Free Critical Thinking On The Natural Resource Curse

The natural resource curse is an idea that alludes to the thought that natural resources cause economic stagnation and conflicts, as opposed to economic and financial growth and advancement. This happens in light of the fact that the revenues obtained from these resources are regularly misused by corrupt governments, political leaders, and other major stakeholders rather than being utilized to help development and expansion of the country’s economy, infrastructure, social amenities, and other key public goods and services such as education and health. Additionally, the vast revenues obtained from these resources cause and fuel various internal injustices that cause civil wars and conflicts to erupt and prolong for many years. A significant number of the world's poorest nations have large reserves of oil and other important natural resources that are critical for economic growth.
Despite this, several scholarly studies demonstrate that, controlling for income level, nations that are exceptionally reliant on incomes from oil and various minerals score poorly on the United Nations Human Development Index, and have very high rates of corruption. These countries also have a more significant likelihood of conflicts within any five-year period, and large numbers of their population live below the poverty line. In addition, these countries dedicate a very large percentage of government budgetary allocations to military spending and practice authoritative leadership as compared to other countries that have a more diverse source of revenue and wealth. In order to understand this problem further, below is analysis of four possible explanations why some resource rich countries are able to avoid it while others do not.

Dutch disease phenomenon

The Dutch disease phenomenon refers to an economic occurrence in which the revenues obtained from a country’s natural resource exports cause negative effect on the country's profitable economic sector by causing an increment in wages and real exchange rates (Matsen & Torvik, 2005). This greatly affects the trading sectors of that economy, especially manufacturing and agriculture as they are unable to compete effectively within the world market. This phenomenon was first experienced in the Netherlands after the country found huge natural gas reserves in 1959. The country began to export the gas resulting in economic benefit and increased revenues. However, the country focused greatly on this resource as its increased exports, resulting in an increase in the value of the Dutch currency.
This greatly hurt the nation's capacity to export other goods as other countries were unable to buy its products. This resulted in a recession in the country’s economy, as the other sectors of the economy were affected while the gas exports increased (Matsen & Torvik, 2005). A similar occurrence has also affected other natural resource rich countries such as Venezuela and Angola as natural resources exports affected the economies in these countries as other sectors of the economy were affected negatively. Increased international competition results in the decline of these economic sectors and causes significant increased reliance on the natural resources and consequently leaving the economy powerless against changes in prices of these natural resources.

Early versus late industrialization

Another important reason why some countries with natural resources have been able to avoid the curse is that nations with distinctive levels and amounts of institutional quality underwent industrialization at diverse times. The nations that experienced industrialization early were able to develop high quality institutions that helped to prevent harmful growth effects that natural resources would have caused while those nations that utilized their assets at a later stage did not have such institutions already developed. Natural resource discovery is more unwelcome for a nation that has not yet being able to develop the appropriate institutions to help manage that resource. In most of the countries that have been unable to avoid this curse, they utilized their oil riches to add to the power of the state, as opposed to strengthening their national firms and institutions. As such, their National Oil Companies were able to grow and develop very quickly before these nations had establishment solid institutions and systems that would be able to regulate these national oil companies (Economist, 2006). These weak governments were therefore forced to look to these national oil companies to perform activities that would regularly be undertaken by the government, creating major loopholes for widespread corruption and inefficiency. Most of the oil-rich states depend on these national oil companies to collect revenues that will bankroll all their budgets and other financial plans, as opposed to trying to gather taxes and other levies. They additionally rely upon them to do most of the government spending as is observed in some countries where state oil firms are included in such activities as distributing various government subsidies as well as providing various social amenities and services to the people (Economist, 2006). In contrast, countries such as Norway have benefited from its oil because the country was already developed and had well controlled institutions by the time it discovered oil. This enabled the country to effectively manage its oil resource through Statoil, its national oil company. These impartial systems and institutions helped to prevent corruption and spur efficient production leading to economic benefit to the country.

Onshore versus offshore oil

There are a few evidences that nations with offshore oil perform better economically than nations with onshore oil. For instance, inland oil reserves increased the danger of civil conflicts in a nation occurring as compared to offshore oil which had no impact on the possibility of conflict onset. This finding could indicate that onshore oil provides distinctive motivating forces and opportunities to various radical groups as compared to offshore oil. A reason for this is that offshore oil establishments are simpler to secure and the operations of such an oil field can be pretty much free from any activities on the coast. Conversely, onshore and inland oil reserves and fields give various players better conceivable outcomes of utilizing violence to seek control of these oil assets, which may cause political, economic, and social instability.
In addition, offshore oil may bring more economic growth that onshore oil because it requires more technical expertise and specialized equipment in order to be able to produce the oil under the water. This is a favorable factor that helped Norway to be able to benefit from its oil resources. The tough climate and drilling undertaken deep in the ocean resulted in the development of a very high technology oil mining industry that enabled the country to explore its oil reserves and achieve economic benefits. This industry is now the world leader in offshore drilling, yet it only developed due to necessity after the country discovered oil. This has resulted in the other countries using Norway’s Statoil to explore and drill their offshore oil reserves due to the vast expertise it has accumulated over the years. This need for advance technology to be able to drill and export this offshore oil is therefore a great deterrent for rebel groups to want to seek to control such oil fields as they would not be able to sell the oil. This then offers governments the ability to therefore use this resource and gain the required revenue to spur economic growth in the country.

Presidentialism versus parliamentarism

A study undertaken by Andersen and Aslaksen (2008) established that the natural resource curse phenomenon is more present in countries that adopted presidentialism as opposed to countries that practiced parliamentarism. Besides, adopting parliamentary or presidential leadership bears more weight to the issue of natural resource use and development impacts of natural assets than being autocratic or democratic. These results obtained from this study clearly indicate that there is a close association between the natural resource curse and political incentives and other motivating forces, in spite of the fact that there is still limited comprehension of why large natural resource quantities have a more negative development impact in presidential nations than in parliamentary ones. A comparison between parliamentary administrations and presidential administrations established that presidential administrations apply a reduced amount of rent extraction by legislators, have a smaller public sector, and in most cases, public spending was focused towards influential minorities as opposed to expansive spending projects (Persson, Roland, & Tabellini, 2000).

References

Andersen, J. J., & Aslaksen, S. (2008). ‘Constitutions and the Resource Curse’. Journal of Development Economics, 87, 227–46.
Economist (2006). ‘Special Report: National Oil Companies’. The Economist, 12, 58–60.
Matsen, E., & Torvik, R. (2005). ‘Optimal Dutch Disease’. Journal of Development Economics, 78, 494–515.
Persson, T., Roland, G., and Tabellini, G. (2000). ‘Comparative Politics and Public Finance’. Journal of Political Economy, 108, 1121–61.