How to turn 'resource curse' into blessing

Joseph Stiglitz says a fair deal on extraction will give them a good start

PUBLISHED : Monday, 13 August, 2012, 12:00am
UPDATED : Monday, 13 August, 2012, 11:14am

New discoveries of natural resources in several African countries raise an important question: will these windfalls be a blessing that brings prosperity and hope, or a political and economic curse, as has been the case in so many countries?

On average, resource-rich countries have done even more poorly than countries without resources. They have grown more slowly, and with greater inequality - just the opposite of what one would expect. After all, taxing natural resources at high rates will not cause them to disappear, which means that countries whose major source of revenue is natural resources can use them to finance education, health care, development and redistribution.

A large literature in economics and political science has developed to explain this "resource curse". Three of the curse's economic ingredients are well known:


  • Resource-rich countries tend to have strong currencies, which impede other exports;



  • Because resource extraction often entails little job creation, unemployment rises;



  • Volatile resource prices cause growth to be unstable.


Moreover, resource-rich countries often do not pursue sustainable growth strategies. They fail to recognise that if they do not reinvest their resource wealth into productive investments above ground, they are actually becoming poorer. Political dysfunction exacerbates the problem.

There are antidotes: a low exchange rate, a stabilisation fund, careful investment of resource revenues, a ban on borrowing, and transparency. But there is a growing consensus that these measures are insufficient. Newly enriched countries need to take several more steps to increase the likelihood of a "resource blessing".

First, they must do more to ensure their citizens get the full value of the resources. There is an unavoidable conflict of interest between (usually foreign) natural-resource companies and host countries: the former want to minimise what they pay, while the latter need to maximise it. Well designed, competitive, transparent auctions can generate much more revenue than sweetheart deals. Contracts, too, should be transparent, and should ensure that, if prices soar, the windfall gain does not go only to the company.

Unfortunately, many countries have already signed bad contracts that give a disproportionate share of the resources' value to foreign companies. But there is an answer: renegotiate; if that is impossible, impose a windfall-profit tax.

All over the world, countries have done this. Of course, natural-resource companies will push back, and threaten to leave. But the outcome is typically otherwise.

Equally important, the money gained through natural resources must be used to promote real development. This requires exploring all possible linkages: training local workers, developing small and medium-sized enterprises to provide inputs for mining operations and oil and gas companies, domestic processing, and integrating the natural resources into the economic structure. Of course, today, these countries may not have a comparative advantage in these activities, and some will argue they should stick to their strengths. From this perspective, their comparative advantage is having other countries exploit their resources.

That is wrong. What matters is dynamic comparative advantage, or comparative advantage in the long run, which can be shaped. Forty years ago, South Korea had a comparative advantage in growing rice. Had it stuck to that strength, it would not be the industrial giant it is today. It might be the world's most efficient rice grower, but it would still be poor.

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 the resources benefit all their citizens. Resources should be a blessing, not a curse. They can be, but it will not happen on its own. And it will not happen easily.

Joseph E. Stiglitz, a Nobel laureate in economics, is professor of economics at Columbia. Copyright: Project Syndicate


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