The curse of resource abundance

Resource-rich countries have a choice: consume for the present or use their bounty to invest in a self- sustaining economic future.

Why are so many countries that are blessed with an abundance of nonrenewable natural resources experiencing sluggish economic growth? The phenomenon is so common that experts have come to refer to it as the "resource curse."

Countries said to be significantly affected by this curse, now or in the recent past, include Libya, Nigeria, the Congo, Venezuela, Russia, Mexico and the phosphate-rich Pacific island nation of Nauru, which I once heard a banker refer to as a country "facing moral and physical extinction." There are many more.

In contrast, countries such as Korea, Switzerland and Singapore are often hailed for achieving remarkably high standards of living despite being almost completely bereft of tradable natural resources.

So, is this curse real?

A big difference between resource abundance and resource scarcity is that countries experiencing the latter have no choice but to count on ingenuity and innovation, and to plan for the future by investing in education and training, if they aspire to a high standard of living. This requires achieving a certain degree of political consensus, economic openness, social mobility and freedom of expression.

However, resource-rich countries do have a choice: consume for the present by living off those natural resources as if they are going to last forever or use their bounty to invest in a self-sustaining economic future.

In many resource-rich countries, resource revenues give governments and their citizens the power to maintain a certain economic and social status quo. Even then, an aversion to private, especially foreign, investment can make it difficult to maintain the capital required for the extraction of resources, as seen in Mexico’s state-owned oil industry in the recent past and in Venezuela today.

Such aversion thrives in conditions that make it hard for a country to escape the curse. These include corruption, strife between groups whose primary purpose is to divide resource spoils among their constituents and populist redistribution of wealth by governments in the form of "free" or subsidized goods. Other countries muffle discontent by spending heavily on the military and other order-maintaining institutions.

Yet a careful look at the record suggests that the real problem is a strong temptation to make the wrong long-term choices rather than an inevitable fate. Many resource-abundant nations, ranging from the US to Botswana, have — at some crucial point in their economic development — been able to escape the curse by investing in education and infrastructure and promoting a stable political and business environment conducive to self- sustained economic growth. Others such as oil-rich Norway have been able to put much of their one-off resource revenues into a nest egg to benefit future generations.

Today, the economic and social value that can be derived from natural resources extends well beyond their simple extraction and shipping. Engineering, research, technical, management, logistics, environmental, financial and other professional services increasingly contribute to the economic value of sustainable resource developments. Countries that can develop those capabilities are just as much the beneficiaries, if not more, of the global demand for resources than countries unable to look past a basic extraction model.

The upshot is that resource-rich countries can escape the resource curse in much the same way that resource-poor countries have had to grow: by adopting governance mechanisms that, while they differ according to a country’s circumstances, are sufficiently broadly based, open and stable to permit the benefits of education and other public investments to reach all, and that allow individual, community and business ingenuity to flourish.

Many countries are still painfully searching for such mechanisms — we should wish them the best in their quest.

About the Author

Daniel Schwanen


Daniel Schwanen is assistant vice-president, research, at the C.D. Howe Institute in Toronto.

comments powered by Disqus

Highlights

Jointly presented by CPA Canada and CPA Ontario, The ONE is the must-attend, multi-track event of the year, designed for all CPAs who want to be at the top of their game.

Our Firm Directory allows you to search for Canadian CPA firms using our interactive map as well as other criteria.

You’re in the eye of the storm amid a swirl of slips, forms and receipts. Chart your way through tax-time turbulence with these updates and resources.