democratic,
consensual, and transparent processes -- such as those in
Botswana -- are more likely to ensure that the fruits of a
country's wealth are equitably and well spent.

We also know that stabilization funds -- which set aside some
of the money earned when prices are high -- can help reduce the
economic volatility associated with natural resource prices.
Moreover, such fluctuations are amplified by borrowing in good
years, so countries should resist foreign lenders who try to
persuade them of the virtues of such capital flows.

The Dutch disease, however, is one of the more intractable
consequences of oil and resource wealth, at least for poor
countries. In principle, it is easy to avoid currency
appreciation: keep the foreign exchange earned from, say, oil
exports out of the country. Invest the money in the U.S. or
Europe. Bring it in only gradually. But in most developing
countries, such a policy is viewed as using oil money to help
someone else's economy.

Some countries, notably Nigeria, are trying to implement these
lessons. Nigeria has proposed creating stabilization funds, and,
in the future, it will sell its natural resources in transparent,
competitive bidding processes. Most importantly, the Nigerians
are taking measures to ensure that the fruits of this endowment
are invested, so that as the country's natural resources are
depleted, its real wealth -- fixed and human capital -- is
increased.

Western governments can help with common-sense reforms. Secret
bank accounts not only support terrorism, but also facilitate the
corruption that undermines development. Similarly, transparency
would be encouraged if only payments that are fully documented
were tax deductible. Violent conflict is fed and its effects
worsened by massive sales of arms by Western governments to
developing countries. This should be stopped.

Abundant natural resources can and should be a blessing, not a
curse. We know what must be done. What is missing is the
political will to make it so.

The writer is Professor of Economics at Columbia University
and a member of the Commission on the Social Dimensions of
Globalization. He received the Nobel Prize in Economics in 2001.