Saturday, November 29, 2014

From Resource Curse to Blessing

KAMPALA – New discoveries of natural resources in several African countries – including Ghana, Uganda, Tanzania, and Mozambique – raise an important question: Will these windfalls be a blessing that brings prosperity and hope, or a political and economic curse, as has been the case in so many countries?

On average, resource-rich countries have done even more poorly than countries without resources. They have grown more slowly, and with greater inequality – just the opposite of what one would expect. After all, taxing natural resources at high rates will not cause them to disappear, which means that countries whose major source of revenue is natural resources can use them to finance education, health care, development, and redistribution.

A large literature in economics and political science has developed to explain this “resource curse,”and civil-society groups (such as Revenue Watch and the Extractive Industries Transparency Initiative) have been established to try to counter it. Three of the curse’s economic ingredients are well known:

  • Resource-rich countries tend to have strong currencies, which impede other exports;
  • Because resource extraction often entails little job creation, unemployment rises;
  • Volatile resource prices cause growth to be unstable, aided by international banks that rush in when commodity prices are high and rush out in the downturns (reflecting the time-honored principle that bankers lend only to those who do not need their money).

Moreover, resource-rich countries often do not pursue sustainable growth strategies. They fail to recognize that if they do not reinvest their resource wealth into productive investments above ground, they are actually becoming poorer. Political dysfunction exacerbates the problem, as conflict over access to resource rents gives rise to corrupt and undemocratic governments.

There are well known antidotes to each of these problems: a low exchange rate, a stabilization fund, careful investment of resource revenues (including in the country’s people), a ban on borrowing, and transparency (so citizens can at least see the money coming in and going out). But there is a growing consensus that these measures, while necessary, are insufficient. Newly enriched countries need to take several more steps in order to increase the likelihood of a “resource blessing.”

First, these countries must do more to ensure that their citizens get the full value of the resources. There is an unavoidable conflict of interest between (usually foreign) natural-resource companies and host countries: the former want to minimize what they pay, while the latter need to maximize it. Well designed, competitive, transparent auctions can generate much more revenue than sweetheart deals. Contracts, too, should be transparent, and should ensure that if prices soar – as they have repeatedly – the windfall gain does not go only to the company.

Unfortunately, many countries have already signed bad contracts that give a disproportionate share of the resources’ value to private foreign companies. But there is a simple answer: renegotiate; if that is impossible, impose a windfall-profit tax.

All over the world, countries have been doing this. Of course, natural-resource companies will push back, emphasize the sanctity of contracts, and threaten to leave. But the outcome is typically otherwise. A fair renegotiation can be the basis of a better long-term relationship.

Botswana's renegotiations of such contracts laid the foundations of its remarkable growth for the last four decades. Moreover, it is not only developing countries, such as Bolivia and Venezuela, that renegotiate; developed countries like Israel and Australia have done so as well. Even the United States has imposed a windfall-profits tax.

Equally important, the money gained through natural resources must be used to promote development. The old colonial powers regarded Africa simply as a place from which to extract resources. Some of the new purchasers have a similar attitude.

Infrastructure (roads, railroads, and ports) has been built with one goal in mind: getting the resources out of the country at as low a price as possible, with no effort to process the resources in the country, let alone to develop local industries based on them.

Real development requires exploring all possible linkages: training local workers, developing small and medium-size enterprises to provide inputs for mining operations and oil and gas companies, domestic processing, and integrating the natural resources into the country’s economic structure. Of course, today, these countries may not have a comparative advantage in many of these activities, and some will argue that countries should stick to their strengths. From this perspective, these countries’ comparative advantage is having other countries exploit their resources.

That is wrong. What matters is dynamic comparative advantage, or comparative advantage in the long run, which can be shaped. Forty years ago, South Korea had a comparative advantage in growing rice. Had it stuck to that strength, it would not be the industrial giant that it is today. It might be the world’s most efficient rice grower, but it would still be poor.

Companies will tell Ghana, Uganda, Tanzania, and Mozambique to act quickly, but there is good reason for them to move more deliberately. The resources will not disappear, and commodity prices have been rising. In the meantime, these countries can put in place the institutions, policies, and laws needed to ensure that the resources benefit all of their citizens.

