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The Resource Curse

I read a really interesting article in Knowledge@Wharton about what is called "The Resource Curse". It's an economic paradox in which countries that have substantial natural resource reserves, particularly in petroleum and natural gas, are actually worse off as a result compared to countries that do not have those reserves. The article primarily focuses on African nations that are major oil exporters or where recent oil reserves have been discovered. The cause of the paradox seems to be several fold (these are my conclusions from the article):
  • Over-valued currency leads to decrease in exports - The export of oil greatly inflates the value of the country's currency, causing any other exported item to be uncompetitive in the global marketplace. Agriculture, manufacturing, or most other industries are at a severe disadvantage compared to neighboring countries. This has a substantial impact on the average, every-day African citizen.

  • Single industry economy leads to atrophy of traditional industries - Because of the booming petroleum business, workers flock to that industry leaving all other industries short on labor. Traditional industries like agriculture are decimated. Combined with over-valued currency, you end up with a single-industry economy where you import everything but energy resources. In the short-run this might seem ok, but all of these oil reserves will eventually run dry at some point. At that time, all of the other industries in the country will have atrophied, leaving the country with few industries to fall back on.

  • Corruption leads to lack of internal investment - Oil companies are more than happy to pay their fair share of taxes and kick-backs. Politicians end up vying for these dollars instead of worrying about their constituencies. With a government essentially funded by the oil companies and not funded by income taxes from the general population, the politicians have little incentive to serve their constituents in the short or long-term. In addition, at the time when oil reserves are discovered in most of these countries, their social and political systems are extremely immature. They don't yet have the checks and balances in place to understand how to deal with opportunity. Instead of providing a nudge to mature quicker, infusing huge amounts of cash into the economy likely hinders maturity because there is, again, little incentive for politicians or citizens to do worry about structural improvements in systems like education or infrastructure.

It's a pretty fascinating paradox when you think about. But I'm sure it's not one without parallels in other areas. For instance, politically, can you take Iraq, a country that has been ruled by a dictator for two or three decades, and within the course of several years turn it into a democracy? And then economically, can you take Russia, a country that has for decades relied on a command or centrally controlled economy, and expect it to change and sustain an open-market economy? (Is it that surprising that they are bringing several industries back under state control?) I think generally speaking there's a lesson here about globalization and the pace of change that economies can really capitalize on. If the basic systems are not in place to balance out an economy and sustain opportunity, any benefits from political reform, economic reform, or new investment will be fleeting.
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