Natural Resources

Introduction

The question of whether natural resource endowment is a good or bad thing, in regards to its contribution to both economic and political development in individual nation-states, is a rather complex one. Natural resources, “stocks of material that exists in the natural environment that are both scarce and economically useful in production or consumption, either in their raw state or after a minimal amount of processing” (WTO, 2009), without a doubt, play a dominant role in the economy of many nation-states. But in Rents to Riches, Barma explained that, too often the extractive industries of mostly resource-dependent developing countries have been plagued with what he termed a “resource curse” (p.1). This he attributed to the fact that, most of these countries “pursue short-sighted, suboptimal policies for extracting resources and capturing rent” through the unfair allocation of the resultant dividends to the ruling elites rather than for the public good. In this paper, we will be focusing on economic, as well as political, explanations for the advent of the resource curse and suggest some policy recommendations in an attempt to proffer solutions to some of the issues raised.

Economic Explanations

In this section, we will be exploring the economical perspective in relation to the political economy of natural resources. At first glance, natural resources can be deemed to be advantageous for the development of a particular national economy. This vıew was supported by most development economists, in the early 1950’s. They claimed that less developed countries, which mostly suffer from capital shortfalls, with an abundance of natural resources can export primary products to overcome their capital shortfalls to boost their economy (Ross, Michael L., World Politics, p.301). Not only in the case of less developed countries can it be beneficial, but in that of developed countries as well. An example can be seen in the case of Norway, the second largest exporter of natural gas and fifth largest exporter of oil, and considered as one of the richest world economies. (Paltseva and Jesper, 2011, p.2). ´ On the other hand, the abundance of natural resource might create unexpected hardship on national economies. We can take the Democratic Republic of Congo as a counter example. Congo is the world largest producer of cobalt (49% of the world production in 2009), of industrial diamonds (30%) and is also a large producer of gemstone diamonds (6%). It has around 2/3 of the world’s deposit of coltan and significant amount of copper and tin deposit. However, it has the world’s worst growth rate and the 8 th lowest GDP per capita over last 40 years (Paltseva and Jesper, 2011, p.1). Moreover, when we consider the fast growing economies in East Asia such as Hong Kong, South Korea and Singapore, they all have less natural wealth in comparison with the less developed countries with natural wealth such as in Africa and other Latin American countries. All these examples and contradictions put the arguments which support natural resources-led development in a questionable condition.

While most economists argue that natural resources is a windfall for indıvıdual economies, other economists like Prebish and Singer and most structuralists, challenge this assertion. There are, in general, four main economical explanations why the natural resources might actually harm the national economies rather than helping for their development. First of all, countries who only rely on export of primary commodities can suffer from a decline in the terms of trade. In fact, recent studies revealed that aggregate terms of trade for primary commodities have been on a steady decline since the early 20th century (Ross, Michael L., 1999, p.301-303). The second skeptical economic outlook on natural resource-led development is the instability of the international commodity markets. International commodity markets are usually influenced by unexpected sharp price fluctuations. Countries that only depend on primary product exports can be harmed by this price fluctuations since international markets can affect national economies through foreign exchange and government revenues from this exports (p.304).

A third explanation is the poor economic linkage between the commodity exports and other sectors of the domestic economy. When this linkage is poor, earnings from natural resource industry may encounter difficulties in stimulating other sectors of the economy. This hardship occurs when resource extraction in the domestic economy is mostly owned by foreign multinational companies and particularly, when these foreign multinational companies are allowed to repatriate their profits abroad instead of investing this profits to the host country (p.305). The fourth economical explanation for the so-called “resource curse” is a boom in natural resource exports that may create economic stagnation. This phenomenon is termed “Dutch Disease”. Dutch Disease occurs through two different channels at the same time. First, when there is a boom in resource export, this creates an appreciation in real exchange rates. At the same, it creates a boom in the resource sector to draw capital and labor away from the manufacturing and agricultural sectors of the domestic economy which in turn increases the production costs at the end. This two combined effects lead to a decline in the exports of the manufacturing and agricultural sector and can lead to an increase in the costs of the goods and services in the nontradable sector, which cannot be imported (p.306-307).

Another additional observation on the undesirable effects of natural resources on the domestic economy is the link between the rents from the natural resources and corruption. This link is related to the competition level of the resource sector in the economy. One economical explanation is that, less competition means higher rents for companies and creates a tendency for bureaucrats, who have the control rights over them e.g. tax inspectors and regulators, to behave malfeasantly. Therefore, natural rents and rents induced by the lack of product market competition may foster corruption. (Ades and Di Tella, 1999, p.982-983). However, empirical studies on the relationship between natural resources and corruption are relatively few. The case of Nigeria in the 1970’s is a good example in portraying this relationship. After the oil shock of the 70’s, observers noted that Nigeria’s oil income created extraordinary opportunities for corruption to fester due to the increase in rents of the natural resources (p.982).

