The Perplexing Paradox of Plenty

I assume you are familiar with the "natural resource curse":

The idea that natural resources might be more an economic curse than a blessing began to emerge in the 1980s. In this light, the term resource curse thesis was first used by Richard Auty in 1993 to describe how countries rich in natural resources were unable to use that wealth to boost their economies and how, counter-intuitively, these countries had lower economic growth than countries without an abundance of natural resources. Numerous studies ... have shown a link between natural resource abundance and poor economic growth. This disconnect between natural resource wealth and economic growth can be seen by looking at an example from the oil-producing countries. From 1965-1998, in the OPEC countries, gross national product per capita growth decreased on average by 1.3%, while in the rest of the developing world, per capita growth was on average 2.2%.

Well, maybe there is no curse:

Debunking the ‘curse of oil’, IU News: A paper co-written by an Indiana University economics professor takes issue with the widespread idea that there is a "natural resource curse" that puts countries with oil or mineral wealth at a disadvantage when it comes to economic growth.

The paper also shows that a common explanation for the curse -- that an abundance of oil or other point-source resources causes countries to have lower-quality civic institutions -- isn't true.

Having such resource wealth "may not improve institutions, but it doesn't make them worse. It doesn't affect them one way or another," said Michael Alexeev, professor of economics at IU Bloomington and co-author of the paper with Duke University economist Robert Conrad.

The paper, titled "The Elusive Curse of Oil," has been accepted for publication in the Review of Economics and Statistics.

In the 1990s and early 2000s, a series of economics publications made the claim that an abundance of point-source resources, such as oil, gas, gold and diamonds, was associated with weak economic performance. The idea came to be widely accepted, and the term "natural resource curse" was coined to describe it. Further research focused on the reason for the curse, and the most convincing answer seemed to be that, for a variety of reasons, nations with an abundance of point-source resources tended to have worse-than-average governments and other institutions.

But Alexeev and Conrad found no correlation between natural resource endowments and the quality of institutions if the calculations are done correctly. Previous analyses that found such a link, they say, were skewed by using per-capita gross domestic product (GDP) as a controlling variable. That approach resulted in comparing countries with high GDP and strong institutions with those that have high GDP purely because of resource wealth: comparing Portugal with Kuwait, for example.

"In essence," Alexeev said, "the logic of the earlier work was as follows: Most countries with high GDP have good institutions. Natural resource-rich countries, however, have high GDP but poor institutions. Therefore, natural resources must lead to poor institutions."

In their analysis, the authors calculated what they believed countries' GDP would be if they didn't have oil. With oil-driven increases in GDP removed from the equation, the presence or absence of oil had no impact on the quality of national institutions.

The authors also made use of "a kind of natural experiment," comparing Russia, Ukraine and Belarus, three geographically similar Slavic countries created by the break-up of the Soviet Union. Russia has extensive deposits of oil, gas and minerals; Belarus has almost none; and Ukraine is in between. If there were a natural resource curse, Russia would be expected to have the worst institutions and Belarus the best. In fact, Russia and Ukraine have similar scores for institutional quality, and Belarus scores much worse.

"The fact that growth based on natural resource wealth does not improve institutions is a drawback of this type of growth," Alexeev said. "But it does not make it a curse."

The paper also disputes the very concept of a natural resource curse... While resource-rich countries may not have experienced strong economic growth in recent years, they write, those countries did grow at a faster rate when their oil or other resources were being developed.

"After all," Alexeev said, "long-term growth is everything until now," not just growth that has taken place since an arbitrary starting point of 1960 or 1970.

Alexeev said it's important to have an accurate understanding of the effect of point-source resource wealth on economic growth and institutional quality. The World Bank and other institutions make decisions about guiding and encouraging the development of point-source resources based in part on whether officials believe there is a natural resource curse, he said.

A preliminary copy of the paper: "The Elusive Curse of Oil".

