Download Resource Curse and the Need for Economic Diversification

Proceedings of the Fourth International Conference on Global Business, Economics, Finance and
Social Sciences (GB15Kolkata Conference) ISBN: 978-1-63415-898-5
Kolkata, India, 18-20 December, 2015. Paper ID: KF578
Resource Curse and the Need for Economic Diversification
Usman Lawal Abubakar,
School of Remedial and Basic Studies,
Federal Polytechnic Kaura Namoda,
Zamfara State, Nigeria.
Email: [email protected]
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Abstract
It is certain that resource curse is a common name for the observation that nations largely
dependent upon natural resource(s) have tended to underperform economically relative to
countries that lacked similar or substantial natural resource base. This paper is an attempt to
explore those bedevilled predicaments cushioning the economic efficiency of financial
markets with a particular reference to Nigeria, Middle East and other prominent global
economies, and to provide a prelude for economic diversification and efficient operation of
financial markets. The study adopted a conceptual research method, in which case a survey of
literatures lamented that, a nasty feature of the resources curse and its underperformance is
upon due to the higher propensity for violent civil conflict, Dutch disease, and violation of
human rights, corruption, and inflation in these countries. Oil resources being the most
prominent among the natural resources with the highest revenue volatility and corruption
laden was most emphasized in this research work. In view of the glaring effects of resource
curse as fully analyzed in the paper, this paper therefore, reiterate the need for urgent and
thorough diversification of the economy as the only remedy to total economic and political
woe that plagued such countries who fully depends on the exploitation of those natural
resources as their major source of income. Nigeria and the Middle East are no exception.
This will certainly marked a point of departure to those ailing hitches undermining efficient
financial markets operations, economic buoyancy of Nigeria in particular, and other nations
with similar passion in the global hemisphere at large.
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Key Words: Resource curse, corruption, Diversification, Economy, Oil and financial markets
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Proceedings of the Fourth International Conference on Global Business, Economics, Finance and
Social Sciences (GB15Kolkata Conference) ISBN: 978-1-63415-898-5
Kolkata, India, 18-20 December, 2015. Paper ID: KF578
1. Introduction
The resource curse (paradox of plenty) refers to the paradox that countries and regions
with an abundance of natural resources, specifically point – source non-renewable resource
like minerals and fuels, tends to have less economic growth and worse development outcomes
than countries with fewer natural resources. This is hypothesized to happen for many different
reasons, including a decline in the competitiveness of other economic sectors (caused by
appreciation of the real exchange rate as resource revenues enter an economy). Volatility of
revenue from the natural resource sector due to exposure to global commodity market swings,
government mismanagement of resources or weak, ineffectual, unstable and corrupt
institutions (possibly due to the easily diverted actual or anticipated revenue stream from
extractive activities) (Victor, E. 2006).
The idea that natural resources might be more of an economic curse than a blessing began
to emerge in the 1980’s. In this light, Richard Auty in 1993 described how countries rich in
natural resources were unable to use that wealth to boost their economies and how, counterintuitively, these countries had lower economic growth than countries without an abundance
of natural resources. Numerous studies including one by Jeffrey Sachs and Andrew Warner
(please cite these studies properly) have shown a link between natural resources abundance
and poor economic growth. This disconnect between natural resources wealth and economic
growth can be seen by looking at an example from the petroleum-producing countries from
1965-1998, in the OPEC countries, gross national product per capital growth decreased on
average by 11.3%, while in the rest of the developing world, per capital growth was on
average 2.2%. Some argue that financial flows from foreign aid can provoke effects that are
similar to the resource curse (Friedman T. 2006).
2. Negative Effects of Resource Mismanagement
Resources mismanagement is the basis for sluggish economic growth and instability in the
countries that solely depend on their natural resources exploitation and exportation resource
mismanagement has no economic benefits and its negatives effect are everlasting, no country
that solely depend on its natural resources sustainably manage their economy hence, the
God’s giving resources then became a curse rather a blessing. Below are some of these
effects.
3. Paradox of War between People and Government
The ambitions of the people and the government conflict, due to the large amount of
resources and money a country’s government amass for their own luxuries rather than for the
people. The rate at which the money came and the belief that opportunity comes but once, led
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Proceedings of the Fourth International Conference on Global Business, Economics, Finance and
Social Sciences (GB15Kolkata Conference) ISBN: 978-1-63415-898-5
Kolkata, India, 18-20 December, 2015. Paper ID: KF578
to this. Thus natural resources serve as a curse for the people, who then have a lower standard
of living.
