Why Natural Resources Are a Curse on Developing Countries and How to Fix It

By Stewart M. Patrick

Some ideas for giving emerging economies a fighting chance against the resource curse.

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A man shows crude oil on a riverbed in Nigeria. Reuters

Among the many frustrations in development, perhaps none looms larger than the "resource curse." Perversely, the worst development outcomes--measured in poverty, inequality, and deprivation--are often found in those countries with the greatest natural resource endowments. Rather than contributing to freedom, broadly shared growth, and social peace, rich deposits of oil and minerals have often brought tyranny, misery, and insecurity to these nations. Fortunately, as my colleague Terra Lawson-Remer points out in a new CFR memo, all is not lost. There are concrete steps the international community can take to help break this curse

First, a few facts. The correlation between energy dependence and authoritarianism is clear. "There are twenty-three countries in the world that derive at least 60 percent of their exports from oil and gas and not a single one is a real democracy," observes Larry Diamond of Stanford University. There are numerous hypotheses to account for this correlation, as I note in my book, Weak Links: Fragile States Global Threats and International Security. Most obviously, easy resource revenues eliminate a critical link of accountability between government and citizens, by reducing incentives to tax other productive activity and use the revenue to deliver social services effectively. The same revenues also generate staggering wealth that facilitates corruption and patronage networks. Together, they consolidate the power of entrenched elites and regime supporters, sharpening income inequality and stifling political reform. The history of the oil-rich Arab Middle East has long been a case in point--with Saudi Arabia being exhibit A.

Natural resource revenues have also been linked to slow economic growth rates, inequality, and poverty. One culprit may be the so-called "Dutch disease," whereby resource revenues raise a country's exchange rate, hurting competitiveness in non-resource sectors. Other factors may include the volatility associated with commodity prices, which can have especially negative impacts on weak-state economies; and the underdevelopment of agricultural and manufacturing sectors during boom periods in resource-based economies. And even when oil abundance produces high growth, it often benefits only a few corrupt elites rather than translating into higher living standards for most of the population. Oil-rich Angola is a case in point. Despite having one of the world's highest growth rates from 2005 to 2010, averaging some 17 percent annually, its score on the human development index remained a miserable 0.49, and its infant mortality rate was lower than the sub-Saharan African average.

Finally, the very presence of oil and gas resources within developing countries exacerbates the risk of violent conflict. The list of civil conflicts fought at least in part for control of oil and gas resources is long. A partial list would include Nigeria, Angola, Burma, Papua New Guinea (Bougainville), Chad, Pakistan (Balochistan), and of course Sudan. Econometric studies confirm that the risk of civil war greatly increases when countries depend on the export of primary commodities, particularly fossil fuels. At least three factors could explain this correlation. First, the prospect of resource rents may be an incentive to rebel or secede. Second, wealth from resources may enable rebel groups to finance their operations. Third, the high levels of corruption, extortion, and poor governance that accompany resource wealth often generate grievances leading to rebellion.

Given this sorry picture, can anything be done? In fact, the past decade has seen a raft of international initiatives designed to combat corruption and improve governance in resource-rich nations. The Extractive Industries Transparency Initiative works to improve revenue management in some thirty resource-rich countries. The Open Government Partnership co-chaired by the United States and Brazil, aims to fight corruption by securing concrete national action plans to fight corruption from governments. The Publish What You Pay and Publish What You Lend campaigns call on transnational corporations and banks to publicize their payments and loans to local authorities. The Equator Principles seek to ensure that private bank investments do not exacerbate environmental and social risks. The World Bank-sponsored Stolen Assets Recovery (StAR) Initiative assists successor governments in tracking down the wealth looted by deposed autocrats. Finally, the Dodd-Frank Act of 2011 mandates annual reports by U.S. extractive industry companies to the SEC disclosing payments to host governments.

While each of these steps is worthwhile, such a piecemeal, fragmented approach suffers from inherent limitations. These initiatives are largely voluntary, and thus unenforceable. They are not universal (and in many cases lack participation from critical emerging economies). And they are riddled with loopholes.

The secret to improving governance in resource rich countries, Lawson-Remer argues, is to improve cooperation among three groups: "capital-exporting countries, international financial institutions, and private sector companies." To advance this overall goal, she calls on the United States to work with likeminded countries in major multilateral frameworks (including the Group of Eight, Group of Twenty, Organization for Economic Cooperation and Development (OECD), and the Financial Stability Board) to forge consensus on four priorities.

First, the donor community should extend the International Finance Corporation's recently updated transparency requirements for extractive industries to all bilateral development finance. Second, the international community should work to build demand for accountability in resource-rich countries by providing grants to local civil society actors, so that they are in a position to monitor revenue flows. Third, major financial centers should agree to harmonize transparency requirements for extractive industries in the biggest stock exchanges, building on the Dodd-Frank legislation. Finally, the financial institutions that subscribe to the Equator Principles should "establish independent monitoring mechanisms" to ensure that their membership is actually living by these standards, rather than paying them mere lip service.

This basket of initiatives, if implemented, could give developing countries a fighting chance to ward off the resource curse. The fate of such proposals, like so much in global economic governance today, will depend on whether they can win support from governments and corporations not only in the OECD world, but also within the dynamic emerging economies that are driving today's global growth. Finally, given the difficulty of winning global endorsement for all of these initiatives separately, the United States should push them as a package.

This article originally appeared at CFR.org, an Atlantic partner site.

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