The NY Times cited three reasons why an abundance of resources sometimes resulted in low levels of economic growth. Intuitively, it makes a lot of sense. I’ve heard of these arguments before, most of which cited Japan and Singapore as shiny examples of how resource-poor countries were forced to come up with sustainable and self-reliant industries based on trade. They were forced to come up with business models for their countries via bootstrapping through export-oriented models, versus getting a bail-out by digging for buried treasures underground.
The three reasons cited are the following. One, other sectors get crowded out, since all available human and capital investment would be devoted to the resource industry. I have seen this first hand in Alberta. When money comes so easily with oil, it takes an incredible amount of foresight, discipline, and almost steely political will to purposefully steer investments away from the hand that feeds. Even in democratically elected governments, the mandates are more often than not, populist and one that wants to see a trickling down of dollars to its people. Since a large portion of the population are recent migrants from the outside, they naturally favoured short-term benefits versus long-term development goals.
Secondly, boom and bust cycles of commodity prices wreak havoc on public finances and budgeting. I know from first hand experience what a city that has gone through cycles of bust and boom – Calgary looks like. When oil price is low, the city has little money for infrastructure development. When prices is high, the government stashes away part of the money, while issuing tax refunds to its citizens, and spending can hardly keep up with the onrush of labour. Everything from bus school drivers, to teachers, to medical professionals, are squeezed to the brink.
Of course, this does not have to be the case. Norway has done an admirable job of investing its oil riches in a slush fund for future generations. But Norway is also one of the few developed countries: 1) in possession of resources, 2) found resources after the country has reached considerable political, social, and economic development, 3) has a small and homogenous population that is in agreement when it comes to social and economic directions of the country.
Lastly, corruption and bribery through low taxes makes democratic institutions of a country less robust. Again, this is a problem highly applicable to much of resource-rich Africa. Some argue that dictators are much easier to bribe than democratically elected officials. And even if the government is not outright corrupt, it might be too geopolitically weak to effectively allocate those resource revenues. As for corporations and their social responsibility campaigns and infrastructure investments? Most don’t have the expertise to carry them out.
As a result, the so-called resource curse sees money flowing into the pockets of a few, and the poor sink ever deeper into poverty. Years of reports from the frontline has made it increasingly hard to ignore the relationship between resource development, to instances of relentless social unrest and environmental degradation. And it’s not just big oil, the mining industry is just as culpable.
Prices of most commodities crashed in late 2008, but many are now making a comeback. As bullish as I am on this reversal of fortune, I do watch those charts with some sense of trepidation. Rising oil prices curb peaceful and meaningful development for many places that’s been cursed with such endowment. Robbed of the opportunity to strategically grow its industries through experimentation, and denied the natural evolvement of democratic governance systems, those nations and their leaders will continue to take the deadly, but easy, way out.
picture source: spkc
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