Resource curse

Dutch disease first became apparent after the Dutch discovered a huge natural gas field in Groningen in 1959. The Netherlands sought to tap this resource in an attempt to export the gas for profit. However, when the gas began to flow out of the country, its ability to compete against other countries' exports declined. With the Netherlands' focus primarily on the new gas exports, the Dutch currency began to appreciate, which harmed the country's ability to export other products. With the growing gas market and the shrinking export economy, the Netherlands began to experience a recession. This process has been witnessed in multiple countries around the world including but not limited to Venezuela (oil), Angola (diamonds, oil), the Democratic Republic of the Congo (diamonds), and various other nations. All of these countries are considered "resource-cursed".[16]

Dutch disease makes tradable goods less competitive in world markets. Absent currency manipulation or a currency peg, appreciation of the currency can damage other sectors, leading to a compensating unfavorable balance of trade. As imports become cheaper in all sectors, internal employment suffers and with it the skill infrastructure and manufacturing capabilities of the nation. This problem has historically influenced the domestic economics of large empires including Rome during its transition to a Republic in 509 BCE and the United Kingdom during the height of its colonial empire. To compensate for the loss of local employment opportunities, government resources are used to artificially create employment. The increasing national revenue will often also result in higher government spending on health, welfare, military, and public infrastructure, and if this is done corruptly or inefficiently it can be a burden on the economy. While the decrease in the sectors exposed to international competition and consequently even greater dependence on natural resource revenue leaves the economy vulnerable to price changes in the natural resource, this can be managed by an active and effective use of hedge instruments such as forwards, futures, options, and swaps; however, if it is managed inefficiently or corruptly, this can lead to disastrous results. Also, since productivity generally increases faster in the manufacturing sector than in the government, the economy will have lower productivity gains than before.

According to a 2020 study, giant resource discoveries lead to a substantial appreciation of the real exchange rate.[17]

Prices for some natural resources are subject to wide fluctuation: for example, crude oil prices rose from around $3 per barrel to $12/bbl in 1974 following the 1973 oil crisis and fell from $27/bbl to below $10/bbl during the 1986 glut. In the decade from 1998 to 2008, it rose from $10/bbl to $145/bbl, before falling by more than half to $60/bbl over a few months. When government revenues are dominated by inflows from natural resources (for example, 99.3% of Angola's exports came from just oil and diamonds in 2005),[18] this volatility can play havoc with government planning and debt service. Abrupt changes in economic realities that result from this often provoke widespread breaking of contracts or curtailment of social programs, eroding the rule of law and popular support. Responsible use of financial hedges can mitigate this risk to some extent.

Susceptibility to this volatility can be increased where governments choose to borrow heavily in foreign currency. Real exchange rate increases, through capital inflows or the "Dutch disease" can make this appear an attractive option by lowering the cost of interest payments on the foreign debt, and they may be considered more creditworthy due to the existence of natural resources. If the resource prices fall, however, the governments' capacity to meet debt repayments will be reduced. For example, many oil-rich countries like Nigeria and Venezuela saw rapid expansions of their debt burdens during the 1970s oil boom; however, when oil prices fell in the 1980s, bankers stopped lending to them and many of them fell into arrears, triggering penalty interest charges that made their debts grow even more. As Venezuelan oil minister and OPEC co-founder Juan Pablo Pérez Alfonzo presciently warned in 1976: "Ten years from now, twenty years from now, you will see, oil will bring us ruin... It is the devil's excrement."[19]

A 2011 study in The Review of Economics and Statistics found that commodities have historically always shown greater price volatility than manufactured goods and that globalization has reduced this volatility.[20] Commodities are a key reason why poor countries are more volatile than rich countries.[20]

“Oil production generally takes place in an economic enclave, meaning it has few direct effects on the rest of the economy.” Michael Ross describes how there are limited economic linkages with other industries in the economy. Consequently, economic diversification may be delayed or neglected by the authorities in the light of the high profits that can be obtained from limited natural resources. The attempts at diversification that do occur are often white elephant [public works] projects which may be misguided or mismanaged. However, even when the authorities attempt diversification in the economy, this is made difficult because resource extraction is vastly more lucrative and out-competes other industries for the best human capital and capital investment. Successful natural-resource-exporting countries often become increasingly dependent on extractive industries over time, further increasing the levels of investment in this industry as it is necessary to maintain their states' finances. There is a lack of investment in other sectors of the economy which is further exacerbated by declines the commodity's price. While resource sectors tend to produce large financial revenues, they often add few jobs to the economy, and tend to operate as enclaves with few forward and backward connections to the rest of the economy. Template:Ross, M.L. (2012) The Oil Curse: How Petroleum Wealth Shapes the Development of Nations, Princeton University Press, Oxford