4. Conflict
When people’s trust is betrayed, what next? Protest, conflict down to revolutions as
different groups and factions fight for their share, but the conflicts occur in more hidden
forms oftenly; these include fights between different government ministries or departments
for access to budgetary allocations. This tends to erode governments’ abilities to function
effectively. There are several main types of relationships between natural resources and
armed conflicts. First, resources curse effects can undermine the quality of governance and
economic performances, thereby, increasing the vulnerability of countries to conflicts (the
resource curse’ argument). Poor management of natural resources rents is one of the is
principal causes of Niger Delta crisis (Victor D. 2006), the militia groups that blew up oil
flow stations and abducted several foreign workers in the Niger Delta region did that based on
the fact that the natural resources rents are being mismanaged. They have also been
complaining about the environmental damage from oil exploration and rising unemployment
and poverty in the region, but the successive governments and multi-national oil corporations
have been insensitive to the plight of the people (Punch Newspaper, 2006). Second, conflict
can occur over the control and exploitation of resources and the allocation of their revenues.
The South Sudan and Sudan have been marked by conflict over the Greater Nile oil Pipeline
and in the disrupted region of Abyei, several lives and properties have been destroyed. Third,
access to resource revenue by belligerents can prolong conflicts. According to one academic
study, a country that is otherwise typically but has primary commodity exports around 25% of
GDP has a 33% risk of conflict, but when exports are 5% of GDP the chance of conflict drops
to 6%. (Punch Newspaper, 2006)
5. Taxation
In many economies that are not resources-dependent, government tax citizens, who
demand efficient and responsive government in return. This bargain establishes a political
relationship between rulers and subjects. In countries whose economies are dominated by
natural resources, however, rulers don’t need to tax their citizens because they have a
guaranteed source of income from natural resources. Because the country’s citizens aren’t
being taxed, they have less incentive to be watchful with how government spends its money.
In addition, these benefiting from minerals resources wealth may perceive an effective and
watchful civil service and civil society as a threat to the benefits that they enjoy, and they may
take steps to thwart them. For example, until the days of Ken Saro – Wiwa of the Niger –
Delta region of Nigeria, Niger – Delta region realized the need to agitate for development,
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Proceedings of the Fourth International Conference on Global Business, Economics, Finance and
Social Sciences (GB15Kolkata Conference) ISBN: 978-1-63415-898-5
Kolkata, India, 18-20 December, 2015. Paper ID: KF578
they were deprived the knowledge to the huge amount accrued by the federal government of
Nigeria and the international oil companies (IOC’s) through the exploitation of crude oil in
their region.
6. Dutch Diseases and Operations of Financial Markets
Considering the fact that, the world today is but a global village, in which nations openly
trade and interact with one another. These interactions have serious implications to especially
weak and mono-economy nations. On the contrary, Dutch disease is an economic
phenomenon in which the revenues from natural resources damage the nation’s productive
economic sectors. This makes tradable sectors, notably agriculture and manufacturing, less
competitive in world markets. It equally worsens efficient operation of the financial markets
in the global pace. This could translate in to causing gigantic financial catastrophe as
exemplified in the recent global financial crises. The increasing nation revenue will often
result in higher government spending (health, welfare and military) that increases the real
exchange rate and raises wages. The decrease in the sector exposed to international
competition and consequently even greater dependence on natural resources revenue leaves
the economy vulnerable to price changes in the natural resources. Also, since productivity
generally increases faster in the manufacturing sector, the economy will lose out on some of
those products.
7. Revenue Volatility
Price for some natural resources are subject to wide fluctuation when government
revenues are dominated by inflows from natural resources (for example 99.3% of Angola’s
export came from oil and diamonds in 2006), up to date over 80% of Nigeria’s revenue comes
from oil and gas. Price volatility can play havoc with government planning and debt service.
During the period popularly known as the raining days, government don’t consider the
volatility of this price fluctuation but rather are focused on how they can loot this excess into
their personal account and when the price suddenly drops, it results into foreign debt. Abrupt
changes in economic realities that result from this without prior preparation often provoke
widespread breaking of contracts or curtailment of social programs, eroding the rule of law,
popular support and the inability to enjoy the dividend of democracy.