Resources should be a blessing, not a curse. They can be, but it will not happen on its own. And it will not happen easily.

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    1. CommentedEnrique Fleischmann

      In my humble opinión "The curse" is related but not determined by the relative importance of natural resources. The main source of inequality and por performance is the fact that these economies do not rely upon local consumption power but rather on external demand. Therefore, profits and incomes depend on a larger scale on the wellbeing of affluent countries. Moreover, since these economies must compete with other sources for the same market, the economic logic tend to créate huge pressures on local salaries in order to reduce costs. For the same reason, there is no direct economic reason to charge huge royalties on these resources.

        CommentedOscar Alcalde

        What other alternatives do they have? The competitions and race towards the bottom is created by capitalism itself.

    2. CommentedMassimo Stolzuoli

      What about Norway?... they have bullt on oil a $660 billion sovereign wealth fund, the world’s largest. See at:

    3. CommentedSugandha Pahwa

      because someone will lose their hard earned trust funds with exchange rates higher than the non earned trust rates.

    4. CommentedOlanrewaju Kamil-Muhammed OSENI

      Resources are a curse because they are easy and you did not work for them and you have this belief that they will be there forever.Nigeria have had many leaders and scholars that talk about diversification and at least this has been on for 30 years but the crude oil is killing everything. Manufacturing,services,agroallied and other industries are moribund or not cost effective to attempt to go into them.I really dont know what it will take to diversify the economy.Largest chunk of FDI into Nigeria goes to Oil industry and now to telecommunications and this 2 business does not improve our local content rather they just collect our money by providing poor services and no communit services to where the oil is being lifted. Natural resources i will say is a curse for now.

    5. CommentedSAMINDRA MITRA

      The article brilliantly covers the various facets associated with growth pattern of resource-rich or rather specifically resource-rich countries.
      My reading of the growth saga shows a few revelations: domestic firms, even efficiently-run state-owned firms, contribute highest in terms of economic gain in a developing country instead of foreign firms who promise to bring in world-class technology, expertise in mining, investments and so on. The foreign firms will look for ‘gains’, period, and they’ll find a way through the contract clauses to ensure that ‘rents’ from mining accrue to them alone. The only other entities that may gain in such ventures are the banks that lend to them. In this quest, the asset-owners, will only be a fractional beneficiary, irrespective of the scale of royalty or ‘windfall tax’ they impose because the ‘visible’ or ‘declared’ base value on which taxes or royalties are being imposed, are carefully ‘adjusted’ to be on the lower side.
      Secondly, the ‘idle’ or rather ‘effortless’ earnings of Government or individuals who own the assets or in some cases just the surface rights, will lead to investments either in unproductive activities, populist measures or into subsidies to another sector of economy which may be inherently uncompetitive. These policies may seem to elevate the ‘welfare’ of some in the short run, but eventually impoverishes everyone in the country. Unlike fuel, most other mineral resources from a given base, has the potential to earn high ‘rents’ only for a limited period until the ‘good grades’ disappear. And this gives a limited opportunity to earn ‘rents’ while the marginal cost of extraction runs on the lower spectrum of global cost curve, which is often bolstered by a weak currency if the country has no other significant exports.
      Thirdly, the biggest ‘evil’ seems to come from within the home base itself: corruption is the real ‘curse’ behind the resource-based incomes of a relatively ‘new’ nation where those with powers would like to enrich themselves too quickly. Weak institutions are solely responsible for diversion of the ‘rents’ from the main economic system (into so-called ‘black-money’), for allowing foreign firms to find their gainful ways, for allocation of resources sans transparency and most importantly, to disallow strict adherence to seemingly water-tight rule-sets.
      The net result of all of the above steps, is one: spoiling the gains or ‘rents’ while they last, only to rue thereafter, and call the resource a ‘curse’! Botswana is the least corrupt country in Africa and it has the maximum ‘blessings’ to show from the mineral resources: this is not a coincidence.

    6. CommentedHayel Saeed

      An insightful article and with no doubt a resource should be a blessing to a country and help it prosper. The issue however, is linked to politics and it is the factor that differentiates a resources from being a blessing in a well-functioning government to a being a curse in a corrupt one.
      This is what would make a government capable of renegotiating contracts as there would be a mechanism for doing so and it will facilitate the process of ensuring that the domestic economy taps into the benefits of the resource. Without an established set of rules and a sound legal system, most slices of the pie would be grabbed by few hands, which would not be ideal for any part of the economy when the full picture is analysed.