This research says that resource wealth doesn't make institutions any worse, but it doesn't make them any better either. That leads me to wonder if the discovery of resource wealth solidifies the institutions that are already in place, institutions that are, due to the low initial level of wealth, generally of poor quality. Does resource wealth create the means for those in power to freeze the institutional structure that gives them control over the wealth? If so, then in that sense, resource wealth could still be a curse.

Comments

[hari]

This is a curious paradox in international comparative economic studies.

Algeria is a good example of an Arab nationalist country - with French as a second language - unable to capitalize on its natural gas resources, since 1970s. And inspite of FDI and whatnot from OECD countries, national institutions are still stagnating under pressure of its own domestic post-liberation mentality.

Today's Russia is a curious hodge podge of state-run institutions with an inability to spread its oil and gas generated wealth to the hinterland. The oligarchs are predominant in managing countries natural resources, including nationalization of previouly privately owned fields.

Yet Moscow has become a capitalist mecca today with expensive fashion shops and banking infastructure. It is not absurd to argue that institutional infrastructure building is one of the difficult problems of the current centralized regime which wants to control all levers of development in the huge continental economy.

[hari]

Unlike Russia, China has really benefited from its diaspora in Southeast Asia. Most of the rapid infrastructure and highway development was in form of capital and know-how being literally imported with own managment from Overseas Chinese capitalists.

Common Mandarin/Cantonese language and, above all, a culture of Chinese nationalism, is part and parcel of the process
of recent development on mainland China.

Don't forget the role of Hong Kong as a symbol of *two systems* under one state structure. The current boss of HK, appointed by the Chinese Communist Politburo, is none other than ex-Financial Secretary/Monetary controller of former British crown colony - with a local currency pegged to dollar and a mercantile trading outpost linked to rest of the world.

NRI (non-resident Indian diaspora) has more or less the same influence in bringing FDI and risk capital to invest in Indian infrastruture and housing sector, in particular.

One cannot avoid or neglect the institutional impact of these two Asian diasporas on monetray and fiscal policies, as well as institutional and infrastructure building in these fast developing economies....

[hari]

Mauritius - an island in the Indian Ocean - plays a critical role in chanelling FDI from its offshore based financial insfrastructure for sectoral investment in India by NRI.
Indians form a large part of Mauritius population and also its political leadership.

Through political pressure of these NRI lobby, Indian Gov finally decided to issue dual citizenship to NRI by an act of Indian Parliament.

[el presidente]

Here is some more on the resource curse in Science. The article goes the other way around: bad institutions hamper growth, and slow growth leads to resource dependence.

[evagrius]

Anything on Canada?

[bakho]

Should one ask what the economy of an area would be without the resource? Much of the Middle East is too arid to be very productive in Agriculture and manufacturing that relies on a lot of water. They may have oil, but do they have the resources to make steel?

Plus the legacy of colonialism (extracting much of the wealth and underdevelopment of infrastructure) did not exactly position many of these countries for modern development. Countries that have nationalized their oil and pursued more egalitarian policies end up with crippling trade sanctions.

[ken melvin]

I'd say culture and institutions including politics are the more important.

[akatsuki]

@bakho- colonialism left a variety of institutions, some better than others.

Oil most likely leads to a concentration of power in a few people interested only in maintaining the status quo. Although focusing on institutions is still the focus du jour of many development economists, good institutions and the rule of law could arguably still be used to help protect these privileged few.

[ken melvin]

How important the destruction of the status quo?

[save_the_rustbelt]

How about:

lack of democracy

excess of corruption

[Aaron]

Yemen is repressive and poor. They don't have any oil. There is no causality here. Norway, Canada, the U.S., U.K, and Mexico all produce oil and are decent places to live. Kuwait and UAE seems like they are betting better. Their per capita income now is higher then ours. Russia's economy and sense of self is also improving.

A gas tax or CAFE requirements is not the ticket to making the world safe for democracy.

[Aaron]

akatsuki says...

Oil most likely leads to a concentration of power in a few people interested only in maintaining the status quo.

Any examples?

[lonesome moderate]

Aaron:
akatsuki says...

