global political economy

Abstract

There has been a contentious debate among researchers as for the authenticity of the statement that the countries that are rich in resources are the poorest or that the concept of resource curse holds true. Many researchers have historically tried to prove why resource rich countries remain poor. The concept of resource curse has guided many of these studies with poor policies, governance, civil way and the Dutch disease featuring resource curse. While resource rich countries must unite their efforts in balancing the economic growth and development, they must also learn how to diversify the resources to other sectors for economic sustainability. Economic diversification and policy review are some of the most needed solutions to this problem. Current paper seeks to portray the concept of resource curse as a myth by conducting a critical review of existing theoretical frameworks. In this context, various theoretical frameworks are discussed in the research. The study then proceeds with giving recommendations on how countries rich in natural resources can best ensure their economic development.

Introduction

For an increased number of countries in the developing world, the current commodity boom offers huge opportunities. However, if economic history is anything to go by, countries which are rich in resources are sadly the poorest. This is especially true for most African countries which are locked in the natural resources trap. Countries that depend on gas, oil and mining tend to record poorer growth, higher poverty rates and higher level of inequality in the long run as compared with countries that do not depend on these natural resources but have the same level of income. Higher level of income in resource rich countries can be attributed to rent as opposed to the growth in the level of output. While many studies have termed the phenomenon as a resource curse, this cannot be said to be entirely true with some studies pointing towards economic abstraction in other sectors.

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Resource Curse

Commodity boom such as the one that has recently been experienced helps countries increase output but this only lasts for a few years. After some years, these economies tend to produce less than they would without the commodity boom. It is however important to note that some countries like Chile and Botswana have relied on resource extraction to develop their economies. This is not true for some other resource rich countries. There are various explanations as for why resource rich countries remain poor.

Theoretical Perspectives

One can distinguish between internal and exogenous explanations of the poor economic growth performance in many countries that are rich in resources. Revenue volatility and long-run declining tendency in relation to the trade of natural resources represent an attempt to explain the situation that can be traced to structuralist economic theory. Another explanation is that of the “Dutch disease phenomenon”. This exogenous explanation points towards a decline in competitiveness and productivity in the manufacturing and other sectors which produce tradable goods. According to the explanation, the resource boom leads to an appreciation in the real exchange rate. This poses a threat to the manufacturing sectors and other tradable sectors which are marked by economies of scale. While exogenous explanations leave little opportunity for policy makers to find a solution to the problem, they nevertheless offer a good insight into the reasons for the problem’s existence. The Dutch model, for example, assumes that labor and capital should be fixed and fully engaged for a boom in the export market to occur.

Internal explanations of a resource curse point towards bad policies as the root cause of the problem. Misguided policies such as protectionist barriers to import substitute goods are common for many resource rich countries. More specifically, most resource rich countries end up in a predatory state characterized by huge corruption rates, poorly developed economic institutions, political conflicts, rampant inequality, accumulated human capital and crowded innovative and entrepreneurial activities. Political attention plays a vital role in the escalation of the problem of the resource curse.

The neoclassical perspective as well as the new institutionalism, behaviouralism and public choice theories have all been used to explain the problem of resource curse. According to behaviouralism, abundance in natural resources results in different types of irrational and emotional behaviors in regard to the political elite which by extension contribute towards poor economic policies and deterioration of economic institutions. More specifically, this theory argues that resource abundance induces myopia, over-exuberance and sloth within the political elite. For example, it has been argued that resource abundance creates an optimistic tendency in countries which enjoy it. This may in turn lead to excessive spending by the government.

Rational actor perspective on the other hand depicts political elite as rational utility maximizing people. Thus, according to this perspective, the resource curse problem does not occur because resource abundance creates irrational behavior in the political elite. It rather occurs because abundance creates an opportunity to increase their personal wealth with rent seeking. Corruption is rampant in many resource rich countries as the political elite seeks benefit directly from the rents or by gaining control over the power to allocate them. State-centered perspectives see the problem of poor economic growth in resource rich countries as a result of the influence of the resources on the capacity of the state to promote development. Much effort is directed towards political distribution of income made from these resources as compared to promotion of economic growth, production and private investment. This is particularly true in regard to a situation where the resource rich economy domination occurs simultaneously with state formation. A good example is that of South Sudan which is oil rich and only recently has acquired it sovereignty.

Historical-structuralist perspective argues that the abundance of natural resources has destructive economic effects due to its tendency to affect the relative power of various social classes or groups. For example, resource abundance may strengthen a well-connected group of businesses that would in turn pressurize the government to pursue certain personal interests instead of the public ones. While appreciating the probabilities of predation expressed by the above three perspectives, their determinism can be questioned. Essentially, significant variations exist in the dynamics of the renter of the natural resource exporting countries. The generalizing tendency to assume that the countries rich in natural resources are facilitating their economic development is to some extent problematic. Such countries as Malaysia and Norway have proven successful in using natural resources to stimulate growth. In addition, most of these perspectives assume that the government is the sole owner of the natural resources but this may not always be true. In some countries, public-private ownership models have been applied.