Political Explanations

In the field of Political Science research, and in regards to the widely observable prevalence of a resource curse amongst primary commodity exporting nations, Michael Ross postulated that, there currently exist only “weak non-cumulative findings”. He further went on to argue that, “this dearth in hypothesis testing,” in this regard, according to Ross, “has hindered the contribution of political science to the study of resource curse” and “[m]ore subtly, has enabled political scientist to produce theories that are unworkably vague” (p.321). Ross earlier identified three categories of these theories in trying to explain a possible Political basis for the reoccurring phenomenon that is the resource curse in his article, The Political Economy of the Resource Curse. First, was a cognitive explanation that entailed the contention “that resource booms produce a type of shortsightedness among policy maker; societal explanations, which argue that resource exports tend to empower sectors, classes or interest groups that favor growth-impending policies; and state centered explanations […] which contend that resource booms tend to weaken state institutions” (p.298).

Thad Dunning expounded on the political angle of understanding the behavior involving governments of resource-rich nations by focusing on what he termed: “the political foundation of resource dependence” brought about by resource wealth in his conditional theory of the resource curse. Making use of examples from three case studies that included: Mobutu’s Zaire, Suharto’s Indonesia, and post-independence Botswana, in a description of the three equilibrium path model of a resource rich political economy, Dunning came to the conclusion that there exist variations in outcomes among resource-rich countries that can be linked to the existence of political and economic incentives for elites to diversify as well as the factors that influence these incentives. He further outlined how the world market structure for the resource, the degree of societal opposition to elites, and the prior development of the non-resource private sector can influence elites’ incentive for diversification and thus shape outcomes along the dimensions of political stability and economic performance (p.451).

In the case of Botswana, a stable market in the diamond industry was an incentive not to diversify, while the degree of opposition was the incentive not to in the case of Mobutu. For Suharto, development in the non-resource sector led to incentivized diversification with the main aim of each of these cases being the attainment of political stability. But what Dunning failed to take into account was other factors like violent suppression of the opposition by each of these despotic regimes and that such stability may also prove to be unsustainable in the long-term as Mobutu was subsequently forced out of power in 1997 as Zaire (now the Congo) was plunged into a long drawn-out and bloody civil war while Suharto was disgraced out of office in 1998. This further reinforces the argument of Ross regarding the prevalent “weak non-cumulative findings” in the political science field.

Conclusion

In Barma’s Rent to Riches he further expounds on what he termed the resource paradox in which resource-rich countries tend to grow more slowly than other poor countries—even after such variables as initial per capita income and trade policies are taken into account. He provided several pathways for intervention that could be implemented by resource-rich governments that could to enhance the developmental orientation of the natural resource management (NRM). He outlined three main incentives-compatible interventions. They include, policies aimed at extending time horizon and thereby improving inter-temporal credibility e.g. emphasis on a process that grants resource concessions, leading to a minimization of investors uncertainty and the enhancement predictability; policies that mobilizes stakeholders to cooperate on such NRM, which expands political inclusiveness e.g. through the use of model contract and fiscal regime; and policies that enclave institutions and capacities in NRM in order to foster some form of functionality in a context of perverse political economy dynamics (p.221).

Also, in accordance with the “good-fit” approach for the extractive sector, proposed by Barma, individual policies have to be implemented that functions properly in each section of extraction, taxation or investment. This differentiation helps to ameliorate the adverse effect of weak inter-temporal credibility and low political inclusiveness. Further prescriptive suggestions for promoting better NRM, particularly in cases of nation-states with weak institutions may include the promotion of transparency as a precondition to addressing the apparent poor management of natural resources (Ascher, 1999). In this regard, the Extractive Industries Transparency Initiative (EITI) provides an institutionalized mechanism for reconciling and validating information concerning the payments made by firms operating in the extractive industry, and the payments governments report as received. The EITI is built on a multi-stakeholder platform that brings together governments, extractive companies and civil society, which requires among other things some common norms and standards, and ensures there’s more accountability amongst resource extraction companies. There still exist more room for improvement both in the field of research and establishment institutional mechanisms that can alleviate the prevalence of the so-called “resource curse.”

References
Ades, Alberto and Di Tella Rafael (1999). The American Economic Review, Vol. 89, No. 4, p 982-993 Barma, Naazneen, et al. (2011). Rents to Riches?: The Political Economy of Natural Resource-Led Development. World Bank Publications
Dunning, Thad. (2005). Resource Dependence, Economic Performance and Political Stability. Journal of Conflict Resolution 49 (4) p.451-482
Michael L. Ross (1999). The Political Economy of the Resource Curse. World Politics, 51, pp. 297-322
Paltseva, Elena, and Roine, Jesper, (2011). Resource Curse: What Do We Know About It? Web: http://freepolicybriefs.org/2011/11/21/are-natural-resources-good-or-bad-for-development/ (Access: 29.06.2015)
Paltseva, Elena (2013). Empirical Evidence on Natural Resources and Corruption. Web: http://freepolicybriefs.org/2013/02/25/empirical-evidence-on-natural-resources-and-corruption/ (Access: 29.06.2015)

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