8. Excessive Borrowing
As a result of insensitivity to natural resources price volatility and the fact that
governments always expect more income in the future, they start accumulating debt, even
though they are receiving natural resource revenues as well. This is encouraged because when
the real exchange rate increases, through capital inflows, this makes the interest payment on
the debt cheaper. In addition, the country’s natural resources act as collateral leading to more
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Proceedings of the Fourth International Conference on Global Business, Economics, Finance and
Social Sciences (GB15Kolkata Conference) ISBN: 978-1-63415-898-5
Kolkata, India, 18-20 December, 2015. Paper ID: KF578
credit. However, if the natural resources prices begin to fall, and if the real exchange rate falls
a government would have less money with which to pay a more expensive debt.
9. Corruption
In resource-rich countries, it is often easier to maintain authority through allocating
resources to favoured constituents than through growth oriented economic policies and a
level, well-regulated playing field. Huge flows of money from natural resources fuel this
political corruption. The government has less need to build up the institutional infrastructure
to regulate and tax a productive economy outside the resource sector, so the economy may
remain undeveloped. The presence of offshore tax heavens provide widespread opportunities
for corrupt politicians to hide their wealth, many extractive operations are illegal and
encouraged by corrupt multi-national co-operations in collusion with national governments.
Objections made by indigenous inhabitants are usually ignored.
10. Lack of Diversification and Grave Effects
Economic diversification may be neglected by authorities or delayed in the height of the
temporary high profitability of the limited natural resources. The attempts at diversification
that do occur are often ground public works projects which may be misguided or
mismanaged. However, even if the authorities try to diversify the economy, this is made
difficult because the resources extraction is vastly more lucrative than other industries.
Successful natural- resources –exporting countries often become more dependent on the
extractive industries over time. The abundance of revenue from natural resource discourages
long-term investment in infrastructure which would support a more diverse economy,
increasing the negative in fact of sudden resource-price drops. While the resource sectors tend
to provide large financial revenues, they often provide few jobs, and tend to operate as
enclaves with few forward and backward connections to the rest of the economy. Ever since
the discovery of crude oil in Nigeria, the initial major source of income to the nation which is
agriculture has degraded to the extent that the country now imports agricultural products.
11. Deprivation of Human Rights
It has also been argued that one can correlate rises and falls in the price of petroleum with
rises and falls in the implementation of human rights in major oil-producing countries
(Friedman T. 2006). Human rights throughout resource cursed countries are dismal or
completely lacking. Most normally resource cursed countries are ruled by either Authoritarian
or other types of highly regressive regimes that are kept in power by select elite such as high
ranking politicians and military leaders. As long as the existing government keeps these few
happy they can rule without fear of consequences. This system is set up so that the common
folk those most in need of the protection are left to fend for themselves. In places like the
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Proceedings of the Fourth International Conference on Global Business, Economics, Finance and
Social Sciences (GB15Kolkata Conference) ISBN: 978-1-63415-898-5
Kolkata, India, 18-20 December, 2015. Paper ID: KF578
Democratic Republic of Congo human life has almost no value and slave labour is common.
Venezeula demonstrated the resource curse because of its abundance of oil. The country
which saw the easy wealth of the oil did not need to expand into other markets due to
comparative advantage. The comparative advantage states that if Venezuela can produce oil
better than other exports then it should produce the oil. However, since Venezuela’s oil
company is nationally owned it has been criticized as inefficient and backwards. The resource
curse is also evident in Venezuela because of the enormous gap between the rich and the
poor. In Venezuela all the profits go directly to the state and the Authoritarian government
with little or none to the lower socioeconomic classes. The resource curse can cause a
country’s government to turn volatile towards their people because they do not need them for
taxation. (O’Neil, P. 2004).
12. Criticism
Amu (1997) study argues that the curse vanishes when looking not at the relative
importance of resource exports in the economy but rather at different measure: the relative
abundance of natural resources in the ground. Using that variable to compare countries, it
reports that resource wealth on the ground correlates with slightly higher economic growth
and slightly few armed conflicts. That a high dependence on resource exports correlates with
bad policies and effects are not caused by the large degree of resource exportation. The
causation goes in the opposite direction; conflicts and bad policies created the heavy
dependence on exports of natural resources. When a country’s chaos and economic policies
scare off foreign investors and send local entrepreneurs abroad to look for better
opportunities, the economy becomes skewed. Factories may close and businesses may flee,
but petroleum and precious metals remain for the taking. Resource extraction becomes the
“default sector” that still functions after other industries have come to a halt.
Amu L. (1997) that examines the long-term relationship between natural resource reliance
and regime type across the world from 1800 to 2006 demonstrates that increases in natural
resources reliance do not induce authoritarianism. On the contrary, the authors find evidence
that suggests that democratization. These researchers also provide qualitative evidence for
thus fact across several countries.
