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A REAPRAISAL OF THE RESOURCE CURSE THEORY

As discussed previously, this chapter begins with an overview of the resource curse theory. This is necessary to understand the effect of the transmission channels through which natural resources wealth causes an inverse impact on growth and development.

A REAPRAISAL OF THE RESOURCE CURSE THEORY

Very important theoretical literature has emerged to rethink natural resources as a major cause of inverse development in developing countries (see Auty: 1993). Dating back to the early 1990s, the resource curse syndrome surfaced following the recognition that the performances of resource-rich countries were very poor and that they are far worse-off, compared to resource-poor countries (Karl: 1997; Auty: 2001: 3), a phenomenon that defies the common notion that translates natural resource wealth into economic growth and development. This self-contradictory paradigm proposes that most developing countries that are richly endowed with natural resources represent the major losers in the whole development process (Auty: 1993). They have meagrely demonstrated that these wealth have been properly exploited in and their economies are benefiting enough from the resources they have at hand. (African Development Bank: 2009). Simply put, the curse of natural resources claims that natural resource abundance and dependence causes slower growth rates (Auty: 2001), increased rates of poverty (Bulte et al: 2005), corruption (Papyrakis and Gerlagh: 2004), epileptic education system and human capital development (Auty: 1998; Gylfason: 2000; Birdsall et al: 2001), authoritarian leaders (Ross: 2001), rent-seeking states (Madhavy: 1971; Beblawi and Luciani: 1987; Leite and Weidmann: 1999) violent conflict and its machineries (Mauro: 1998; Collier et al: 2003; Hodler: 2005; de Soysa and Neumayer: 2007; Le Billion: 2008) in its host nations.

Viewed as “gifts of nature” (Basedau: 2005) or the “golden touch gift” (Papyrakis: 2006), and diverse in all ramifications, natural resources were regarded as beneficial materials to the economy of any country (Gylfason and Zoega: 2001). Contrarily, development economics postulates that resource-rich economies tend to grow slowly than economies that do not have natural resources and supporting this are evidences from developing countries like Angola, Liberia, Sierra Leone, but to mention a few, showing that natural resource wealth creates economic, social and political distortions. These obstructions tend to cause poor economic performances as well as demean the political frameworks of these countries.

Academic debates on the impact of natural resources and its effect on development spell out several transmission mechanisms through which natural resource abundance correlates negatively with growth and development – the Dutch Disease, rent-seeking, low incentives for human capital development and education, poor savings and investments, weak democratic regimes, corruption, unaccountability and even violent conflict outburst. For simplicity, the study classifies these mechanisms based on their

DUTCH DISEASE

The “Dutch disease” [1] syndrome translates to the adverse effect of an export windfall on tradable sectors in economies that depend to a great extent on export of their natural resource commodity – commonly oil. The driving mechanism is the interaction between the primary commodity and exchange rates in which an increment in the real exchange rate suffers other non-natural resources sectors like the manufacturing sector as was the Dutch case and agriculture sector in developing states (Humphreys et al : 2007). According to Matsuyama (1992), these two major sectors, manufacturing and agriculture [2] , stand as frameworks of industrial revolution in an economy. When a country’s natural resource products becomes over-valued, the natural resource sector becomes the focal point as labour and capital are forced away from other sectors and pulled towards its sector –the resource pull effect– prospecting more and more future resource price increment, influx of foreign currency and favourable real exchange rates and foreign direct investment (FDI), which plays a fundamental role in the development of economies (Gylfason: 2001).

This appreciation in foreign exchange rates which is caused by influx of natural resource wealth leads to a decline in the tradable sector (Sachs and Warner: 1997, 2001) and makes domestic commodities less competitive for export – the spending effect– (Ebrahim-Zadeh: 2003) as resources move from the tradable to non-tradable sector. The FDI shrinks as with the manufacturing and non-natural resource sectors that build on “learning-by-doing” are weakened and become non-tradable. Labour force is negatively affected by the shift in exports from manufacturing (and agriculture) sector (see Ross: 2007). Due to the volatility of primary commodity exports which are dependent on international prices, when market forces come into play and their prices fall, productivity in the natural resource sector is forestalled and the other sectors face difficulties in bouncing back to resuscitate the economy (Humphreys et al: 2007).

