Natural resources - Curse or blessings

Abstract:

The resource curse refers to a complex phenomenon that resource rich countries fail to take the advantages from their natural resources. According to this term countries with abundance of natural wealth are unable to gain the benefits of having the resources that they are supposed to get in comparison to the countries with fewer natural resources. This paper describes the existence of resource curse, how to deal with this curse and its implication to development of Middle East.

Introduction

Even though a country with plenty of natural resources should progress in terms of GDP and economic growth at far more pace as compared to countries with far less resources or with no resources at all as compared to them, studies and experiments do tend to suggest otherwise. True, natural resources reserves do help a country raise individual living standards, economic growth, nevertheless, unless made full use of it can result in a negative GDP too.

Experiments after being carried out in this regard has shown that in some countries despite resources being available in plenty their progression was not in line with it. On the contrary, countries which should have struggled to make their way through, as they had little resources or none at all, in reality have out-performed countries with abundant resources through the help of their service and manufacturing industries. While on the other hand some natural-resources rich countries have done exceptionally well as they utilized their wealth with perfection. To sum up, it can neither be said having less natural resources will mean a country can not progress nor can it be said that having enough of it will prevent a country from moving further forward. The whole thing has got to do more with whether proper utilization of it was made or not.

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Is there a resource curse?

If a closer look is taken at some countries in the Middle Mast, for example, Saudi Arabia, Kuwait, Iran and Iraq, it can be seen that they all share some things in common. These countries have more oil reserves than any other countries in the world; they are governed by Islamic laws, the fate of the people lies at the hand of their leaders, and where democracy is not present at all. General people have nothing to say as to how the country would be run and armed forces are often used as a weapon by the leaders to ensure that power does not come out of their hands. Despite having natural wealth, these countries have not performed as per expectation. Still they have slow population growth and poor life expectancy than average, low quality education and health care, low market diversification, poor socio-political development indices.

There are some other natural resource-rich countries, where natural resources could not bring blessings.

In some African countries civil war occurred over the control of the resources which may lead to separatism. People from natural resource areas want to keep control over their resources. Thus they get engaged in conflict with their Government. The Government’s abilities to perform go down badly. For instance, in Angola and Sierra Leone, some rebel groups in the area where natural recourses like diamond, gold etc are located, are engaged in different forms of crimes like extortion, drug dealing, kidnapping foreign executives of multinational companies for ransom.

The revenues from natural resources can go up and down. When the prices of the natural resource rise the economy of the countries dominated by natural resources booms and again if the price falls down the economy also plummets. For instance, the price of crude oil shot up from $10 per barrel in 1998/1999 to $140 per barrel in the middle of 2008. Again in December 2008 the price plunges to $40 per barrel. On 29th of December 2009 the price was $76.19 per barrel. The wild fluctuation of the price of natural resource can have a great impact in the Governments annual development budget if the economy depends absolutely or mostly on natural resources.

In the resource rentier countries, the Government does not tax the citizens because they have fixed sources of income from resource rent. They do not have to explain about their policies, rules, and laws to the public. People also do not or can not complain about their living standard, health, Government policies etc even though they are poorly served by the Government. As a result, the relationship between the rulers and public collapses. In the Middle East people can not protest against any Government policy. In fact the rulers, dependent on natural resource rent, tend to be repressive, corrupt and poorly managed.

In the resource abundant countries human resources are often ignored. Instead of investing in the development of education, health and research, Government make huge expenditure on buying luxurious products, military, police from which the only rulers or elite societies get benefited.

The countries which have natural resource, the giant multinational companies gather there. They want to get control over the resource to mine it by paying a token money. They try to get the control either by bribing money or other forms of gifts to the rulers of that country, or by creating pressure from their own country to the resource owner country. If the Government is not accountable to its citizens, it is very tough to avoid such pressure or the greed of bribe. Thus the multinational companies are spreading corruption in the poor, but with natural resource, countries. For example, Niko, a Canadian company is in charge of gas exploration in Bangladesh. In 2005 because of the incompetence, technical fault of Niko, two huge blowouts of gas occurred. Bangladesh faced a loss of tk7.4650 billion in local currency ($1=tk70 approximately) including gas and environmental damages. But instead of paying the compensation they gave a luxurious car which cost 10 million in local currency to the state minister for energy as a bribe to avoid compensation.