Oil most likely leads to a concentration of power in a few people interested only in maintaining the status quo.
Any examples?

Well, off the top of my head--Saudi Arabia, Iran, Venezuela, Nigeria.

It's really startling to me that anyone would seriously argue that resource-rich countries don't have poorer-quality institutions than otherwise, atlhough perhaps the oil wealth compensates, or more than compensates.

[Cynthia]

The only reason oil is a curse for an oil-rich nation, such as Saudi Arabia, is because the US has backed a monarchy (over a democracy) in this nation. And the only reason the US has done this is because in an oil-rich nation ruled by monarchy, less wealth (via oil) flows to its citizens, freeing up more oil (and thus more wealth) to flow to the US.

The last thing the US wants to do is turn Saudi Arabia into a nation such as Norway. After all, more wealth (via oil) flowing to the citizens of Saudi Arabia not only would mean less oil (and thus less wealth) will flow to the US, but it also would give the Saudi citizens the means to think and live democratically and thus freely.

So long as oil is the lifeblood of the US economy, establishing democratic rule in any oil-rich nation is a curse for the US!

[anne]

"A paper co-written by an Indiana University economics professor takes issue with the widespread idea that there is a 'natural resource curse' that puts countries with oil or mineral wealth at a disadvantage when it comes to economic growth.

"The paper also shows that a common explanation for the curse -- that an abundance of oil or other point-source resources causes countries to have lower-quality civic institutions -- isn't true.

"Having such resource wealth 'may not improve institutions, but it doesn't make them worse. It doesn't affect them one way or another,' said Michael Alexeev, professor of economics at IU Bloomington and co-author of the paper with Duke University economist Robert Conrad."

There is of course no resource curse, and the idea is absurd. Countries have complex histories differing intensely one from another and the histories need to be studied to understand development patterns. Also, much of what was and is the lesser developed resource-rich world was colonized, often for extensive periods, and forgetting the effects of colonial exploitation is a cheap conceit.

[anne]

Cynthia:

"So long as oil is the lifeblood of the US economy, establishing democratic rule in any oil-rich nation is a curse for the US!"

Never ever get in an argument with Cynthia.

[Aaron]

lonesome moderate says...

Well, off the top of my head--Saudi Arabia, Iran, Venezuela, Nigeria.

It's really startling to me that anyone would seriously argue that resource-rich countries don't have poorer-quality institutions than otherwise, atlhough perhaps the oil wealth compensates, or more than compensates.

This issue is causality. Here is a partial list of screwed up countries without any or negligible oil. Yemen, Chad, Syria, Congo, Burma, Zimbabwe, North Korea.

Also, Norway, Canada, the U.S., the U.K., and Mexico all produce lot of oil. These countries are fine so there is no causality here.

Its not the oil, it's oppressive governments that screw up the world. Big repressive government. With or without oil. Big government with too many rules is the problem. Not oil.

[anne]

The issue is not oil but natural resources, and Yemen and Burma and Zimbabwe and Chad and Democratic Republic of the Congo are variously resource rich, while as for big government with big rules that is, of course, a rightest American concept of no discernible meaning.

[Aaron]

Cynthia says...

So long as oil is the lifeblood of the US economy, establishing democratic rule in any oil-rich nation is a curse for the US!

That's funny, you really don't hear this sentiment in the United States. However, in the summer of 1990 I was working in Oslo and heard a version of it. I don't remember the exact words but it was something along the lines of not helping the developing world because they would compete for resources. Maybe Americans should think like this, but they don't. If you want to see this mentality look for it in Europe and Scandinavia., especially old Europe.

[Aaron]

anne says...

The issue is not oil but natural resources

We have vast natural resources so that's not it either.

[xfire]

To paraphrase Tolstoy:

All developed nations have things in common, freedom, democracy, rule of law etc. All oppressive & rogue nations are bad in their own way. It is futile to come up with a common thread among all the bad & repressive nations.

[anne]

Mark Thoma:

"I assume you are familiar with the 'natural resource curse....' "

"A paper co-written by an Indiana University economics professor takes issue with the widespread idea that there is a 'natural resource curse' that puts countries with oil or mineral wealth at a disadvantage when it comes to economic growth...."