In many poor countries, natural resource industries tend to pay far higher salaries than would be available elsewhere in the economy. This tends to attract the best talent from both private and government sectors, damaging these sectors by depriving them of their best skilled personnel. Another possible effect of the resource curse is the crowding out of human capital; countries that rely on natural resource exports may tend to neglect education because they see no immediate need for it. Resource-poor economies like Singapore, Taiwan or South Korea, by contrast, spent enormous efforts on education, and this contributed in part to their economic success (see East Asian Tigers). Other researchers, however, dispute this conclusion; they argue that natural resources generate easily taxable rents that more often than not result in increased spending on education.[21]

A study on coal mining in Appalachia suggests that "the presence of coal in the Appalachian region has played a significant part in its slow pace of economic development. Our best estimates indicate that an increase of 0.5 units in the ratio of coal revenues to personal income in a county is associated with a 0.7 percentage point decrease in income growth rates. No doubt, coal mining provides opportunities for relatively high-wage employment in the region, but its effect on prosperity appears to be negative in the longer run."[22]

Another example was the Spanish Empire which obtained enormous wealth from its resource-rich colonies in South America in the sixteenth century. The large cash inflows from silver reduced incentives for industrial development in Spain. Innovation and investment in education were therefore neglected, so that the prerequisites for successful future development were given up. Thus, Spain soon lost its economic strength in comparison to other Western countries.[23]

A study of US oil booms finds positive effects on local employment and income during booms but that after the boom, incomes "per capita" decreased, while "unemployment compensation payments increased relative to what they would have been if the boom had not occurred."[24]

A 2019 study found that active mining activity had an adverse impact on the growth of firms in tradeable sectors but a positive impact on the growth of firms in non-tradeable sectors.[25]

A 2019 meta-analysis of 69 studies found "that there is no aggregate relationship between natural resources and conflict."[30] According to a 2017 review study, "while some studies support the link between resource scarcity/abundance and armed conflict, others find no or only weak links."[31] According to one academic study, a country that is otherwise typical but has primary commodity exports around 5% of GDP has a 6% risk of conflict, but when exports are 25% of GDP the chance of conflict rises to 33%.[32] "Ethno-political groups are more likely to resort to rebellion rather than using nonviolent means or becoming terrorists when representing regions rich in oil."[33]

There are several factors behind the relationship between natural resources and armed conflicts.[2] Resource wealth may increase the vulnerability of countries to conflicts by undermining the quality of governance and economic performance[34] (the "resource curse" argument). Secondly, conflicts can occur over the control and exploitation of resources and the allocation of their revenues (the "resource war" argument). Thirdly, access to resource revenues by belligerents can prolong conflicts (the "conflict resource" argument).[35][36] A 2018 study in the Journal of Conflict Resolution found that rebels were particularly likely to be able to prolong their participation in civil wars when they had access to natural resources that they could smuggle.[37]

A 2004 literature review finds that oil makes the onset of war more likely and that lootable resources lengthen existing conflicts.[38] One study finds the mere discovery (as opposed to just the exploitation) of petroleum resources increases the risk of conflict, as oil revenues have the potential to alter the balance of power between regimes and their opponents, rendering bargains in the present obsolete in the future.[39] One study suggests that the rise in mineral prices over the period 1997–2010 contributed to up to 21 percent of the average country-level violence in Africa.[40] Research shows that declining oil prices make oil-rich states less bellicose.[41] Jeff Colgan observed that oil-rich states have a propensity to instigate international conflicts as well as to be the targets of them, which he referred to as "petro-aggression".[42] Arguable examples include Iraq’s invasions of Iran and Kuwait; Libya’s repeated incursions into Chad in the 1970s and 1980s; Iran’s long-standing suspicion of Western powers;[43] the United States' relations with Iraq and Iran. It is not clear whether the pattern of petro-aggression found in oil-rich countries also applies to other natural resources besides oil. A 2016 study finds that "oil production, oil reserves, oil dependence, and oil exports are associated with a higher risk of initiating conflict while countries enjoying large oil reserves are more frequently the target of military actions."[44] As of 2016, the only six countries whose reported military expenditures exceeded 6 percent of GDP were significant oil producers: Oman, South Sudan, Saudi Arabia, Iraq, Libya, Algeria. (Data for Syria and North Korea were unavailable.)[45] A 2017 study in the American Economic Review found that mining extraction contributed to conflicts in Africa at the local level over the period 1997-2010.[46] A 2017 study in Security Studies found that while there is a statistical relationship between oil wealth and ethnic war, the use of qualitative methods reveals "that oil has rarely been a deep cause of ethnic war."[47]