There are many countries with little or no natural resources at all, which have been able to develop.

Resource-rich countries like Middle East could not perform well in terms of economic growth. Even the growth of some countries with ample natural resources was negative. On the other hand countries with low natural resources performed extremely well. Most of the resource poor countries like Singapore, Korea, Taiwan, and Hong Kong grew rapidly during the period. They achieved rapid economic growth from export industries based on manufactured products. Lack of natural resources could not be an impediment in their development.

Some countries with affluent natural resources used this wealth effectively and thus they became developed. USA for example, was a resource rich country. But unlike others it used its mineral resources as a ladder of progression. Natural resources played an important role in the technological and industrial development. US made a huge investment in exploration, geological knowledge, transportation and the technologies of mining, refining and utilization. US excelled other countries in the world in mineral sector. Mineral sector contributed a lot to enhance the knowledge and technological capabilities. In the way to leadership in manufacturing, the mineral sector of the USA was an important issue. According to Wright (2004) “resource extraction in the United States was more fundamentally associated with ongoing processes of learning, investment, technological progress, and cost reduction, generating a manifold expansion rather than depletion of the nation’s resource base.” It had a great effect in the progress of education. By the nineteenth century, the education system of the US in mining engineering and metallurgy came out as the world leader. Columbia School of Mines which was opened in 1864 became the leader. Later University of California at Berkeley developed into world’s largest mining college. Wright (2004) wrote in his journal that “The most famous American mining engineer, Herbert Hoover—an early graduate of Cal’s cross-bay arch rival, Stanford—maintained that the increasing assignment of trained engineers to positions of combined financial and managerial, as well as technical, responsibility was a distinctive contributing factor to U.S. leadership in this sector.” In 1917 a survey was conducted which found there were 7500 mining engineers in the USA.

Thus natural resources contributed in the progress of law, investment and education which led to overall development in America.

Considering all the evidences, it can be said that natural resource is neither a vital element of development nor a curse. Development depends on lots of factors like Government policies, accountabilities, human resource development, education, fiscal policy, manufacturing industries etc. When a Government can not rule the country properly, it becomes authoritarian and repressive. It uses the rent from natural resource to dominate the public and avoid accountability, transparency. At that time resource becomes a curse. But for this natural resource can not be blamed rather the mismanagement can be blamed. If the natural resource is utilized appropriately, it can be blessing.

How can a state overcome the resource curse?

Some evidences suggest that there is a negative relationship between natural resources and growth. So resources were called a curse by many researchers. But it is not always true. A country can get rid of this curse by taking some steps. The guaranteed income from natural wealth can be used as a source of investment rather than a source of public disbursement. The transformation of natural assets into manufacturing capital can lead to break the curse. The country can use the resource rent to develop the infrastructure. The country can invest the rent in different sectors like manufacturing, health, education, development of law and order, human rights. If the country can manufacture goods in a large volume, it can export them. Income from exports will reduce the dependence on natural resource. The government can launch a comfortable taxation system. It will establish the relationship between the ruler and the public. Whenever government will take money from the citizens, it will have to explain the incomes and expenses of the country. It will provide accountability and transparency.

The Government can share the revenue with the local people. When the local community was given the power to handle resources of the country, it not only motivates long-term investment but also takes the pressure off the shoulder from central government, and also helps to alleviate poverty. Through the proper management of natural resources, a government can sustain the welfare of the country; can raise the life standards of the people living below the poverty line and thus make the natural resources as a blessing.

‘The Middle East will not develop until its oil reserves run out’. Discuss.

