The Resource Curse NS4053 Week 7.1

Agenda What is the resource curse and why pay attention to it? Resource curse: mineral vs. fuel export dependency Impact of oil exports dependency on development Is high level of resource export dependency always a curse? Specifying when resource exports are a problem

Mineral wealth dependency

What is the resource curse? Resource export dependency: found in countries with high levels of mineral and/or fuel exports relative to their overall economy. Resource curse: resource export dependent countries experience poor economic, political and social outcomes compared to countries without this dependency.

Why focus on the resource curse? Associated with autocracy, political instability, poor economic and social outcomes. Associated with ‘order breaking’ states. Associated with higher levels of internal conflict and international conflict. Associated with states challenging prevailing international order or creating national or human security issues that spill over borders.

Commodity Prices

Special characteristics of oil National asset Motor of globalization Depletability Boom-bust cycles Capital intensive Enclave nature Exceptional profits

Paradox of Plenty Resource curse appears to be more acute in developing countries where oil exporting is the dominant industry. Most oil reserves now found in developing world. Developing states with oil exporting industries experience lower per capita GNP growth than other developing states.

Impact of oil exports on development Dutch disease: oil exports  currency appreciation  other sectors of domestic economy being uncompetitive. Rentier states: – governments do not need citizens for taxes, citizens do not have ‘skin in the game.’ Political economy of oil exporters: – Politics of allocating oil rents shapes state and society. – Perverse incentives

Socioeconomic impact Paradoxically, high poverty and income inequality Lack of diversification in economy Changes in society – Fewer domestic entrepreneurs and professionals. – Middle class vulnerable to boom/bust cycles. – Few jobs for working class. – High rates of urbanization and immigration.

Impact on State Tendency towards weak states with broad scope: – Lack the constraints that promote efficiency and responsiveness to citizens. – Citizens expect ‘wealthy’ state to have responsibility for a wide range of activities. – Lack incentives to develop state capacity. – Experience loss of fiscal discipline. – Poor record of investing oil wealth. – High levels of corruption.

Political results of oil export dependency Undermines democratization. Patronage politics rather than representative politics. Autocratic governments buy political peace: – Welfare spending and police state. Internal divisions in country may increase – Civil wars and secession movements. – Resources available to fund long wars. – Westernization and failure to meet expectations lead to anti-Western backlash movements.

Not always a curse? Is oil just another mineral or is it special? Does oil undermine development or encourage it? – When education and technology are indigenously available to develop industry, encourages it. Do US and Norway cases contradict oil curse? – Correct mix of property rights and institutions. Poor outcomes not a result of mineral wealth but of government policy. – Sure, but why is government policy frequently poor in countries with high levels of exports of minerals? If oil curse is correct, what is to be done about it?

Resource curse: correlation or causality?

Torvik: key explanations Saving vs. consumption of resource income. – Mineral wealth producers have poor savings records. Presidentialism vs. parliamentarianism. – Presidential systems tend to concentrate power. – ‘Winner take all’ and fixed terms decrease importance of consensus politics. – Parliamentary systems depend on continuous support, so more consensual approach to oil wealth. Institutional quality – Only countries in the top 20% (n=87) of institutional quality show benefit from resource income.

Torvik: key explanations Offshore vs. onshore oil: offshore is harder to do, so it drives more indigenous technological development. Early vs. late industrialization – Early industrializers least affected by resource curse. – Tend to also have high quality institutions, which is why they industrialized first.

Possible solutions? Tune in Wednesday