You are on page 1of 12

Jeremy D.

Ruiz
SGS 501: Research Assignment
11.30.2015

The Resource Curse

In most developing countries, people regard the possibility of finding oil as something almost
magical, something which, like winning the lottery, will bring great opportunities. And so it can,
but like winning the lottery it can also bring great problems.
-Michael Alexeev and Robert Conrad, the Elusive Curse of Oil

This paper aims to present the situation of the countries that are rich in natural resources,
specifically crude oil, whose paradox is that they are spoiled of their endowment and thus these
countries remain increasingly poorer as for the citizens standard of living and the countries level
of economic development. I will analyze the link between a countries natural resource
endowment and economic growth. As for the theoretical framework, it will be circumscribed in
the economic development arena and draw upon Max Weber and his theory of bureaucracy with
a dash of Marxism. My goal of this research is to point out the problems about this important
phenomenon and to see what could be done in order to better the present situation. The means of

proving these evidences are different, depending on the problems that the countries are facing
and their level of economic development.
In developmental economics, economists have noticed the emergence of a phenomenon
known as the resource curse. The term resource curse, also known as the paradox of
plenty or oil curse, was first described in 1993 by Richard Auty in his book Sustaining
Development in Mineral Economies: The Resource Curse Thesis. Mr. Auty showed evidence
that countries which contained an abundance of natural resources, such as crude oil, were not
able to develop their economies efficiently, and after exporting an enormous amount of their
natural resources, these countries were left with weaker economic growth than those countries
who received their resources (see table 1 for examples on OPEC countries with slow economic
growth). Meanwhile, resource deprived developing countries in Southeast Asia, China and India
had a robust growth in their manufacturing sector and increased the level of their economic
development and gross domestic product (GDP) per capital for the citizens of these countries
(table 2). For developing economies, this is such an influential paradox that the more crude oil
that is extracted from the state, the lower is its economic growth and more perilous its state
institutions.
For developed nations, the usual explanation of the resource curse is an economic effect
known as the Dutch disease. The term is named after the hardships that befell the Netherlands
after the country found oil and gas in the North Sea in the late 1960s. The ingredients for the
Dutch disease are as follow:
1. When a country strikes, produces and exports its newly found natural resource, a
sudden inflow of dollar denominated revenue (can also be Euro or Pound) often leads
to a sharp appreciation in the domestic currency.

2. The appreciation in the domestic currency tends to make non-natural resource sectors
like agriculture and manufacturing less competitive on world markets, thus leaving
only one sector to dominate the economy, a sector like oil and gas.
3. Extraction starts to be performed with less labor and cost. Investment has no interest
in developing other sectors of the domestic economy and as a result, unemployment
grows.
We have learned from David Ricardo that a country should specialize in the industries in which it
has a comparative advantage; so a country rich in a natural resource such as oil would be better
off specializing in the extraction of that resource and then trade with other nations for what it is
lacking. However, this does not hold true because the price volatility that natural resources
generate can decrease competitive advantage when prices collapse and leave the domestic
economy less diversified in other industries to soften the blow. This leads to slower economic
growth in the resource rich country and was rampant in the Dutch economy in the 1970s to
1980s.
For developing nations that find an abundance of natural resources in their backyards, it
is suggested that the resource curse leads to phenomenon X which causes slower economic
growth. This is because each developing country is at varying stages of its economic
development and no one cause can be attributed to the resource curse; however, a few causes of
phenomenon X have been identified and tracked by global actors such as the International
Monetary Fund and World Bank Group. Causes of the resource curse for developing nations are
non-diversified economies, political strife, weak institutions, and civil conflict.
Because developing nations do not have the capital or technology to extract a natural
resource like oil from its land, they must rely on international oil and gas corporations such as