Most studies assume that natural resources are exogenous geological endowments. It is important to note that comparative advantage in natural resources should not be used in terms of resource abundance. Economic theory argues that each country has some type of a comparative advantage. It therefore means that a comparative advantage created through the availability of natural resources may imply that the country may lack some other types of resources. Given the fact that the indices are largely imperfect, the statistical bias assumes that more than one comparative advantage is addressed. Moreover, successful resource-based economic development is not necessarily a matter of geological endowment. For example, in the late 19th century, the United States used natural resources to grow their manufacturing sector yet they did not have resource endowment.

Until the early 1980s, research on the terms of trade and economic development remained at a stalemate largely because of the poor quality of data. Introduction and enhancement of more complex tools of predicting long-term patterns have however improved the level of research since them. Modern studies now contend that primary products’ aggregate terms of trade have declined since the beginning of the 20th century. Equally, studies indicate that terms of trade play a vital role in shaping a country’s economic growth. In this context, the problem of poor development in countries with abundant natural resources or what is otherwise referred to as resource curse can be attributed to a reduction in terms of trade. It is notable however that a closer look will also raise critical questions with such a perspective. Composite indexes have been used in studies related to the terms of trade. These have been used to measure changes in the international market prices and suggest that while some trends may be declining for some products, others have been positive for a couple of years now. For example, the price for palm oil, a Malaysia’s major export commodity, has continually declined over the last few years. In this context, the effects of the terms of trade while remaining high at the international level may weaken in the local and national markets.

The second concern that this approach raises is that when commodity markets are unstable, there is always a possibility that resource exporters would be harmed. While many agree that most developing countries with high reliance on commodity markets tend to have unstable export earnings, it remains contentious when it comes to how this instability may affect their economies. Instability in the export markets leads to greater levels of private investment as investors look for ways of cushioning themselves from future price shocks. Export instability on the other hand may or may not have negative effects on economic growth.

The third argument related to the terms of trade and commodity exports is that they contribute little to the growth of other economic sectors. More specifically, export of natural resources has had very little impact on the development of other sectors. Resource abundant countries are still facing the problem of linkages. This may partially be attributed to efficiency constraints in regard to export diversification. On the other hand, the problem of linkages may also be linked to policy failure with the state having the capacity to establish linkages yet for this or that reason failing to do so. All the above perspectives have two inherent claims at their core.

Recommendations

First, all, the perspectives treat the state as a revenue satisfier as opposed to maximize and second, when the state’s demand for revenue decreases, the soundness of its economic policies also diminishes. On the contrary, the perspectives suggest that when a state is poor in regard to revenue and yet imposes heavy tax on the population, it must adopt good economic policies and record better economic growth. There are a number of options available for resource rich countries to improve their economic development using abundant resources.

One of the major problems identified and leading to resource curse is poor governance. Manipulation of power by the political elite to channels rent from natural resources for their selfish interest is the major problem faced by resource rich countries. In this regard, there is a need to enact economic policies which balance between the existing economic needs. This includes policies aimed at fighting corruption and inequality. In addition, managing good economic policies means that the revenue can be allocated between different sectors in an equitable manner. For example, while good management of natural resource rent may help meet the economic needs, the manufacturing sector has the potential of growing at a higher rate thanks to the growth in technology and learning. The natural resources sector however has a tendency to remain stagnated in terms of growth and technological advancement.

Diversification of the economy as a way of the redistribution of revenue to other sectors is a proven way of increasing economic development. In this context, the government should aim at investing the manufacturing and other tradable sectors as a way of ensuring long-term economic sustainability. Diversification of different sectors helps a country to take advantage of export opportunities in the international market. Redistribution of resource rent to other sectors will help in building the industrial sector and by extension increase the chances of the country to exploit global export markets. Countries will also be able to learn through the adoption of new technology.

In addition to the above, the problem of research curse has also been attributed to state ownership of the industries that process these resources. Previously, many resource firms were owned by multinational companies. Foreign multinational companies acted to cushion resource rich countries from shock in terms of international prices. The independence of many of the resource rich countries led to nationalization of the firms. While this does not advocate for colonization, reducing state ownership and giving private investors more freedom may help improve the level of public participation and control over the budget. For example, the privatization of coffee sector in Costa Rica has helped to relieve the sector way above countries that have the same amount of resources. Privatizations also help increase accountability and income redistribution.

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Conclusion

The current trend of international market price provides an opportunity for resource rich countries to transform their economies and embrace economic development. However, while some countries have already embraced the opportunity and tapped into their resources to increase production capacity in other sectors, most of them have not. The statement that resource rich countries are the poorest continues condemns these countries to criticism. Previously, the development had been harnessed through avoiding policy mistakes which by extension led to contraction and economic growth. However, the tendency to remain productive in the long run has made most countries’ output fall below twenty five percent after a decade of primary products output. This increases vulnerability if immediate action is not taken. Whilst the concept of resource curse is in itself a myth, countries with rich natural resources needs to come out of their comfort zone and embrace change driven policies. Removal of governance barriers including corruption and bureaucracy is vital for the benefits of the resource rent to be fully enjoyed. Diversification in the manufacturing and other tradable sectors is also required to create a buffer for the economy in the long run. Creating private participation through reduced state ownership is also crucial for ensuring accountability in the political sphere. It is only by doing so that the problem of resource curse can be solved.

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