The National Resource Curse
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Natural resources are distributed unevenly over the planet and this provides the main reason for the existence of international trade. Paradoxical is that being wealthy at natural resources does not necessarily mean a country’s prosperity or social and economic stability. In a large number of cases resource rich states are categorized as developing or under developed ones. The World Bank data shows that about 10 of the 20 mineral provider countries are referred to as “highly indebted poor” ones and so are most of the oil dependent states (World Bank 2012). This evidence comes out of the natural resource curse which characterizes a range of economies in the world.
The natural resource curse can be defined as “the observation that countries rich in natural resources tend to perform badly” or “grow more slowly than resource-poor countries” (Sachs and Warner 827). This is an economical paradox as being rich in such valuable commodities as oil, gas, precious metals, rare minerals or gemstones, any country should have enough financial resources for stable growth and development. Still, the resource wealthy states remain among the least developed economies with negative national product growth rates, poor infrastructure and serious social problems.
Existence of the natural resource curse is often questioned by various researchers. Still, there is very strong statistical confirmation which proves the failure to build a country’s development strategy on the resource-oriented economic basement. In one of their research works on the natural resource curse problem, Sachs and Warner indicate that there is “no overlap in the set of countries that have large natural resource endowments” and “the set of countries that have high levels of GDP” (828). Besides, regression analysis of the natural resource wealth and economic growth of the countries also proves the correlation between “high resource intensity” and “slow growth”. On the other hand, most of the resource poor states have showed rapid growth rates and better economic performance than the resource rich areas. There are several reasons for why such countries as Sierra Leone (wealthy at diamonds), Angola (oil and diamonds), or Indonesia (natural gas, copper and gold) remain poor and undeveloped.
The Natural Resource Curse – Reasons and Possible Solutions
Various economic and political issues occurring in the local and international markets lead to the natural resource curse problem. Resource rich states suffer from external trade regulations, internal corruptive structures, inappropriate economic policies and other negative factors which affect their overall growth rates, social prosperity, and even political stability.
One reason for the natural resource curse to occur is related to the international trade conditions. Most countries pose low or no barriers for the raw materials import, especially, in the form of unrefined natural resources. At the same time, tariffs and quotas for importing finished goods are much stricter as developed states intend in order to protect their own national producers and provide them more competitive prices. This builds up unfavorable conditions for the countries which are rich at natural resources and plan to switch from resource oriented export to produce and trade finished (or at least refined) products. As suggested by Michael Ross, developed countries “could help the resource-dependent states to diversify” their revenues from export activities by “removing the tariffs and nontariff barriers to value added goods” (22). These barriers could have been removed for at least the poorest countries which are included in the list of “highly indebted poor countries” by the World Bank.
This external effect of trade regulations alone would not cause the natural resource curse occurrence, had the countries chosen appropriate economic policies. The main problem to be mentioned is that resource rich states concentrate on the natural resource export too much leaving other sectors of economy without necessary attention while revenues from the export is higher in the short-term perspective. The less focus is usually given to “providing education and health care” for the citizens (Ross 20). The situation occurs in which most of the human and financial resources flow into the natural resource extraction. This imposes two types of risk on the resource wealth country, internal and external ones. First, focusing on one economic sector means that other sectors become much less profitable. When publicly important sectors (such as food production, infrastructure, medical service, and education) are not supported by the government and stay unattractive for a period of time, a country is socially unsafe and cannot sustain any further development. Besides, workers employed in other sectors get much lower wages, lose their consumption capability and either move to the resource extraction sector, or join the poverty layer.
Second, the country’s economic condition is too highly correlated with the revenues inflowing from the natural resource export. As prices for the exported resource fluctuate, the whole country’s economy becomes unstable. If a country’s government is unable to construct effective economic policy to prevent excessive correlation of the country’s stability to the one sector’s performance, it suffers from the natural resource curse significantly.
Countries which have avoided the natural resource curse problem put much attention to the development of various economic sectors providing them strong centralized support. Diversification can be considered the best way to deal with this problem. Other well-known measures are establishing stabilization funds, signing long-term fixed-price contracts, and using insurance mechanisms against economic shocks. Yet, using these measures also requires having strong economic management policies which is not always the case.
