Navigating the Natural Resource Curse

When oil was discovered in 2007 off the shores of small, sturdy Ghana, the country’s government officials called the discovery “perhaps the greatest managerial challenge” the country had faced since independence. John Kufuor, Ghana’s president at the time, warned that “instead of a being a blessing, oil sometimes proves the undoing of many … nations who come by this precious commodity.”

Ghana’s reaction no doubt surprised oil-starved observers in developed countries, but the Ghanaian officials were referring to the “resource curse” that has wreaked havoc in other resource-rich, developing countries. Natural-resource wealth not only increases civil violence but, in a bizarre development paradox, is linked to lower economic growth.

In The Bottom Billion, the economist Paul Collier cites three reasons why resource wealth results in low levels of economic growth. First, the discovery and extraction of natural resources can lead to the crowding out of other sectors, otherwise known as “Dutch Disease.” The booming natural resource sector draws labor and capital away from other areas, and the natural-resource revenues result in a stronger exchange rate, reducing the competitiveness of non-resource exports.

Second, commodity price volatility enables boom and bust spending cycles characterized by poor investments and irresponsible spending. Collier writes that during an asset-price bubble in Kenya, “one ministry raised its proposed budget thirteenfold and refused to prioritize.”

Finally, Collier argues that resource revenues can cause deterioration in governance and public institutions through a variety of channels. Bribery becomes a more efficient means of obtaining votes than the delivery of public services. Citizens paying low taxes thanks to resource revenues are less likely to scrutinize their leaders.

Last week, the Natural Resource Charter was launched in Oslo. Developed by a group of economists including Collier and Nobel Laureate Mike Spence, the charter is “a set of economic principles for governments and societies on how to use the opportunities created by natural resources effectively for development.” Essentially, the charter tells countries how to avoid the resource trap.

Will a charter actually do anything? There might be some lessons gleaned from the experience of the Extractive Industries Transparency Initiative (EITI), which was proposed by the British government in 2002 and is now widely supported by governments and industries.

Resource-rich governments that commit to the EITI agree to implement increased transparency measures. The EITI board announced this week that Albania, Burkina Faso, Mozambique, and Zambia will join the 26 candidate countries already committed to implementing the EITI protocols. The jury is still out on the effectiveness of the EITI in candidate countries, but preliminary results are encouraging.

Perhaps more importantly, the EITI is already shifting attitudes in resource-rich developing countries. Collier writes of sitting in a meeting of West African ministers as they discussed resource-revenue governance. The EITI served as a concrete rallying point for both reformist countries and for reformers in reluctant countries. Collier writes, “An international charter gives people something very concrete to demand: either the government adopts it or it must explain why it won’t.”