Shaxson (2007) summarises this crowding-out effect as “a classic display of oil’s jealous character, crowding out and crushing other economic sectors”. The eventual impacts of the syndrome are unemployment and visible poverty margins as a once-blossoming economy plummets worse-off than its initial take-off status (Auty: 1995), though there are reflections on how the factors of production react positively with the natural resource sector, making a resource boom to lead to growth expansion (see Findlay and Lundahl: 1994).

RENT-SEEKING

Arguments that natural resources inhibits economic growth and development in resource-rich economies postulate that the abundance of natural resources instils in them, rent-seeking behaviours which according to Madhavy (1970: 428) resource-rich states depend to a great extent on regular revenues from

“substantial [amounts] of external rent [3] [in form of] rentals paid by foreign individuals, concerns or government to individuals, concerns or governments of a given country, ... revenues received by governments of the oil exporting countries”

Beblawi (1987) also classifying military and political aids sent to a country as intervention measures to sustain super powers as rents, adds that these rents which are paid as rewards for possessing the natural resources play a very vital role in the country’s economy, He thus outlines four effects of natural resource abundance on the countries: -

Even though every country receives rent in one form or the other, extensively capitalise on market distortions, etc. and rent-seeking from natural resources is predominant.

The economy relies on exogenous rent rather than revenues generated through hard work.

Creation of rent is by a small sect of the society but the vast majority are involved in the distribution and consumption of these rents

The government is the primary collector of these unearned rents which means he (the Rentier) has the (sole) discretion to distribute the wealth (rents).

This strand posits that since it depends on foreign revenues gotten from its exports and anticipates more future rents, the government becomes a cardinal point in the economy as the natural resources are primary commodities and the state controls the economic activities in it. Large windfalls of revenue, it is argued, are so cumbersome that they encourage irrational government expenditures since revenues derived from primary exports especially from oil (Humphreys et al: 2007). Rosser (2006) elucidates that they take on distributive functions rather than adopt measures to promote tax implementation because, as he quotes Luciani, unearned revenue intoxicates with some form of myopic illusion which makes them adopt expenditure and allocation policies. They become exuberant in economic planning and embark on capital-intensive projects that may be short-lived, sometimes due to the volatility of foreign rates, and may not contribute to their GDP (Sachs and Warner: 2001). Natural resource wealth increases the rate of public spending while decreasing the quality in spending (see Auty: 2001, van Ploeg: 2007).

LOW INCENTIVES FOR HUMAN CAPITAL DEVELOPMENT AND EDUCATION

The “knowledge is power” rationale behind education holds little or no importance in resource-abundant countries as Gylfason’s (2001) study shows a minimal investment in their education sector. Gylfason (2000; 2001), Gylfason and Zoega (2001) make cross-country arguments that natural resource revenues have a “Dutch disease” [4] effect on human capital, making all policy input redirected towards the natural resource sector, and making no efforts to develop human capabilities – education, health, national security, employment, social security, skills acquisition programmes, etc — since the sector requires more of the low-skilled workers than highly-skilled workers. While Townsend (1979) emphasises the importance of building up human capabilities because they are the sustenance tool of an economy, Humphreys et al (2007), Sachs and Warner (1999) add that the economy suffers as government is relaxed to give sufficient attention to these sectors which are all instruments for wealth creation. A typical is how health and education sector suffered abruptly in Sierra Leone even the economy realised about $200 million profits from legal diamond exports, (Reno (1998). On the other hand, Botswana made paramount investments in education in accordance to its National Development Plans (see Ministry of Finance and Development Planning, Botswana). However, Hausmann and Rigobon note that even when government intends to pursue ec

LACK OF SAVINGS AND INVESTMENT

Sachs and Warner (1995) attest that countries with higher investment rates experience rapid economic growth. Stevens and Dietsche adds that investment from large revenue inflows due to price hike in natural resources creates opportunities for investment in development projects and programmes but finds that resource-rich countries take irrational investment decisions. Gylfason (2001: also suggests that resource abundance creates a sense of “false sense of security” from uninterrupted revenue flow, at least as long as the natural resource is inexhaustible. He (ibid) highlights that this creates disincentive to make investment in both public and private ventures owing to the fast “money-making” mineral wealth brings. Laxity in savings and investment in mineral-rich countries creates inequality gaps as according to the Oversees Development Institute, focus on natural resource production and export become inclined with the interests of the elites (Oversees Development Institute: 2006 in African Development Bank: 2009:103).

Alao (2007) however asserts that it is not the natural resources per se that is problematic but that it is the politics governing the entire process from its extraction until the final disbursement of revenues generated from these resources that ascertain its outcome as a curse or blessing to its possessors.


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