Haber and Menaldo (2007) study argues that previous assumptions that oil abundance is a
curse were based on methodologies which failed to take into account cross-country
differences and dependences arising from global shocks, such as changes in technology and
the price of oil. The researchers studied data from the World Bank over the period 1980 –
2006 for 53 countries, covering 85% of world GDP and 81% of world proven oil reserves.
They found that oil abundance positively affected both short – term growth and long – term
income levels. In a companion paper, using data on 118 countries over the period 1970 –
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Proceedings of the Fourth International Conference on Global Business, Economics, Finance and
Social Sciences (GB15Kolkata Conference) ISBN: 978-1-63415-898-5
Kolkata, India, 18-20 December, 2015. Paper ID: KF578
2007, they show that it is the volatility in commodity prices, rather than abundance per se,
that drives the resource curse paradox.
13. The Need for Economic Diversification
The mismanagement of natural resource has proven to be the bane of political instability,
endemic corruption, economic non-performance and social stagnation. The oil curse is the oil
perspective of the globally recognized problem that countries with huge natural resource tend
to always lag behind countries with little or no natural resources.
Germany and Japan have little or no natural resources, and today both countries occupy
respectable positions among the world’s wealthiest nations, China has no commercial deposit
of steel yet it is one of the largest producer of steel and presently the country with one of the
most stable economy. Nigeria, Iran, Iraq, Saudi Arabia, Libya and Venezuela have all the
petroleum resources, yet these mentioned countries have become global symbols of economic
retrogression, political instability and social oppression. One then begin to wonder, why the
reverse situation is always the case, where countries obviously given and advantage by nature,
just fail to pull it off; whereas, lesser endowed nations always find a way to shake off the pull
of poverty, under-development and political tyranny. Hence the need for urgent economic
diversification. For Nigeria’s agriculture has fizzled out to the level that the nation is now a
net importer of food where it once was known for its export of agriculture produce at the
international market.
The urgent need to stop corruption and corrupt officials from their aggressive assault on
the wealth of the citizen. The government must now focus on providing infrastructures, its
management of natural resources revenues and in the delivery of public services (Adamu
Aliyu 2014).
Investors also want societies that have highly educated youth populace. This explains the
attraction of Indian and China to investors. India and China have highly educated youth
populace, especially in the area of information systems and engineering. Nigeria’s recent
increase in the number of universities that are licensed to operate in the country is a welcome
development (Adamu Aliyu 2014).
14. Conclusion
Our crude oil will definitely finish one day since it is not a renewable source of energy,
Nigeria only has a window of between 10-20 years to make good planning for renewable
energy sources in the future by encouraging research which will in turn promote our
industries and manufacturing sectors, our future and that of the world now rest of proper
knowledge and planning. Several countries analysed above failed in this regard and the wise
ones are diversifying their economy. The only solution to this revenue curse is an urgent and
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Proceedings of the Fourth International Conference on Global Business, Economics, Finance and
Social Sciences (GB15Kolkata Conference) ISBN: 978-1-63415-898-5
Kolkata, India, 18-20 December, 2015. Paper ID: KF578
sincere economic diversification as there are vast opportunities in the agricultural and
educational sector; even tourism is another goldmine for revenue generation.
References
Adamu Aliyu (2014) “Environmental and Social Economic Impact of Oil Spillages in the Petroleum
Producing Riverine Areas of Nigeria”. In the Proceedings of 1997 NNPC International Seminar on the
Petroleum Industry and Nigerian Environment.
Amu, L.A.O. (1997) “A Review of Nigeria’s Petroleum Industry” NNPC, Lagos.
Auty, Richard M. (1993): Sustanable Development in mineral Economies: The Resource Curse Thesis.
London: Rutledge, Pp.12.
Friedman T. (2006): The Devil’s Excrement, fortune magazine, Pp.5.
Haber, Stephen; Menaldo, Victor, (2007): “Natural Resources in Latin America: Neither Curse nor
Blessing”, SSRN Working Paper, Pp.31.
O’ Neil, Patrick (2014): Essentials of comparative politics. New York London: Norton and Company,
Inc. Pp.147.
Punch Newspaper (December 16, 2006): “Militants kill two soldiers, kidnap three oil workers in
Bayelsa”, Pp, 7.
Sachs, Jeffrey D; Warner, Andrew M (1995): NBER Working paper 5398: Natural resource abundance
and economic growth.
Victor E. Dike, (2006): Mismanagement of Natural Resource Rents and the Niger Delta Crisis, 2 nd
edition (New York, Shanghai, Lincoln, Pp. 5.
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