Resource Curse: A Paradox Foretold
Ordinarily, natural resources should be synonymous with blessings. So the idea of resources and curses occurring together in the same sentence and in reality is not only an oxymoron but the very definition of paradox. But it is real. The story of many resource-intensive countries, including ours, has amply and sadly demonstrated this. Beyond anecdotal evidence or the conflation of coincidence with causality, it has been proven empirically by Jeffrey Sachs and others that resource-rich countries mostly perform worse economically than those not similarly endowed.
True, there are a few resource-rich countries that have escaped resource curse. But these countries—such as Norway, Canada, Malaysia, UAE and Botswana—are the exceptions rather than the norm. The exceptions have however also shown that resources do not come studded with curses. It is the risks and choices that resource-endowment predispose the ruling elites and the larger societies of resource-intensive countries to that turn natural resources from potential enablers of prosperity to uncanny facilitators of poverty. Resource-intensive countries are usually prone dependence, delusions and distortion, three afflictions which translate to high levels of corruption, incessant conflicts and a dysfunctional ethos of politics and society and ultimately to poor economic outcomes.
The first of such afflictions manifests in the form of what is called the Dutch Disease. Deriving its name from the paradoxical outcome of the discovery of large gas reserves by the Netherlands in 1959, this concept describes what could happen when a country experiences sudden and massive inflow of foreign exchange because of the high price of its natural resources in the international market. This is likely to result in raising the value of the country’s currency but with the net and negative effect of making its other exports expensive and therefore non-competitive and imports relatively cheaper. This in turn creates what is called the crowding out effect, where the export of natural resources crowds out other sectors of the economy such as agriculture and manufacturing and which are in turn crowded out by cheap imports. The country ultimately becomes a mono-cultural economy, depending on the valuable natural resource for its export, for most of its foreign exchange and for government revenues. In addition, the country becomes dependent on imports to meet most of its household and industrial needs. Does this sound like a country we all know? This double-dependence would not be a problem as long as the price of the primary product stays high. But it is also a known fact that commodity prices fluctuate and despite the existence of cartels such as OPEC that try to constrain supply to keep prices high, resource-dependent countries are price takers and prone to be boom-and-bust cycles.
Resource-dependent countries are thus usually advised to save during boom times as insurance against bust times. Another common prescription is for resource-dependent countries to deliberately diversify their export and revenue base. But they hardly save for the rainy day and they hardly, beyond lip services, diversify their revenue and export base. This is because the elite and even the citizens of resource-rich countries, flushed with sudden and massive wealth, become deluded. They think the good times will last forever. They take the easy road. They make choices that are not sustainable. They mistake natural wealth for real wealth. But while benefits of booms are usually narrowly confined, the burdens of busts are usually widely dispersed, leading to the kind of economic meltdown that Nigeria is slowly emerging from.
The other affliction of resource-dependence is that it distorts not just the structure of the economy but also that of politics and the society. The economy shifts from a tax and productive economy to an extractive one. This changes the dynamics between the citizens and those in authority, leading to what some have called the unholy pact: “we will not bother you about taxes, and you will not bother us about what we do resource rents.” Transparency and accountability thus go out of the window; corruption not only increases but also becomes the norm. This also changes the organising philosophy of politics from one driven by service to one animated by extraction of benefits for selves and clients. Public office becomes unduly attractive and the intense competition for access fuels conflicts. When revenue uncertainties co-join with low national productivity, high import-dependence, predatory politics, pervasive corruption, and constant conflicts, the vicious cycle of resource curse is complete. But it has also been established that resource curse is not destiny. It is not inevitable. (See concluding part on www.thisdaylive.com)