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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 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] _________________________________________________________________________ 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. ___________________________________________________________________________ Key Words: Resource curse, corruption, Diversification, Economy, Oil and financial markets 1 www.globalbizresearch.org 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 2 www.globalbizresearch.org 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, 3 www.globalbizresearch.org 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 4 www.globalbizresearch.org 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 5 www.globalbizresearch.org 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 – 6 www.globalbizresearch.org 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 7 www.globalbizresearch.org 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. 8 www.globalbizresearch.org