ExxonMobil and Chevron to extract the oil and gas resources for them. Governments make
contracts with these international oil and gas corporations with the contracts generally giving the
corporations a 12 25% royalty interest, which means these corporations will receive 12-25% of
the profits that are extracted for the life of the investment. The government will receive the 88
75% of the profits and are able to use the money as they see fit. Thus, during the initial period of
extraction, governments receive a windfall of revenue from oil producers.
In many economies that are not dependent on natural resources, governments will tax
their population to fund the countries endeavors. The population who is taxed will demand a
more efficient and responsive government in return, this bargain establishes a political
relationship between the government and the general population. In countries whose economies
are dominated by natural resources, however, governments dont need to tax their citizens
because they have a guaranteed source of income from natural resources and because the
countrys citizens arent being taxed, they have less incentive to be watchful with how their
government spends its money. A resource rich countrys government and its elites may adopt a
dismissive or even hostile attitude towards its population because the country no longer has to
rely on the population for tax revenues, it can simply sustain its self from oil revenues. The result
is often misallocation of public spending, slower economic growth, and even slower poverty
reduction in many resource rich countries such as Cameroon and Nigeria.
It is believed that the resource curse operates because governments do not have to
negotiate with their populations to collect taxes which helps undermine representation of good
governance. Thus petroleum rich nations need exceptionally strong governments and institutions
to cope with the volume and volatility of their revenues. Countries with good institutions are
supposed to benefit from the abundance of natural resources, while the countries with bad

institutions fall victim to the natural resource curse. It is a fact that countries with weak
institutions and governments would have been poor in the absence of substantial natural resource
endowment, however, they reap relatively large benefits from their natural resource wealth;
Kuwait without oil would most likely have been a poor nation. Whereas, countries with strong
institutions and governance would have been rich anyway and tend to benefit less from the
positive effect of natural resources, Norway would have done well with or without oil.
In order to help make institutions/ governments stronger and possibly avoid the resource
curse, countries can start by implementing Max Webers theory of bureaucracy. Max Weber
believed that the ideal form of administration, especially in the government sector, was
bureaucracy. Weber believed that a carefully managed bureaucratic administration can lead to
effective decision making, optimum use of resources and successful accomplishment of
organizational goals. Weber proposed a few principles that should be present in a bureaucratic
system. Resource rich countries can draw upon Max Webers theory of bureaucracy and apply
the following principles towards their institutions and governments:
1. Form a hierarchical structure: For example institutions that extract, produce and export
natural resources should be directly supervised and controlled by the national government
in order to hold institutions accountable for their actions.
2. Specification of laws and management by rules: Higher ranks, governments, should
create specific rules and these rules should be applied consistently by all the lower offices
and levels, i.g. institutions. Rules should be clear and concise so that consistency can be
applied throughout the countrys economy.
3. Officials should be selected based on qualifications: Officials should be selected to run
the government and institutions based on merits and technical qualifications in order to
make the system run efficiently.

4. Division of Labor: Every employee in the organization has well defined power and
authority based upon employees specialization and expertise. This helps to regulate
duties throughout the system.
5. Impersonal: Max Weber wanted rules and controls to be applied uniformly to avoid any
involvement of favoritism with individual workers.
Once strong institutions and governments have been established, they need to get out of
their populations way and set up an environment for growth. Institutions and governments can
create growth within their economies by encouraging innovation, implementing smaller taxes
and having a smaller government. Institutions can show that they are strong by showing restraint
and reducing the size of oil revenues that their states rely on. By leaving the oil in the ground, it
will be like a savings account and force the nation to develop other economic sectors like
manufacturing to help fund the government and diversify the economy.

Because oil production tends to happen in enclaves, the spillover effects on the local
economy can be negligible. The resource extraction industry is very capital intensive, however, it
is not labor intensive. For example, Oil accounts for 90% of Saudi Arabias exports and revenue,
yet less than 2% of the active workforce is employed in the petroleum industry. Because of
resource concentrations, the resulting wealth passes through only a few hands and thus leads to
increased income inequality amongst the population of a country. Thus governments and
institutions need to provide incentives and programs to increase the private sector demand for
domestic labor. To accomplish this, greater investments need to be made in education and
training for the domestic work force geared towards growing the service based private sector
industries. Governments and institutions should aim at providing education and training
programs in sectors such as advanced technology, engineering, construction and finance. These

