What is the resource curse?

Despite the fact that many countries have abundant natural resources such as minerals or fuels, poverty and inequality remain burning issues in these countries. The “resource curse” relates to the paradox that nations with abundant natural endowments seem to perform less well economically than countries with limited natural resources. In other words, resource-based economies tend to fall into the poverty trap if natural resources are not exploited appropriately.

In authoritarian regimes, the resource curse continues to happen as oil wealth reduces levels of democracy and reinforces autocratic rule (e.g., Jensen & Wantchekon, 2004; Ross, 2011; Wright et al., 2015). Focusing on oil resource, Ross (2013) argues that political and financial issues of the oil-dependent countries can originate from the unusual properties of petroleum revenues. Such argument can reflect the following four indications. First, when the scale of oil revenues becomes huge, it makes authoritarian governments easier to quiet talks for disputes. However, this could lead to conflicts of interest between population groups. Second, the source of petroleum revenues can be instrumental in different issues of oil-dependent economies. Oil-funded governments are mainly financed by their country’s petroleum wealth instead of by taxes on their citizens. When governments are dependent on oil revenues, they become less susceptible to public pressure and civil societies, which clarifies why so many oil-delivering nations are undemocratic. Third, other problems can be related to the instability of oil prices. The fluctuation of world oil prices and the rise and fall of country reserves have significantly impacted the government’s finances. This consequently brought about unpredicted tasks that many governments have struggled with while trying to find solutions for regional conflicts between governments and rebels. Finally, the secrecy of oil incomes exacerbates these issues. In order to hide their transactions, governments frequently collude with foreign oil firms while using their own national oil companies to conceal both revenues and expenditures. This evinces that exploitation resulted from greed and incompetence can be hidden and at the time same explains why oil revenues are commonly wasted and oil-fueled dictators can continue to exist.

The exploitation of natural resources can result in slow economic growth rates. When depending on one single resource, an economy can be vulnerable to price fluctuation in that resource. For instance, Venezuela benefitted from their natural resource and went through difficulties at the same time due to the vulnerability to price fluctuation. During the tenure of President Hugo Chávez, oil production helped the government carry out various domestic programs and social development projects despite economic sanctions from the US. This is because Venezuela has the largest oil reserves in the world, along with being one of the top oil-producing countries. The Venezuelan economy as well as the value of the bolivar, as a result, became heavily dependent on global oil prices. When oil prices suddenly nosedived in 2014, the value of the bolivar went along the sinking ship. Additionally, focusing on natural resources can hurt the competitiveness among non-resource sectors such as agriculture and manufacture, neither creating enough jobs for people nor promoting development across sectors. As a result, oil-dependent economies will be vulnerable to market fluctuations. To mitigate the negative impact of the resource curse, it is recommended that the oil-dependent governments not only focus on exploiting natural resources but also develop other sectors. This can help reduce the dependence of countries’ budget on minerals or fuels while diversifying revenue sources. Furthermore, the governments can establish sovereign wealth funds or independent central banks to manage and control a portion of their reserves, especially in a crisis. At the same time, promoting good governance is a key factor in dealing with negative aspects of the curse, benefiting stakeholders, the economy, and society as a whole. Finally, providing higher-quality education with less focus on natural resources can be the main route to raise the awareness of people from the beginning instead of being comfortable with having abundant natural resources.

Bao Nguyen 

References:

Jensen, N., & Wantchekon, L. (2004). Resource Wealth and Political Regimes in Africa. Comparative Political Studies37(7), 816-841.

Ross, M. L. (2001). Does Oil Hinder Democracy?. World Politics, 325-361.

Ross, M. (2013). The Oil Curse. Princeton, NJ: Princeton University Press.

Wright, J., Frantz, E., & Geddes, B. (2015). Oil and Autocratic Regime Survival. British Journal of Political Science45(2), 287-306.