Resource Rich, But Still Poor
BY GOVIN VATSAN
Developing countries cope with myriad challenges: they must foster economic growth, maintain government stability, limit corruption, and tolerate religious conflict while shielding themselves from manipulation by foreign powers. These nations thus exist in perpetually fragile states, vulnerable to even the smallest disturbances. When a country in this category discovers natural resources of vast economic potential, prospects for short-term economic boon is accompanied by a set of popularly termed the “resource curse.”
Poor nations that discover large quantities of natural resources, such as minerals or petroleum, within their borders often find their economic development hindered, rather than driven, by newly abundant extractive commodities. Various situations, from inefficient management to corruption and territorial disputes, can give rise to this “curse.”
All of the recently discovered oil deposits are in the developing world, and many oil-rich countries have experienced problems as they have attempted to extract, refine, and sell their oil. In most cases, these nations do not use their oil reserves to improve the quality of life of its people; this reality, coupled with economic dependence upon a single resource, is characteristic of the resource curse.
A Few Case Studies
Oil generates over 95% of Nigeria’s export revenue. But while oil has boosted Nigeria’s economy dramatically, it has not enabled an improved standard of living for Nigerians. Moreover, militant groups have taken root in the oil rich Niger Delta of the country (largest one is called MEND – Movement for the Emancipation of the Niger Delta), and are constantly disrupting the oil industry from really taking root in Nigeria. Estimates suggest that at least 1,000 people a year die from militant violence. This militant rise is due in part to the large amount of corruption that envelops the Nigerian oil industry. Since Nigeria discovered its oil reserves in the 1950s, it nationalized the industry decades ago, setting up the Nigerian National Petroleum Corporation (NNPC) to regulate its oil production. However, this organization proved shady, and by the early 1980s, over $100 billion had been lost to overseas private accounts. Essentially, through a series of power-grabbing coups and backroom deals, oil money designed to help Nigeria was redirected into the pockets of private citizens and corporations through offshore havens like Switzerland and the Cayman Islands. Nations like Nigeria that are economically dependent on a single, government-controlled product are vulnerability to the corruption that comes with utter lack of accountability. Government unaccountability is closely tied to the rise of authoritarianism and corruption. For example, a recent report stated that, between 2009 and 2011, the Nigerian National Petroleum Company (NNPC) reserved only 356,000 oil barrels a day for Nigerian citizens daily out of a stated 445,000, smuggling away the difference. Similar reports dot the half-century history of Nigerian oil production.
Yet domestic corruption is only half the story. Domestic corruption is ultimately fueled by international corruption. One recent report states that Nigeria could lose between $2 and $5 billion a year due to international bribery networks that result in oil being shipped to the wrong places. And in other nations such as Uganda (and extremely possibly in Nigeria as well), international oil companies have been accused of bribing government officials in order to secure drilling rights (most recently London based Tullow Oil bribed officials for petroleum exploration in Uganda). This is unfortunate because countries like Nigeria and Uganda don’t have their own national oil companies. Therefore they are dependent on foreign corporations (Texaco, Chevron, Shell, etc.), resulting in a symbiotic relationship that can easily turn parasitic if the foreign companies take advantage of the poorer host nations.
Domestic struggles can add to the conflict. For example, Uganda and the Democratic Republic of the Congo have had border wars over national boundaries, especially along lines that have high promises of oil reserves. And international companies drilling along these unstable “fault” lines don’t exactly help the situation either. What’s more is that religion can also play a driving factor. Going back to Nigeria, while MEND is a guerilla organization that claims it wants to protect citizens from being taken advantage of by oil corporations, it also represents a largely Christian part of Nigeria, the Niger Delta (Nigeria is 50% Muslim and 40% Christian), and recently stated it would fight to defend Christianity in Nigeria (likewise, Boko Haram is a jihadist Islamic group in Nigeria). Therefore, it is hard to determine the base reasoning behind militant warfare, since militant groups themselves fight for so many reasons, some logical and some irrational, but all detrimental to the people.
Of course, the Resource Curse is not just limited to Africa. It appears in Venezuela, which has the largest oil reserves in the world. Venezuela has had to deal with massive inflation (99% inflation in 1996) simply because of how dependent the Venezuelan economy is on oil prices, so when oil prices collapsed, so did the economy. Larger nations can get around this because their economy is dependent on so many factors from agriculture, to technology, to engineering, to mining, etc., so any one sector collapsing cannot dismantle the nation as a whole. Small countries don’t have this luxury.
The curse is not limited to oil, either. Sierra Leone relies on mining for economic stability, with minerals being the main export, especially diamonds, which make up about 30% of the country’s export trade. As a result, financiers of the corrupt mining industry played a critical role in starting the Civil War in Sierra Leone.
Ultimately, then, it is clear that resource exploitation can very easily get mixed up in the larger problems of a developing nation, making it extremely hard to determine the root of a specific problem, since all these problems are fundamentally interrelated. All the resource curse is, then, is the difficulties of managing a profit where so many factors might affect it. In large countries with many different sources of income, one natural resource matters much less to the economy. Small countries are dependent on what they have, and cannot easily diversify. But to take advantage of their resources, they must successfully develop infrastructure without ceding ground to international corporations, and they must also ward off corruption at all levels of the government (something that is extremely hard to do for a poor country), maintain socio-cultural-geographical-religious tensions, and understand the volatility of natural resources so that their economy does not fluctuate with the resource itself. No wonder it’s so hard to avoid the Resource Curse.
But some countries have seemingly been able to do so, right?
Yes—to an extent. The United Arab Emirates is a good example. The UAE has been able to stabilize itself through foreign trade, private sector infrastructure, tourism and government regulation. It should also be noted that unlike Nigeria or Uganda, the UAE has little religious or militant conflict and has its own oil processing company, which means it has the time and money to focus on economic growth. However, the UAE is still afflicted by the Resource Curse in that its economy is so oil dependent that it is subject to instability based on oil price volatility.
Ultimately, the Resource Curse isn’t one specific thing. You can define it in as many ways as you want. And in an age of global financial instability, every nation in some way suffers from the resource curse. Some suffer to a higher degree than others, but all are touched in some way by the complex factors that drive and characterize the phenomenon.