THE CURSE OF NATURAL RESOURCE ABUNDANCE

There is a growing consensus that large natural resource endowments are a curse to any economy.

It is widely believed that abundance of natural resources should help promote economic growth because it increases revenue (from increased exports) which can be used in providing infrastructure to develop the economy.

On the contrary, since the 1970s growth failure has been recorded in almost all resource-rich countries except for a few success stories like Mauritius, Botswana, Chile and Malaysia.

The questions then arise, why does natural resource abundance seem to be a curse? Why do resource-poor countries perform better than resource-rich countries? Why do some resource-rich countries seem to escape the resource curse?
Many reasons have been advanced as to why large resource endowments lead to growth collapse. A distinction has been made between point-source resources and diffuse resources and their effect on economic growth. It is generally agreed by economists that point-source resources (oil, minerals, coffee and cocoa because of the concentration of their ownership) have a more negative effect than diffuse resources (agricultural commodities) on political institutions thus inhibiting economic growth.

The production of point-source resources are usually more capital-intensive requiring high levels of skilled labour. Their production has no linkages in the economy so they do not have much positive impact on the rest of the economy while diffuse resource production is more labour -intensive and can make use of surplus rural labour thus creating linkages in the economy. Thus, it appears it is point resources and not just all natural resource endowment per se that have negative effects on growth.

Natural resource endowments delay rapid industrialization and urbanization because the rents they give make it possible for governments to continue pursuing growth-inhibiting policies for a longer period of time. Rents from natural resources result in the inefficient use and allocation of resources as well as corruption.
Resource booms, which may be as a result of a sharp temporary increase in the world price of a resource or the discovery of natural resource deposits, lead to increased government spending which results in excess demand due to increased money incomes. This results in inflation and high levels of importation to meet the excess demand. Deficient demand reduces activity in the real sector causing increased unemployment and decreased real incomes. Unsustainable expenditures and large debt profiles resulting from borrowings against future earnings cause reduced incomes and output when the real incomes differ from the projections.

Poor political institutions, high level of corruption, income inequality and political instability are characteristic of many resource-rich countries. One then wonders why some resource-rich countries have been able to escape the 'curse' of natural resource endowment. Different reasons have been given for this but there is a general consensus that good political institutions which pursue good policies are responsible for their apparent success.

Good political institutions are necessary to provide public goods and to formulate, implement and monitor good policies. The presence of good political institutions constrains the government to pursue policies that are in the collective interest of the citizens. It also makes the government accountable to the people thus checking its excesses.
In resource-poor countries, low per capita income constrains a government to pursue policies that promote the growth of labour-intensive manufacture exports which increase domestic investment and precipitates the growth of heavy industry. Since resource-poor countries are constrained by scarce resources, low income and the low tolerance of the citizens for inequitable wealth distribution, they usually abandon infant industry and closed trade policies earlier than resource-rich countries.

Many resource-rich countries do not have the ability to pursue coherent policies because of various interest groups who see reforms as threats and will do anything to maintain the status quo even if it means overthrowing the government.

Successful resource-rich countries like Malaysia and Botswana have been able to pursue policies that promote diversification of primary exports so that they are insulated against price shocks in the world market. It has also been able to use natural resource endowment judiciously due to economic policies by successive governments to ensure equitable distribution of income and increased employment thus maximizing national welfare.

Slow economic growth in resource-abundant countries can be said to be a product of poor institutions and policies and not just the mismanagement of resources. The role of government, through established political institutions, cannot be over-emphasized.

To stimulate economic growth, the government has to pursue policies that diversify exports to offset declining terms of trade, ensure fiscal discipline, and promote openness to trade. Excess revenue should also be used to develop other sectors like manufacturing and in the accumulation of social and human capital.

Macroeconomic planning should be based on conservative projections of resource prices and income to avoid budget deficits. Resource booms should be followed by devaluation policies that reduce the appreciation of the exchange rate. The government can also keep excess revenue in a stabilization fund (to cushion the economy against price shocks) or a savings fund (for the use of future generations) as practised in Norway and Kuwait.
We can then conclude that large natural resource endowment is not a curse in itself but the absence of good institutions to pursue good policies to promote growth is responsible for the growth failures associated with resource endowment.