Resource riches and commodity curses

17th August 2012

Now which nation has made the most progress in the past twenty years and which has made the least – gone backwards by many counts? Again no prizes – the two answers to the first question are reversed. 

Now Nobel prize winning economist Joseph E. Stiglitz asks whether newly discovered natural resource riches in several African countries-including Ghana, Uganda, Tanzania, and Mozambique will be a blessing that brings prosperity and hope, or a political and economic curse, as has been the case in so many countries?

In an essay on why natural riches usually end up impoverishing populations, the economist shows that on average, resource-rich countries have done even more poorly than countries without resources.

"They have grown more slowly and with greater inequality," he writes. And that is just the opposite of what one would expect.  It should be easy for countries to gain from what's under the ground.

But it does not work like that. It appears that few countries manage to spread the wealth from their minerals beyond a corrupt group. The money which could be spent on education, health care, and  development, ends up in Swiss banks. 

Cheap labour and the easy life

In a few instances – tiny Dubai – the resource wealth has served as a major impetus. But this is a tiny country, which has largely spent the cash on consumption items for the native minority while importing cheap labour to do all the work from building roads to controlling IT systems.

Stiglitz says: A large literature in economics and political science has developed to explain this "resource curse," and civil-society groups (such as Revenue Watch and the Extractive Industries Transparency Initiative) have been established to try to counter it. "

Three of the curse's economic ingredients are well known:

Sustaining growth strategies

Resource-rich countries rarely pursue sustainable growth strategies. They are like miners in a gold rush – they spend the bonanza on high living. But because they fail to reinvest resource wealth into productive investments above ground, they become poorer – they have less cushion against price volatility and may actually deplete the resources by selling them to others.

"Political dysfunction exacerbates the problem, as conflict over access to resource rents gives rise to corrupt and undemocratic governments," says Stiglitz.

There are easy solutions to the commodity curse. Stiglitz lists a low exchange rate, a stabilization fund, careful investment of resource revenues (including in the country's people), a ban on borrowing, and transparency (so citizens can at least see the money coming in and going out).

Solutions are possible

But even if all of these are adopted – and there is probably little chance in many nations – they may not be enough.

The next stage entails citizens (and not foreign companies) getting the full value of the resources from the mining companies. Easier said than done when miners want to minimize what they pay, while populations must maximize it.

Transparency is key in the shape of "well-designed, competitive, transparent auctions" which can generate much more revenue than sweetheart deals. Contracts must ensure that if prices soar-as they have repeatedly-the windfall gains go to the country, not the company.

"Unfortunately," the Nobel prize winner writes, " many countries have already signed bad contracts that give a disproportionate share of the resources' value to private foreign companies." His response is to renegotiate and if that is impossible, impose a windfall-profit tax. Developed mineral rich countries such as Australia and the US already do this.  But resources companies see developing countries as a soft touch – aided by corruption.

The blessings of a minerals bonanza

What infrastructure is built is often solely aimed at the extractive industries. When they leave, as they will, these roads, railways and airports will go to waste. They will be designed in any case to get the minerals out of the country as quickly as possible, leaving no space for local industries to develop.

Stiglitz concludes: "Companies will tell Ghana, Uganda, Tanzania, and Mozambique to act quickly, but there is good reason for them to move more deliberately. The resources will not disappear, and commodity prices have been rising. In the meantime, these countries can put in place the institutions, policies, and laws needed to ensure that the resources benefit all of their citizens.

Resources should be a blessing, not a curse."


More on Mindful Money:

Beyond GDP: Measuring natural wealth

Google guys to mine asteroids, but where can earthbound investors tap into natural resources?

Wind power rises in the UK, but at what cost to taxpayers?

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