The Paradox of Plenty: Disentangling developing countries from the resource curse.

For over three decades, economists have been studying the paradox of plenty also known as the resource curse. Over the years, it has been observed that countries that are endowed with natural resources, ranging from precious metals, hydrocarbons to black gold, tend to experience slower growth rates, higher levels of poverty and are most likely to descend into civil strife compared to countries without abundant natural resources.

The disconnect between natural resource wealth and economic growth was clearly demonstrated by oil-producing countries between the mid-1960s to late-1990s. Per capita growth decreased in OPEC countries on average by 1.3%, while per capita growth was on average 2.2% in the rest of the developing world.   Several studies have shown a link between natural resource abundance and poor economic growth. Countries with an abundance of natural resources were unable to bolster economic growth and development and, counter-intuitively, less endowed countries experienced better growth levels.

Africa is abundantly endowed with natural resources and has not been an exception. Several factors operating together, in some cases very carefully orchestrated, are bleeding economies dry and diverting national wealth into the pockets of few individuals who are close to power and enjoy the trappings that come with brushing shoulders with the high and mighty. The value of natural resources extracted from Africa each year is around $300billion, far more than the amount the continent receives in foreign aid.

The continent has made tremendous strides towards transparency and accountability with the promulgation of new constitutions and sealing loopholes that leaders had exploited to gain personal wealth at the expenses of the masses. However, more still needs to be done.  Accountability and improved institutions have seen extreme poverty levels decline continuously for the past twenty years from 60% in 1993 to 48% in 2010.

The common explanation for the resource curse is the “Dutch Disease.”  When a country strikes hydrocarbon and other natural resources, the inflow of dollar-denominated revenues leads to an appreciation of the domestic currency as a result of a surge in demand.  Unlike agriculture, which is labor-intensive and employs a large number of unskilled labor (employs 60% of Africa’s population), the oil sector and other extractive sectors employ few unskilled people. Incomes in these sectors are also concentrated in the hands of very few people. A rise in the price of oil, for instance, means the poor will feel the impact more due to their limited purchasing power.  Another observation is the fact that most African leaders who got into power through illegitimate means in oil-rich countries found no incentive to raise revenues through taxation. The un-taxed populace, on the other hand, turned a blind eye to the lack of accountability, corruption and inefficiencies associated with the ruling regime.

Strong public institutions will play a critical role in addressing the resource curse. Empowering public institutions will guarantee transparency and accountability of the actions of players in extractive industries. Automation of processes along value chains from tendering all the way to exportation will go a long way in curbing some of the irregularities that culprits easily get away with.  Value addition will also increase earnings margins for local citizens and bolster public coffers. Increased earning and proper monitoring and evaluation will lead to investment in development projects and lift millions out of extreme poverty boosting per capita GDP in resource-rich developing countries.

Some governments have used stabilization policies where proceeds from oil are saved for a rainy day. Funds are established to reserve oil revenues to be used during difficult economic times thus stabilizing the macroeconomic environment. This model has been tested in several countries with much success realized in Norway. However, this model has failed in some countries including Zambia and Venezuela where the fund was raided for political mileage.

There is a concerted effort by oil producing countries and oil companies to address the various challenges facing the industry. The Extractive Industries Transparency Initiative (EITI), which seeks to address governance issues in the extractive sectors, has seen major stakeholders in the industry join the bandwagon advocating for transparency.  It is believed that gains made from this initiative will spill over to other resource sectors.  Africa has a long way to go in combating corruption, supporting weak institutions and igniting the will of political leadership and policymakers to enact measures that will actually bear fruits. Establishment of independent oversight committees that represent the interest of the civic society is also paramount.


The Paradox of Plenty: Disentangling developing countries from the resource curse


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