[don]

Anne: "Also, much of what was and is the lesser developed resource-rich world was colonized, often for extensive periods, and forgetting the effects of colonial exploitation is a cheap conceit."
I assume you think the effects were adverse. I doubt it, with the possible exception of what happened when the colonial rulers brought in foreign labor.

[mik]

Should one ask what the economy of an area would be without the resource? Much of the Middle East is too arid to be very productive in Agriculture and manufacturing that relies on a lot of water. They may have oil, but do they have the resources to make steel?

I seem to recall a country in the ME with no natural resources and with GDP per capita on West European level.
Did you hear about that country, Bacho?

Also, have you heard about couple of small countries in Far East with no resources and GDP/capita to match almost anyone in the world?

Geography 101 is needed urgently.

[mik]

Yet Moscow has become a capitalist mecca today with expensive fashion shops and banking infastructure. It is not absurd to argue that institutional infrastructure building is one of the difficult problems of the current centralized regime which wants to control all levers of development in the huge continental economy.

What the hell it means?

[FreedomLover]

Whatever happened to fairness?

[Aaron]

FreedomLover says...

Whatever happened to fairness?

Its hard to define. Free is less subjective.

[Ex-Worker]

Like a wise man said, money doesn't buy happiness. Then again, it doesn't necessarily buy unhappiness either.

[epar]

All in all their results sound like what you would get when you spend too much time playing with regression software and not enough time reading history. Reality is messy; you can't distill the evolution of nations into some slope coefficients and pretend to have learned anything.

[mik]

Norway, Canada, the U.S., U.K, and Mexico all produce oil and are decent places to live.

You have missed entirely the target of the paper: under-developed countries with natural resources that contribute most of their GDP.

Mexico is middling country, not quite developed, but in better shape than Algeria or Nigeria.
The rest, with possible exception of Norway which was highly developed country before their oil boom, have small to negligible part of GDP coming from oil.

Do you really think Mexico is a decent place to live?
Do you have that much money?
Did you try it for longer than 5 days and outside of full-service resort?

[btg]

"Also, Norway, Canada, the U.S., the U.K., and Mexico all produce lot of oil. These countries are fine so there is no causality here."

rather than comparing similar countries, i wonder what happens if they had looked at countries that were industirialsed that suddenly discovered oil - like norway, britain, holland, etc.

if there is a natural resource curse, it is similar to the "dutch disease" - it drives up the currency making imports cheap, and making it difficult for non-resource industries to compete - this is happening today in canada, where western resourced based provinces are flourishing, while industrialised ontario is facing tough times.

resources tend to diminish over time - the easy stuff is extracted first, and so productivity in resource extraction should decline, while productivity in other products will increase at a faster rate.

but even if you look at some other countries - say compare venezuala before chavez with other latin american countries (guatemala, columbia, etc.) i think it will be hard to detect any pattern because each country is unique.

but with the easy wealth from oil, it makes it more tempting for the "elites" to monopolise the wealth and to squander it - again, like venezuela - there is bound to be more internal conflict if there is the slightest instability.

[RegularFolk]

Hum! well the results of any analysis are only as good as the model on which that analysis is built. And as none of the models can capture the complexity of reality, some results can be supurious, others limited to only one (or limited) dimension-view.

Article in Science mag, referenced above, had quite a different explanation and seems closer to the truth. Every country, democratic or nondemocratic, has ciritical segments of the society. If a dictator (or royal family, or a political party in a democratic country) can keep those ciritical segments happy, he can continue to rule as the rest of the people are too divided. (The difference between a democracy and an autocracy is the size of the critical segments of the populace, or whatever you want to call them). Being resource-rich allows a dictator to keep critical segments of the society loyal to him and that is where, in my view, the curse of the resources comes into play. [well, I have also tried to simplify a complex situation and may be a victim of the problem stated above]

[Klatoo]

Bakho says: Do the countries of the Midle east have the respources to make steel?