    7. CommentedPhilani Lubanyana

      Mr. Joseph Stiglitz’s suggestion that developing countries must “renegotiate contacts” is very fascinating considering the fact that African countries are being instructed by imperialist’s countries “not to temper with private property”! If they temper with private property sanctions kicks in and the entire economy suffers. African countries are being bullied by imperialist’s countries that they are forbidden from starting debate on “nationalization” because it is scaring the investors and it is a taboo! Then the question is how can developing countries renegotiate contacts if they cannot debate issues and put facts on the table? The looting of African resources by imperialist’s countries and companies is the main threat to African prosperity. Imperialist’s countries/companies are the major sponsors of conflict violence in Africa. Philani.Lubanyana@Durban.South Africa

    8. CommentedPhilani Lubanyana

      Mr. Joseph Stiglitz’s suggestion that developing countries must “renegotiate contacts” is very fascinating considering the fact that African countries are being instructed by imperialist’s countries “not to temper with private property”! If they temper with private property sanctions kicks in and the entire economy suffers. African countries are being bullied by imperialist’s countries that they are forbidden from starting debate on “nationalization” because it is scaring the investors and it is a taboo! Then the question is how can developing countries renegotiate contacts if they cannot debate issues and put facts on the table? The looting of African resources by imperialist’s countries and companies is the main threat to African prosperity. Imperialist’s countries/companies are the major sponsors of conflict violence in Africa. Philani.Lubanyana@Durban.South Africa

    9. CommentedPaula Lezama

      Talking about the course of resource rich countries.

    10. CommentedSUMANT KUMAR

      "Moreover, resource-rich countries often do not pursue sustainable growth strategies. They fail to recognize that if they do not reinvest their resource wealth into productive investments above ground, they are actually becoming poorer"
      That is correct that the Natural Resources Costing should provide fund to the development of the Country men. That is the One part of the Economics and the other Part is that it should provide fund to the future(i.e fund for sustainaibility, funding for green Technology). This is the two dimensional costing. Costing for the geographical area( Counntry) and costing for the time frame (Future). The Opec Countries have mostly priced for 1st Dimension and not for 2nd Dimension. They have used the fund for their food, house and their luxeurious habits only. And the Second Dimension would be more Costly. And further, after geting fund on the second Dimension, keepiung the fund in the Correct Bottle is again an important issue.

    11. CommentedAlvaro Cedeno

      According to the Global Footprint Network, humanity is extracting nearly 50% more natural resources every year than what the planet can naturally regenerate. What will happen when economists understand what ecologists have known for 25 years? Resource curse indeed!

    12. CommentedDonata Garrasi

      In 2011 more than 40 countries and organisations, including 19 conflict affected and fragile countries, the entire UN system, the World Bank, the US, and the United Kingdom have signed up to five Peacebuilding and Statebuilding Goals, as part of the New Deal for Engagement in Fragile States ( Goal number 5 "Revenues and services" recognises that a transparent management of resources, including natural resources, is critical for more equitable service delivery in conflict affected and fragile contexts. It is critical for local, regional, and global peace and security. Fulfilling this goal is a collective responsibility. World leaders, senior officials of major international organisations, heads of big multi-national corporations, and ordinary citizens must wait no longer to implement the recommendations and commitments to better manage natural resources, including the commitment to implement the internationally recognised Peacebuilding and Statebuilding Goal number 5. People living in resource rich, but conflict affected and fragile countries are increasingly aware that missed opportunities are becoming the uncomfortable status quo. Change can happen if resources and political capital are invested in breaking the resource course. It is an achievable goal, and one that brings benefits for all. Donata Garrasi, International Dialogue on Peacebuilding and Statbeuilding

    13. CommentedSolomon Mkumbwa Mkumbwa

      I follow Stiglitz well and have always enjoyed his comments. I guess this is a very good tip, especially for African leaders. Often in a bid to seal the mining deals before the next elections, renders Africa get a raw deal for some contracts that they could better negotiate if they had a little patience. On the converse, where leaders have no panic of elections calendar, for example, the former South Africa, Libya, better deals were made and visible infrastructure development is evident.

