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  • Writer's picture Paul Boëffard

WHAT IS THE RESOURCE CURSE ?

The Resource Curse, or the Paradox of Plenty, refers to the potential negative consequences stemming from an abundance of natural resources, particularly non-renewable ones like oil and minerals. While these resources offer opportunities for prosperity, mismanagement can lead to economic instability, social conflict, and lasting environmental damage.


The crucial question emerges: why do some resource-rich economies, such as Botswana or Norway, succeed, while others, like Nigeria or Angola, face significant challenges despite their immense natural wealth?



I) Causes of the Resource Curse


a) The Dutch disease

Dutch Disease arises when a nation becomes overly reliant on a booming resource sector, resulting in a decline in other industries like manufacturing and agriculture. The influx of revenue from resource exports can lead to currency appreciation, making other sectors less competitive.


Example: the Dutch discovered a huge natural gas field in Groningen in 1959, when the gas began to flow out of the country, its ability to compete against other countries' exports declined.


b) Volatility

The unpredictable nature of commodity prices, especially in the case of oil, can disrupt a country's economic stability. Abrupt price drops result in revenue shortfalls, impacting government budgets and public services.


Example: Venezuela, heavily reliant on oil exports, faced a severe economic crisis when global oil prices plummeted in the mid-2010s. This caused widespread inflation, leading to a decrease in real GDP and sparking social unrest.


c) Economic Dependency

Oil and gas expansion in Africa is poised to continue perpetuating an extractivist and colonialist dynamic, whereby resources exported from the continent benefit the Global North while local populations are saddled with environmental impacts


Example: Oil Change International research shows that European, Asian, and North American companies control 60% of the projected production in Africa from 2020–2050


d) Economic Stagnation

“Addictive economies" are resource extraction-driven, providing short-term benefits but often fostering shortsighted policymaking. An illustrative paradox is seen in the limited development of energy access.


Example: Nigeria, one of the largest and most established oil and gas producers in Africa, faces the world's largest energy access deficit. In 2021, only 43 percent of Nigerians had access to electricity.


II) Consequences of the Resource Curse


a) Social inequalities

Resource extraction often establishes isolated economic zones, known as enclaves, where the wealth generated does not permeate the broader economy. This leads to regional disparities and increased inequality.


Example: Nigeria's per capita oil revenues rose from US$33 to US$325 between 1965 and 2000. Despite this increase, the proportion of the population living on less than US$1 per day surged from 26% to nearly 70%, ranking Nigeria among the 15 poorest countries globally (IMF Working Paper No. 03/139)


b) Conflicts

Resource wealth can escalate conflicts, both internal and external, as groups vie for control over valuable assets.


Example: Since 1990, oil-producing countries have been twice as likely to experience civil wars. Political scientists point to examples of the Democratic Republic of the Congo, the Niger Delta, Iraq, Libya and Angola to illustrate this tendency


c) Authoritarian regimes

The presence of a significant single-point source of revenue, such as oil projects, often allows elites to manage funds outside normal budget processes, reducing transparency.


Example: The data behind this theory is hotly debated, but there are well-documented examples in Afghanistan, Sierra Leone and Tunisia.


d) Environmental Degradation

Intensive resource extraction, especially in the case of oil and mining, can lead to severe environmental degradation, impacting ecosystems and local communities.


Example: The Niger Delta in Nigeria has suffered significant environmental damage due to oil spills and toxic gas flaring, affecting local communities and biodiversity.


e) Gender Inequalities

Oil production can reduce women's presence in the labor force, reinforcing patriarchal cultures and political institutions.


Example: The notable difference in female political representation between oil-rich Algeria and oil-poor Morocco and Tunisia, despite similar backgrounds (former French colonies, simultaneous independence, rapid suffrage, Muslim-majority), is illustrative (Oil, Islam and Women, MICHAEL L. ROSS)





III) Mitigating the Resource Curse


a) Economic Diversification

Economic diversification is a key strategy to mitigate the Resource Curse, where countries reduce dependence on a single resource sector.


Example: Botswana stands out as a success story in economic diversification. It strategically invested diamond earnings in education, healthcare, and infrastructure. As a result, Botswana developed a robust tourism sector and fostered a growing financial services industry.


b) National Funds

Establishing sovereign wealth funds is another effective approach, allowing countries to invest resource revenues in foreign assets, providing a financial buffer during commodity price fluctuations.


Example: Norway's Government Pension Fund Global, funded by oil revenues, was valued at over $1.3 trillion USD. This fund is considered one of the largest sovereign wealth funds globally.


d) Strong Governance

Implementing transparent and accountable governance of natural resources is vital to prevent corruption and mismanagement.


Example: Norway serves as a model for good governance. Its stringent regulations on oil extraction ensure transparency and accountability and prevent corruption.


c) Investment in Long Term Wealth Creation

Investing in education, health and infrastructure is crucial for fostering economic development beyond resource extraction.


Example: Malaysia's focus on education investments, notably led by Petronas, has driven societal or economy-wide change.


In conclusion, the Resource Curse serves as a cautionary tale for nations endowed with abundant natural resources. Recognizing and addressing the various causes and consequences is crucial for charting a sustainable and equitable path to development.



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