Resource curse – Ross
States with abundant resource wealth perform less well than their resource-poor
counterparts, but little agreement on why this occurs.
Sub-Saharan Africa, Latin-America, North Africa and Middle-East still depend on primary
commodities for at least half of their export income.
Four most prominent explanations for the curse: a decline in the terms of trade for
primary commodities, the instability of international commodity markets, the poor economic
linkages between resource and nonresource sectors, and an ailment commonly known as the
“Dutch Disease”.
Why resource-exporting gvts seem to manage their economies so poorly, explanation
fall into one of three categories: societal explanations (resource exports tend to empower
sectors, classes or interest groups that favour growth-impeding policies), cognitive
explanations (resource booms produce a type of short sightedness among policy-makers), and
state centered explanations (resource booms tend to weaken state institutions).
Two other explanations little explored: attribute the curse to state-owned enterprises (governe
resource extraction in developing states); a sate’s inability to enforce property rights may
directly or indirectly lead to a resource curse.
In this domain, economists and political economists seem to be unaware of each
other’s contributions.  Compare the approaches of economists and political scientists to this
issue.
Is there a resource curse?
Casual glance at growth rate across the developing world (resource-rich Africa and
resource-poor East-Asia) seems consistent with the notion of a resource curse. But how strong
is the evidence?
Studies: major oil exporters and major hard-rock mineral exporters performed less
well than their resource-poor counterparts. What accounts for this effect?
- 1950s, development economists suggested abundance would help “backward states”, not
harm them. // Minority of scholars raised three objections to dvpt strategies based on resource
exports: primary commodities exporters would suffer from a decline in the terms of trade
(which would widen the gap between the rich industrialized states and the poor resource
exporting states); international commodities markets are subject to unusually sharp price
fluctuations (fluctuations transferred to their domestic industries if we rely on them, private
investment risky); resource industries unlikely to stimulate growth in the rest of the economy.
- 1960s and 1970s research on the terms of trade produced conflicting results. OPEC oil
shocks implied that the terms of trade for primary commodities could improve the long run.
For a time, resource-rich developing states seemed to hold a privileged slot in the
international division of labour.
- Since the 1980s however, terms of trade for most primary commodities have tumbled. Drop
caused by 1) rising volume of commodity exports, 2) collapse of international commodity
agreements. After 1989 fall of planned economies of Eastern Europe and Soviet Union, 19971998 Asian financial crisis reduced the demand for commodities and sent prices lower.
But no clear data for primary commodities. Between 1900 and 1983 5 have significant
declining terms of trade, 5 others positive trends, 16 trendless.
Is the instability harmful? Export instability produces unusually high levels of private
investments, as exporters try to buffer themselves against future price shocks. Export
instability  paradoxically higher economic growth.
More recent studies however: export instability  either harmful impact on economic growth
or no impact at all.
Gvts appear to have the capacity to foster linkages (growth on commodity exports have
negligible effect on the performance of the non-export sector), yet have commonly failed to
do so.
Boom in resource exports can produce economic stagnation: Dutch Disease. Two
effects following resource booms: 1) appreciation of a state’s real exchange rate (sharp rise in
exports), and tendency of a booming resource sector to 2) draw capital and labor away from a
country’s manufacturing and agricultural sectors. Decline in export of agricultural and
manufactured goods  inflate the cost of goods and services that can not be imported.
Dutch Disease may be less common in developing states. The model assumes that an
economy’s capital and labour supplies are fixed and fully employed before a boom begins.
Yet developing states often have labour surpluses. Model also assumes that domestic and
foreign goods are perfect substitutes.
Why gvts fail to take corrective actions? Large role in the resource sectors of almost
all developing countries. Counteract Dutch Disease by :
1) maintaining tight fiscal policies,
2) temporarily subsidizing their agricultural and manufacturing sectors, and
3) placing their windfalls in foreign currency to keep their exchange rates from
appreciating.