    14. Commentedsrinivasan gopalan

      Prof.Stiglitz monograph gives a graphic picture as to how resources-endowed nations should convert their raw resources into building things above the ground. Yet even in a relatively emerging economy like India, the resource-rich States such as Bihar, Chattishgarh or Andhra Pradesh and Karnataka, let alone other States like Jharkhandand Rajasthan continue to be a mute spectator for not being able to exploit their wealth to foster a sustainable growth pattern. Both the Federal law and the governments at sub-national level had not done helped to make these resources useful to the economy either for captive consumption or export in raw form or through value-additions because no one is serious about harnessing resources to maximize gains and minimize pains. A lamentable lack of any concerted and coordinated strategy such as evolving a national mineral policy, paying due royalties and taking on board foreign investors' concerns for uninterrupted supply of the minerals through contracts that are recognized by all the stakeholders are all responsible for this sorry state of affairs. In recent years, the concerns over forest lands and environmental clearance needed for mining have further muddied the waters, making the authorities hapless. It is time India, a country rich in mineral resources, did not become one to curse its hidden wealth by policy inertia and deplorable lack of purposeful actions on the ground. Let us learn a few valuable wrinkles from Prof Stiglitz as also from the experiences of African countries who have unfortunately been reduced to seeing their wealth wasted away due to a perverse combination of factors, all of which denied them their due share in their own natural endowments.
      G.Srinivasan. New Delhi, India

    15. CommentedGary Marshall

      Hello Again,

      Here is a little excerpt of a summary on your exemplary nation of Botswana:

      Unlike many African nations, Botswana has successfully kept corruption in check.

      We do acknowledge we are no longer the poorest of the poor. But we don't accept that we should be totally excluded.

      According to the corruption watchdog, Transparency International, Botswana is the least corrupt country in Africa.

      The poster on the wall in the arrivals hall at Gaborone Airport is a clear pointer.

      "Botswana has ZERO tolerance for corruption. It is illegal to offer or ask for a bribe," it reads.

      Lebang Mpotokwane, chairman of Transparency International in Botswana, says that in a fast-growing economy, there are temptations, but the government has led by example.

      "The government is forever preaching to the nation about corruption, and I can't think of any corruption involving government ministers," he says.

      But being the least corrupt country in Africa is still not saying much.


    16. CommentedGary Marshall

      I see, Mr. Stiglitz, its the companies, who actually go into some very inhospitable nations, find, develope, and extract the resource while paying a handsome royalty to the government, educating the workers, greatly improving their standards, enriching the local economy that are the threat. And I thought it was the corrupt, thieving, despot riddled, undemocratic governments and their employ that were responsible for the impoverishment of their own peoples.

      There is a great deal of energy production in countries like the US and Canada where one can find little of the destitution and nefarious activities that you describe. It only seems in nations in which one can find little of a similar government that such problems thrive.

      Is it any wonder that economics is in such a sorry state with practitioners like yourself. And they even gave you a Nobel. Well, you are in good company. They even gave one to Arafat. Be proud and be Nobel.


        CommentedMK Anon

        this is war economics you talking about... ie. find the ressources, defend it against hostile poeple.. and paying the less taxes possible to biggest power (i.e. the army) to act freely.

        Now, if you think differently and accept that these resources the north crave for BELONG to the poeple of that land. Then, it should be totally normal that the poeple of that land sell the resources for the highest price possible.
        Companies buying governments and bribing dictators (directly wired to Swiss bank account) and paying barely enough taxes to pay the army that will defend them against the "hostile" people. They are actually stealing the resources.
        You argument is that since these companies mange to "convince" a couple corrupted people at the top, their actions are right and ethical?

        As for the local development, these are low skill jobs, and most technical workers come from abroad. So actually all the value added goes abroad. But what stays there is the pollution from open-sky mines, oil spill, polluted rivers, ect.. no wonder people are hostile.

        CommentedGary Marshall

        Hello Hoang,

        I did read the article. I can see you read the article as well. The all important question is, "Did you understand it, Hoang?"