The emergence of the Sicilian Mafia has been attributed to the resource curse. Early Mafia activity is strongly linked to Sicilian municipalities abundant in sulphur, Sicily's most valuable export commodity.[48] A 2017 study in the Journal of Economic History also links the emergence of the Sicilian Mafia to surging demand for oranges and lemons following the late 18th century discovery that citrus fruits cured scurvy.[49]

A 2016 study argues that petrostates may be emboldened to act more aggressively due to the inability of allied great powers to punish the petrostate.[50] The great powers have strong incentives not to upset the relationship with its client petrostate ally for both strategic and economic reasons.[50]

A 2017 study found evidence of the resource curse in the American frontier period of the Western United States in the 19th century (the Wild West).[51] The study found that "In places where mineral discoveries occurred before formal institutions were established, there were more homicides per capita historically and the effect has persisted to this day. Today, the share of homicides and assaults explained by the historical circumstances of mineral discoveries is comparable to the effect of education or income."[51]

A 2018 study in the Economic Journal found that "oil price shocks are seen to promote coups in onshore-intensive oil countries, while preventing them in offshore-intensive oil countries."[52] The study argues that states which have onshore oil wealth tend to build up their military to protect the oil, whereas states do not do that for offshore oil wealth.[52]

Research shows that oil wealth lowers levels of democracy and strengthens autocratic rule.[28][53][54][55][56][57][58][59][60][61] According to Michael Ross, "only one type of resource has been consistently correlated with less democracy and worse institutions: petroleum, which is the key variable in the vast majority of the studies that identify some type of curse."[2] A 2014 meta-analysis confirms the negative impact of oil wealth on democratization.[62] A 2016 study challenges the conventional academic wisdom on the relationship between oil and authoritarianism.[63] Other forms of resource wealth have also been found to strengthen autocratic rule.[64] A 2016 study finds that resource windfalls have no political impact on democracies and deeply entrenched authoritarian regimes, but significantly exacerbate the autocratic nature of moderately authoritarian regimes.[65] A third 2016 study finds that while it is accurate that resource richness has an adverse impact on the prospects of democracy, this relationship has only held since the 1970s.[66] A 2017 study found that the presence of multinational oil companies increases the likelihood of state repression.[67][68] Another 2017 study found that the presence of oil reduced the likelihood that a democracy would be established after the breakdown of an authoritarian regime.[69] A 2018 study found that the relationship between oil and authoritarianism primarily holds after the end of the Cold War; the study argues that without American or Soviet support, resource-poor authoritarian regimes had to democratize while resource-rich authoritarian regimes were able to resist domestic pressures to democratize.[70] Prior to the 1970s, oil-producing countries did not have democratization levels that differed from other countries.[71]

Research by Stephen Haber and Victor Menaldo found that increases in natural resource reliance do not induce authoritarianism, but may instead promotes democratization.[72][73][74] The authors say that their method rectifies the methodological biases of earlier studies which revolve around random effects: "Numerous sources of bias may be driving the results [of earlier studies on the resource curse], the most serious of which is omitted variable bias induced by unobserved country-specific and time-invariant heterogeneity."[72] In other words, this means that countries might have specific, enduring traits that gets left out of the model, which could increase the explanation power of the argument. The authors claim that the chances of this happening is larger when assuming random effects, an assumption that does not allow for what the authors call "unobserved country-specific heterogeneity".[72] These criticisms have themselves been subject to criticism. One study re-examined the Haber-Menaldo analysis, using Haber and Menaldo's own data and statistical models. It reports that their conclusions are only valid for the period before the 1970s, but since about 1980, there has been a pronounced resource curse. Authors Andersen and Ross suggest that oil wealth only became a hindrance to democratic transitions after the transformative events of the 1970s, which enabled developing country governments to capture the oil rents that were previously siphoned off by foreign-owned firms.

There are two ways that oil wealth might negatively affect democratization. The first is that oil strengthens authoritarian regimes, making transitions to democracy less likely.[2] The second is that oil wealth weakens democracies.[2] Research generally supports the first theory but is mixed on the second.[2] A 2019 study found that oil wealth is associated with increases in the level of personalism in dictatorships.[75]

Both pathways might result from the ability of oil-rich states to provide citizens with a combination of generous benefits and low taxes. In many economies that are not resource-dependent, governments tax citizens, who demand efficient and responsive government in return. This bargain establishes a political relationship between rulers and subjects. In countries whose economies are dominated by natural resources, however, rulers don't need to tax their citizens because they have a guaranteed source of income from natural resources.[76][77] Because the country's citizens aren't being taxed, they have less incentive to be watchful with how government spends its money.[78] In addition, those benefiting from mineral resource wealth may perceive an effective and watchful civil service and civil society as a threat to the benefits that they enjoy, and they may take steps to thwart them.[28] As a result, citizens are often poorly served by their rulers,[79] and if the citizens complain, money from the natural resources enables governments to pay for armed forces to keep the citizens in check. It has been argued rises and falls in the price of petroleum correlate with rises and falls in the implementation of human rights in major oil-producing countries.[80][81]