Political explanations for the Resource Curse
Theories of policy failure: cognitive theories (blame policy failure on the shortsightedness of state actors), societal theories (cite the pernicious influence of privileged
classes, sectors, client networks, or interest groups), and statist theories (fault a state’s
institutional strength or weakness).
Each theory takes resource windfalls (or rents) as their independent variable and
economic stagnation as their dependent variable. Cognitive: rents produce myopis disorders
among policymakers, societal: rents empower social groups that favour growth-impeding
fiscal or trade policies, statist: rents weaken state institutions.
Absence of careful testing: scholars unable to produce a cumulative body of knowledge about
policy failures, arguments often left underspecified
- Cognitive explanations
Resource wealth causes a type of myopia among public or private actors. Machiavelli
Montesquieu Adam Smith John Stuart Mill. “get rich quick mentality” among
businessmen “boom and bust” psychology among policymakers
Several problems with the approach: transgression of rationality assumption, deployed in
an ad hoc manner rather than part of an explicit and testable theory, little evidence that
policymakers collectively fall into wealth-induced stupors.
Appealingly simple way to explain failure of gvts.
- Societal explanation
Booms enhance political leverage of non-state actors who favour growth-impeding
policies. Explains why resource-rich latin America fell behind resource-poor east Asia in
the 1970s. ISI : import-substituting industrialization in latin America because of those
who enjoyed resource sectors.
Generalization ? Not sure… Societal explanations rely on the same five cases to
illustrate their arguments, suggest that the curse of slow growth comes from trade barriers
which protect the winners of boom resource, work best when non-state actors have first
claim on any resource rent (exceptional).
- State-centred explanations
If policymakers are rational and the behaviour of societal actors is held constant, statecentred explanations are hybrid (mix of cognitive societal and institutional arguments).
When gvts gain most of their revenues from external sources they are freed from the need
to levy domestic taxes and become less accountable to the societies they govern. Resource
rent makes the states myopic and risk-averse, promote status quo instead of promoting
dvpt. Little social pressure (low taxes and generous welfare programs).
Non-obvious claims: states are revenue satisficers, not revenue maximizers; when
a state’s demand for revenue diminishes, so will the soundness of its economic policies.
Implies that states that are revenue-poor and tax their populations more heavily will
adopt sounder economic policies and have better growth records. Shafer: when an export
sector has a small number of large firms, high barriers to entry and exit, and greater assetspecificity, it will have greater difficulty copying with international market fluctuations
and will be more prone to seek gvt help. However, limits (hard to see why the presence of
an inflexible leading sector should prevent a state from developing institutions to address
non-leading sectors needs.
Other Directions: Parastatals (= state-owned orgs) and Property Rights
Two other explanations.
-
much of the resource curse has been caused by the state’s ownership of resource
industries. Firms nationalized, but foreign multinationals had previously served as
buffers against export instability (states now more exposed to international market
shocks); state ownership may also have softened the budget constraints of resourceexporting gvts; and parastatals are exceptionally inefficient and often deprived of
funds they need to improve productivity.
-
Link the resource curse to the failure of states to enforce property rights.
1. Economic decline and resource dependence might be independently caused
by poorly enforced property rights (risk of lost investments cannot be offset by normal
profit margins), but resource extraction can still proceed: result= a state that grows
slowly, and where resource extraction forms a large proportion of all commercial
activity.
Or 2. Settings where the rule of law is already weak, lucrative opportunities for
extortion. Foster the rise of extralegal organizations that seek out protection rents.
Result= violent form of the resource curse, in which the rise of resource industries
leads to further destabilization of property rights and hence the decline of nonresource
industries.
Conclusion
Resource curse tied with international economic factors, including a decline in the terms of
trade for primary commodities and the instability of commodity markets. We still know little
about the politics of the resource curse (why resource exporting gvts respond perversely or
ineffectively to these and other hardships).
Gap between strong cumulative findings on economic questions and weak noncumulative
findings on political questions. Dearth of hypothesis testing in political sciences.
27 of the 36 states in the World Bank’s most troubled countries are primary commodity
exporters.