industries would especially benefit from investments to create a highly skilled domestic labor
force.
The last major possibility of the resource curse that I would like to explore is the possible
consequence of civil unrest and even civil war. An analysis by Paul Collier of Oxford University
suggests that if a third or more of a countries GDP comes from the export of primary
commodities, the likelihood of conflict was 22%; similar countries that did not export
commodities had a 1% chance of conflict. This is because relying on natural resources
exacerbates internal division, often between the government which controls the income and the
poor who usually do not see the benefit of such resources. As a result, civil unrest can break out
which can currently be observed in the countries of Brazil and Venezuela. In these two countries,
the working class and poor are protesting against their governments inability to properly
distribute the countries oil wealth toward social programs and economic development.
Economists and world leaders such as President Obama have helped fight the resource curse
for developing countries by suggesting a number of solutions. President Obama signed the 2010
Dodd-Frank Act that requires U.S. oil and gas companies to report the revenue they extract in
foreign countries in their financial statements so that citizens of those countries can hold their
governments accountable if any revenue goes missing. Another solution is to invest the proceeds
from the extracted resources in an offshore pension fund for the future. This would not only help
spread the wealth over several generations, but also help avoid over appreciation of the domestic
currency. Some countries such as Norway and the United States (State of Alaska) use these
resource pension funds to disburse some oil revenues directly to every household, thereby
ensuring that every citizen sees tangible benefits from their nations endowment of natural
resources. In fact, The Oil Fund of Norway is so well managed that its value as of 2014 was

$857.1 billion and holds one percent of the global equity market. In Karl Marxs view, this form
of the capitalist model would pay workers the full value of the commodities that their countries
produce. The surplus value (the gap between the value a worker produces and the hourly wage
they are paid) that capitalism creates would be one step closer to being closed.
Developmental economics has described the theory of the resource curse in which
developing nations with a rich endowment of natural resources have seen weaker institutions and
governments, fewer benefits for the working class, more frequent civil unrest, and more volatile
economic growth than the rest of the developed world. This paper has documented that one of
the main reasons for the resource curse is that there are weak institutions and governments that
handle the revenues from the exploitation of natural resources such as crude oil. Thus,
governments in developing nations can use Max Webers theory of bureaucracy as a framework
to strengthen themselves and their institutions. As noted, what matters in avoiding the resource
curse is not natural resource availability but rather the way that resources are managed and
invested for the benefit of the population. If the dilemma of returning the income from the
production and exportation of a countries natural resources back to its citizens is managed
correctly the endowment of natural resources to a country can be a blessing rather than a curse.

Table 1: Resource abundant countries like Iran, Venezuela, Indonesia, and Algeria had a flat GDP
since they began exporting their natural resource, crude oil.

Table 2: Resource deprived countries have a higher GDP than resource abundant countries

Works Cited:
Hend Al-Sheikh and S. Nuri Erbas. The Oil Curse and Labor Markets: The Case of Saudi
Arabia. Economic Research Forum, 2012 Working Paper No. 697. Web. 22 November 2015.
Michael Alexeev and Robert Conrad. The Elusive Curse of Oil The review of Economics and
Statistics: Volume 91, Issue 3, August 2009. Web. 21 November 2015.
Yu-Ming Liou and Paul Musgrave. Refining the Oil Curse: Country-Level Evidence from
Exogenous Variations in Resource Income. Comparative Political Studies Volume 13, Issue 3:
September 2014. Web. 22 November 2015.
Ken Conca. Complex Landscapes and Oil Curse Research. Global Environmental Politics
Volume 13, Issue 3: August 2013. Web 23 November 2015.
Oil Curse or Oil Blessing
Foreign Policy, 12/2011, Issue 190
The Paradox of Plenty
The Economist
12.20.2005
http://www.economist.com/node/5323394
Max Weber
https://en.wikipedia.org/wiki/Max_Weber

Charles Lemert
Social Theory, fifth edition
Copyright 2013
P.83-86