Most countries in Middle East, if not all, have some things in common such as monarchy system, oil reserves, no accountability and transparency, absence of democracy, repressive. Economy of these countries relies on their oil income. As they do not rely on tax from its people, they can avoid accountability and other responsibilities to the people. Because of oil being present there in plenty and the income the government extracts from selling them to other parts of the world being more than enough for them to run their country, the government do not feel it important to build manufacturing industries in their country. But at some point down the line this oil reserve will come to an end. Then these countries will be forced to find other sources of income and only then they will really start thinking to build other service and manufacturing industries. This may open the doors for private sector. When the private sectors thrive, it will bring investments from different places which will also in turn create plenty of job opportunities. Government will have to invest for the development of human resource to cope with demand for skilled people. As a result there will be a literate society.

The rulers will loose legislation blocks to investment, private employment, exorbitant regulatory barriers, poor enforcement of commercial contracts and dispute resolution, taxation barriers. The multinational companies (other than Oil companies) will be attracted to these countries to expand their businesses. Huge investment will come that will contribute to the development of the countries.

Another thing, when rulers will tax the citizens, they will have to explain their policies, incomes and expenses. As a result accountability and transparency will grow up. It can lead to democracy. When the rulers will start thinking of the welfare of the public, it will help to sustain the democracy and development of the country.

The example of UAE can be taken. It is expected that the oil reserve of UAE will run out in twenty years. The rulers realised this. So they are trying to move to other sectors, for example tourism. Now Dubai is one of the most lucrative tourist places. Every year millions of tourists from all over the world visit Dubai. Government are earning a substantial amount of revenue from tourism sector.

Dubai is attracting the business companies from the western world. Currently Dubai is one of the best places for business. Almost all of the international companies have branches in Dubai. Thus the Government of UAE is reducing dependence from oil.

Another example is Kuwait. They are utilizing the rent from oil for off-shore investment. This way they are trying to stabilize the economy.

As long as the countries of Middle East will get revenue from oil, they will remain averse to make changes. They will stay in vicious circle until the oil reserve will be depleted. The sooner they realize that oil reserves are not unlimited, they will move to the way to development.

Conclusion:

Though some of the evidences identify natural resources as a curse, but the resources themselves are not a curse. Mismanagement of the resources makes them a curse.

But there is no short term option to get out of the curse. Oil in the Middle East is a sensitive issue. When the Government will decide to use the resource for the development of the living standards of citizens, they will transform into a good government from authoritarian rulers. International pressure and internal pressure can shake the rulers. But because of having a large oil reserve, the rulers can avoid all forms of pressure.

This paper has illustrated all the facts related to natural resources. According to Kirk Hamilton and Giovanni Ruta, (2006) “Whatever the level of government, good management is a precondition for good performance. Natural resources are “governance-intensive.” Sound management of these natural resources can support and sustain the welfare of poor countries, and poor people in poor countries, as they move up the development ladder.”

Bibliography:

• Class Lecture

Journals

• Moore, M. (2004) International Political Science Review. Revenues, State Formation, and the Quality of Governance in Developing Countries, 25(3), pp. 297-319
• Sachs Jeffrey D. and Warner Andrew M. (2001) European Economic Review. Natural Resources and Economic Development The curse of natural resources, 45, pp. 827-838
• Wright, G. and Czelusta, J. (2004) WHY ECONOMIES SLOW. The Myth of the Resource Curse, 47(2), pp.6-38

Online Resources

• Bannon, I. and Collier, P. (2003) HUMAN SECURITY IN CONFLICT SITUATIONS. Natural resources and violent conflict: options and actions [Online]. Pp.242-245. Available from [Accessed 2nd January 2010]
• Hamilton K. and Ruta, G. (2006) Environment Matters. From Curse to Blessing Natural Resources and Institutional Quality [Online]. pp. 24-27. Available from [Accessed 2nd January 2010].
• Humphreys, M., Sachs Jeffery D. and Stiglitz Joseph E. (2007) Escaping the Resource Curse. USA: Columbia University Press. [Online] Available from [Accessed 2nd January 2010].
• Sachs Jeffrey D. and Warner Andrew M. (2001) European Economic Review. Natural Resources and Economic Development The curse of natural resources, 45, p. 829