        Mr. Stiglitz thinks it best that governments take the flows created by resource riches and use them to enrich the land. That it is the cupiditous firms moving in to plunder the land that primarily impoverish its peoples.

        But everyone knows that corporations already perform a valued service in employing and greatly compensating large numbers of people in locating, drilling, extracting and further developing the sought after resources.

        That is how it works in any nation.

        Since when is it a government or national resource when such did nothing to find and procure it? The companies, if they should elicit success after risking immense sums of money in inhospitable regions among hostile peoples, and their employees will doubtless pay large sums in taxes and fees which the government can use to build and supply the needed goods and services.

        There are many nations rich in resources. Some of them well led, others not. Why do some nations fare better in channeling resource riches to their people than others?

        Well, I would think it has something more to do with the rule of law, don't you? Does the proper antidote for a lawless or corrupt government come down to transparency, better pay for the locals, or mitigation of political dysfunction? This is Stiglitz' prescription, and what a woefully comedic one it is.

        The source of the ills of any nation generally stem from the covetous and controlling nature of a favoured few occupying positions of power protected by able mercenaries. And Stiglitz thinks that placing even greater sums in the hands of such people, newly chastened by his potent antidotes, will build the road to prosperity for that nation.

        There is no such thing as an uncorrupt government. There is no such thing as a truly democratic government. And there is generally no such thing as a wise government, whatever that may mean. There are checks and balances. In some nations, they are better than others. In Africa, there are little or none.

        In short, don't blame corporations for the delinquencies, failings, and iniquities of government. But this is the kind of crap we receive from those celebrated Nobel Laureates.

        Gary Marshall

        CommentedHoang-Anh Ho

        Professor Stiglitz did review the role of political dysfunction such as corrupt and undemocratic governments in the resource curse and antidotes for them in the 3rd, 4th, and 5th paragraph.

        He then argued that these antidotes are necessary, not sufficient. Resources-rich countries need a strategy to negotiate with MNCs to gain the biggest price for their resources and use the revenue to industrialize their economies.

        Uncorrupt and democratic governments are not necessarily wise ones. And professor Stiglitz gave them his advices for free. He definitely should be proud of his Nobel prize.

        Is it any wonder that economics is in such sorry state that a critic of Nobel laureate even can read a non-technical article right?

    17. CommentedZsolt Hermann

      The resource curse cannot be cured until we cure the true problem causing it.
      At the moment we view the world as an open playground, where individual people, nations compete against each other, trying to obtain as much treasures, assets as possible for themselves, building up stock piles for themselves way beyond their necessities, exploiting others regardless of what might be happening to them creating the vast inequalities between individuals, nations, or between social layers even within their own countries.
      This all stems from our inherent selfish, subjective nature that only considers its own satisfaction, fulfilment.
      This problem cannot be solved by local, national changes, taxes or policies, as any other problem today we can only turn the curse into blessing by a global approach, first of all changing our general attitude, outlook at life.
      Instead of looking at everything in a self calculating manner, "what is mine/what is yours" we have to consider the whole system, the whole globe as our common, mutual place of existence.
      As our present fragmented, polarized reality is falling apart being unsustainable, we have to start building a new system based on this global, mutually considerate approach.

    18. CommentedRocio L. Barrientos

      I hope with all my heart that in Bolivia we find our "dynamic comparative advantages". This is a very inspiring article to read on our national day, August 6.

    19. CommentedProcyon Mukherjee

      An insightful article that brings to the fore the dichotomy that the resource rich states face in the wake of depletion that is not well balanced through an adjustment that allows the conversion or transformation of the natural capital to human or other forms of productive capital that is not depletive in nature.

      The fundamental problem has been that natural endowments that are not renewable over smaller tenures have to go through a power struggle between the various constituents of the society and determination of a fair share can only be done through implementation of Property Rights, which is never a less contentious matter itself. The second important impediment is the inability of the State to deal with the diversification of investments into the other areas which are less intensive in resource endowments; this diversification includes infrastructure building that would allow forward integration. States with low State capacity in most cases succumb in this journey to provide a balance that results in depression of aggregate consumption and deterioration of general welfare.

      No wonder Partho Dasgupta's study revealed that resource rich States are generally the laggards.

      Procyon Mukherjee