Corrupt members of national governments may collude with resource extraction companies to override their own laws and ignore objections made by indigenous inhabitants.[82] The United States Senate Foreign Relations Committee report entitled "Petroleum and Poverty Paradox" states that "too often, oil money that should go to a nation’s poor ends up in the pockets of the rich, or it may be squandered on grand palaces and massive showcase projects instead of being invested productively".[83] A 2016 study finds that mining in Africa substantially increases corruption; an individual within 50 kilometres (31 mi) of a recently opened mine is 33% more likely to have paid a bribe the past year than a person living within 50 kilometers of mines that will open in the future.[84] The former also pay bribes for permits more frequently, and perceive their local councilors to be more corrupt.[84]

The Center for Global Development argues that governance in resource rich states would be improved by the government making universal, transparent, and regular payments of oil revenues to citizens, and then attempting to reclaim it through the tax system, which they argue will fuel public demand for the government to be transparent and accountable in its management of natural resource revenues and in the delivery of public services.[85]

One study finds that "oil producing states dependent on exports to the USA exhibit lower human rights performance than those exporting to China". The authors argue that this stems from the fact that US relationships with oil producers were formed decades ago, before human rights became part of its foreign policy agenda.[86]

One study finds that resource wealth in authoritarian states lower the probability of adopting Freedom of Information (FOI) laws.[87] However, democracies that are resource-rich are more likely than resource-poor democracies to adopt FOI laws.[87]

One study looking at oil wealth in Colombia found "that when the price of oil rises, legislators affiliated with right-wing paramilitary groups win office more in oil-producing municipalities. Consistent with the use of force to gain power, positive price shocks also induce an increase in paramilitary violence and reduce electoral competition: fewer candidates run for office, and winners are elected with a wider vote margin. Ultimately, fewer centrist legislators are elected to office, and there is diminished representation at the center."[88]

A 2018 study in International Studies Quarterly found that oil wealth was associated with weaker private liberties (freedom of movement, freedom of religion, the right to property, and freedom from forced labor).[60]

Research by Nathan Jensen indicates that countries that have resource wealth are considered having greater political risk for foreign direct investors. He argues that this is because leaders in resource-rich countries are less sensitive to being punished in elections if they take actions that adversely affect foreign investors.[89][90]

According to a 2017 study, "social forces condition the extent to which oil-rich nations provide vital public services to the population. Although it is often assumed that oil wealth leads to the formation of a distributive state that generously provides services in the areas of water, sanitation, education, health care, or infrastructure... quantitative tests reveal that oil-rich nations who experience demonstrations or riots provide better water and sanitation services than oil-rich nations who do not experience such dissent. Subsequent tests find that oil-rich nations who experience nonviolent, mass-based movements provide better water and sanitation services than those who experience violent, mass-based movements."[91]

Research links gender inequality in the Middle East to resource wealth,[92] and likewise for the problems of "petro-sexual politics" in Nigeria.[93] According to Michael Ross,

Oil production affects gender relations by reducing the presence of women in the labor force. The failure of women to join the nonagricultural labor force has profound social consequences: it leads to higher fertility rates, less education for girls, and less female influence within the family. It also has far-reaching political consequences: when fewer women work outside the home, they are less likely to exchange information and overcome collective action problems; less likely to mobilize politically, and to lobby for expanded rights; and less likely to gain representation in government. This leaves oil-producing states with atypically strong patriarchal cultures and political institutions.[92]

A study in the US similarly finds that resource wealth contributes to gender inequality: resource wealth leads to lower levels of female labor force participation, lower turnout and fewer seats held by women in legislatures.[94]

Research finds that the more that states depend on oil exports, the less cooperative they become: they grow less likely to join intergovernmental organizations, to accept the compulsory jurisdiction of international judicial bodies, and to agree to binding arbitration for investment disputes.[95]

There is an argument in political economy that foreign aid could have the same negative effects on the long run towards development as in the case of the resource curse. The so-called "aid curse" results from giving perverse political incentives on a weak body of civil servants, lowering politicians' accountability towards citizens and decreasing economic pressure thanks to the income of an unearned resource to mitigate economic crisis.[96] When foreign aid represents a major source of revenue to the government and especially in low-income countries the state building capacity hinders by undermining responsiveness toward taxpayers or by decreasing the incentive for the government to look for different sources of income or the increase in taxation.[97]

A 2018 study found that "a 1% increase in the value of oil reserves increases murder by 0.16%, robbery by 0.55% and larceny by 0.18%."[98]