Yes,indeed,they do and have built many excellent state of the art facilities for doing so.

The process I am referring to uses natural gas, rather than coking coal to reduce iron ore pellets to pure iron.The product, called Direct Reduction Iron is fed to massive Electric Arc Furnaces and gets converted to steel.

Qatar was the first Middle Eastern country that has built everal modules of these furnaces.Saudi Arabia and Iran have also built similar plants.So has Algeria.In Latin America Brazil, Argentina, Trinidad,Venezuela have all built such plants.

The mistake many economists make is in equating steel making as a static process that is based only on iron ore an coke.Those days are long past.There are even more exciting process developments ahead in steelmaking.This is why I think an economists's perspective on such an important basic industry is "a day late and dollar short".

Coming to the issue of whether natural resources are a curse, I want to refer to one of my favorite economists,the late Professor Julian Simon of the Univesrity of Maryland.He used to say that the only natural resource on earth is the intellect of mankind.That statement ties in with a concept called the takeoff stage of economic growth popularized by Professor Nicholas Kaldor of Cambridge.He states that regardless of the size of the natural resources, a country cannot benefit from such resources unless the people reach an intellectual maturity capable of explotin g those resources with their intellect,and the political and social conditions empower them to do so.

[BJ Feng]

I think RegularFolk and other previous commentators hit the nail on the head. Besides, it's hard to direct the wealth that comes from natural resources in a positive manner. Like with most things, it's easier to mess up than get it right.

Let's also not forget the cultural factors that come with that kind of wealth. In Saudi Arabia, foreigners are imported to do menial tasks even though as much as 30% of the male population are unemployed. Some jobs are just considered unacceptable for a Saudi to have, and so the young continue to mill around waiting instead of working.

Thankfully, we in the United States, have avoided the resource curse thanks to the strong institutions that were already in place. The United States is a remarkably rich country in terms of natural resources, at one time we had as much or more oil than Saudi Arabia.

Could the fact that our resources were never nationalized be part of the reason? That question should be investigated further. When a natural resource is nationalized, it becomes "owned" by the political elite, most who have no intention of sharing a fair amount. In the United States, land resource laws were pretty equitable, anyone could make a claim, but of course once power becomes concentrated, then the winners can use that power to their advantage. Yet for some reason the concentration of wealth didn't hurt this country because the wealthy were never able to monopolize government power. So amassing a great fortune didn't prevent someone else from doing the same, it wasn't just the same old players in the mix.

[Francois]

"Could the fact that our resources were never nationalized be part of the reason? That question should be investigated further. When a natural resource is nationalized, it becomes "owned" by the political elite, most who have no intention of sharing a fair amount."

Norway nationalized their oil resources and had great success in sharing the derived wealth among their citizens.

Maybe some in their elite had no intention of sharing, but strong institutions are precisely there to prevent the few to exploit the many.

That is why everytime I read or hear calls about "Governement is the problem" or Government must be kept VERY small" I take a close look at where is the wealth is supposed to go as per those who advocate a tiny government.

Quelle Surprise! It turns out that said wealth should go to their favorite elites.

We have seen that trend develop at a rapid pace in the USA for the last 3 decades. Far from me to suggest that the current deep malaise about the direction of the country highlighted by serious pollsters could have anything to do about a tilted redistribution of wealth.

That would be far too cynical wouldn't it?

[BJ Feng]

The goal is to prevent concentration and abuse of power. Power is most easily abused when it comes in the form of the government, indeed if you look around, state power is the form that is most widely used for ill gain. Even billionaires like the Yukos guy can be eliminated with one decree from a person who controls the government. That is why many people are right to ask for limits on governmental power, lest that power be used against the populace. And once government does get that power, it will use it. Look at the Patriot Act and the wiretapping. The power to wiretap with very limited judicial oversight was supposed to be used only on foreign terrorist suspects, but it turns out that many ordinary Americans were wiretapped or electronically surveyed even without any links to terror. Give power and it will be used to the fullest.