Besides, resource exporting economies usually suffer from the low level of innovations and new technologies. Most of the modern technological development is focused on the goods and services production process and rarely consider natural resource extortion. In fact, extraction of gemstones or precious metals does not require significant change in technologies or highly qualified employees. Therefore, countries rich at natural resources often experience low technological development and lack of innovations which is worsened by weak education and low qualification of the labor force.
In addition, a resource rich country may become natural resource-dependent if its political institutions are highly corrupted. As noted by Ross, if governments obtain large portion of the revenues from selling natural resources (oil, minerals, or timber), they are “more likely to be corrupt” (24). There is interesting evidence that governments can manage only certain amount of financial funds. If a country receives more money from export than its budget can absorb, corruption will inevitably take place.
Thus, a self-closing cycle arises where high revenues from natural resource exporting cause corruption, which in its own turn causes natural resource curse as corrupted government authorities prefer obtaining personal wealth to considering public needs and prosperity. This may also cause further problems related with inability of the government to provide law and territorial control in the resource-extracting area which becomes self-sufficient and even more corrupted.
The situation can be worsened when military authorities have a stake in the export revenues. The example of Indonesia shows that the central government does not account large part of the foreign currency revenues obtained directly by the military structures from exporting oil, gas and valuable minerals (Ross 26). Therefore, the government cannot control the ways of how these money is spent which influences democratic outlook of the country.
The only way to deal with the corruption problem on the path away from the natural resource curse is to provide transparency of the exporting companies’ and governmental accounts. Developed economies which have avoided resource dependency require their largest corporations in order to publish financial data at least on the annual basis. Besides, developed countries disclose their budget figures with necessary notes and explanations to the revenue and expenditure accounts. Both the government budget and corporate financial reports are inspected by the nationally (or internationally) recognized independent auditors.
Another reason for the natural resource curse to occur comes up from the analysis of historical data. One can note that this economic paradox has evolved only in the second half of the XXth century. Large economies like the United States or Australia which are also rich at natural resources have avoided this problem and sustained outstanding development. Much higher transportation costs in the earlier periods did not allow these countries to export large volumes of their natural resources. Therefore, most of the resource wealth in these states was directed to the domestic production and consumption. That has changed to the opposite lately. Low and insignificant transportation expense provided resource wealth countries with opportunity to carry natural resources out of the domestic economy and sell them in the international market.
Avoiding the Natural Resource Curse – Example of Botswana
There are several examples of countries which have avoided the natural resource curse at the end of the XXth century. Few exceptions are Malaysia, Iceland, Botswana and Mauritius which have sustained positive growth over several decades along with the solid proportion of natural resources in the export volume. Swanson, Oldgard and Lunde discuss the example of Botswana, its economic policies and procedures to success among other resource rich developing countries (82).
Botswana is a diamond rich country, which constitute around three-forth of its foreign trade revenues. It has overcome the corruption threat by imposing strong transparency standards on the government’s reports, especially, in the part of “collection and recording the resource revenues”. Besides, revenue collection is diversified to different ministries so that no single authority would be responsible for the whole budget. Respective ministers periodically report forecasted values of the future expected inflows, collect revenues in their sectors and post money to the single account of Botswana’s government treasury. The resulting volume of export revenues is cross checked with the central bank’s calculations. Moreover, financial data is inspected by the ministerial general accountant and auditor, and transferred to the Public Accounts Committee for publishing.
The example of Botswana underlines the significance of public transparency for a country’s sustainable development. Absence of governmental corruption allows the resource wealthy country to avoid the natural resource curse and develop various economic sectors without too much concentration on the resource exporting area.
The natural resource curse is a paradoxical problem which occurs in resource rich countries that fail to manage their economies effectively. This problem is closely related to the economic instability, high exposure on the resource price shocks, government corruption, and international trade regulations. There are some measures which could improve the situation in countries with the natural resource curse. State budget transparency, export hedging policies, and bargaining trade restrictions are only some of the possible solutions. However, there is no strong evidence that they will critically change the economic condition in such countries.
One can infer that countries with the natural resource curse cannot avoid this problem by their own means. Still, the international community could move such countries away from the indebtedness, poverty, and resource export orientation. Further research could be done to examine the effect of global measures on the natural resource curse problem. Deep analysis of the influence of strict international regulations on the foreign trade transparency and strong support provided by the developed countries to the resource oriented economies can suggest possible ways to overcome the natural resource curse in most of the world’s resource rich states.
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