Paradox of Plenty

Paradox of Plenty

Paradox of Plenty

The curse of oil, minerals, diamonds and anything of value.


by Chandan Kulkarni; June-2018


 

Why have almost no African countries failed to achieve the sustained economic development? Middle Eastern Countries like UAE, Saudi Arabia have done it, why not African Countries?

Why is United States the wealthiest even though Natural Resources aren’t as abundant as Africa?

Why is Japan so successful even though the land mass is way too less and natural calamities like earthquakes are common.

Countries and regions with an abundance of natural resources, specifically point-source non-renewable resources like minerals and fuels, tend to have less economic growth and worse development outcomes than countries with fewer natural resources.

Why have almost no African countries failed to achieve the sustained economic development? Middle Eastern Countries like UAE, Saudi Arabia have done it, why not African Countries?

Striking gold or discovering oil would seem to guarantee instant fortune. Theoretically the development of that resource could produce great wealth for that nation, but historically it has always led to conflict, corruption and poverty. History is full of examples of countries whose natural-resource wealth led to less economic success. Revenue from extracting raw materials might be mismanaged or embezzled by government officials, or siphoned off by foreign corporations.

The resource curse is by no means limited to Africa, but the continent has produced some examples of the curse at its most destructive. Government forces and armed groups have vied for control of resources, with the proceeds from their sale funding more weapons, which prolongs the violence.

Minerals provoke and finance wars, as evidenced by the horrors of Zaire, Liberia and Sierra Leone. They encourage corruption among politicians who have the power to grant these rights, and strengthen the military, whose job is to protect them. Worst still, resources systematically break the link that exists in normal societies between the economic prosperity of a nation’s citizens and the wealth of the state. When the state’s revenues depend on oil and mining operations, rather than taxes on personal incomes, politicians and generals have every incentive to push the county into unrest/civil war.

This phrase refers to the tendency of countries whose wealth is based on gold, oil or other valuable resources creating unproductive and uncreative economies, with low levels of entrepreneurship, and industrial and commercial stagnation. In Africa’s case, however, it is politics more than economics that is to blame.

There are three inter-connected explanations: war, corruption, and the curse of natural resources. The first two are self-explanatory, the last one slightly less so.

Guinea, a small oil-producing country on the continent’s west coast. In 2010, an estimated 75% of the population lived on less than $700 a year, but the average per capita income was almost $35,000, the continents highest. Instead of creating prosperity, resources have too often fostered corruption, undermined inclusive economic growth, incited armed conflict and damaged the environment.

Corruption is endemic in many of Africa’s most resource-rich countries. Rather than invest resource revenues into infrastructure and education, crooked politicians, often in collusion with the companies mining the resources, siphon proceeds from the continent’s mineral and petroleum wealth into their own pockets.

The resource curse is avoidable. Africa could be prosperous if it practiced good governance, transparency in its dealings with mining, oil and gas companies; stronger disclosure and anti-corruption rules; and economic policies that promote diversified economies. Transnational companies could be compelled to play a more important role, too, by enforcing and strengthening existing transparency rules.

 

Dutch disease

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, so too did its ability to compete against other countries’ exports. 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”.

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 from a Republic, 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.

 

The United States taking a lead in controlling such acts has come up with accountability mechanisms.

In 2010 the US Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. It requires extractive industries that are listed on the US stock exchange to make public the type and amount of payments they make to governments.

The Foreign Corrupt Practices Act of 1977 (FCPA) is a United States federal law known primarily for two of its main provisions, one that addresses accounting transparency requirements and another concerning bribery of foreign officials.

Governments in extracting and capital-exporting countries, bilateral donors, multilateral financial institutions, the extractive industry, private financial institutions, and civil society have made promising steps towards addressing the resource curse in recent years.

 

Green Shoots

Alaska (United States) is one of the lesser-known resource majors that have succeeded in more evenly distributing oil-derived revenues. In 1976, as the country’s pipeline construction neared completion, policymakers established the Alaska Permanent Fund to ensure proceeds would benefit sectors of the economy aside from oil. According to the constitutional amendment: “At least 25 percent of all mineral lease rentals, royalties, royalty sales proceeds, federal mineral revenue-sharing payments and bonuses received by the state be placed in a permanent fund, the principal of which may only be used for income-producing investments.”

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