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Resource centre on India's rural distress
 
 

Natural resources: A blessing or a curse for nations?-Joseph E Stiglitz
-The Economic Times

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, healthcare, development and redistribution.

A large literature in economics and political science has developed to explain this 'resource curse', and civil society groups have been established to try to counter it.

Three of the curse's economic ingredients are well known. One, resource-rich countries tend to have strong currencies, which impede other exports. Two, because resource extraction often entails little job creation, unemployment rises. Three, volatile resource prices cause growth to be unstable, aided by international banks that rush in when commodity prices are high and rush out in downturns, reflecting the time-honoured 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 recognise that if they do not reinvest their resource wealth into productive investments, 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 stabilisation fund, careful investment of resource revenues, a ban on borrowing and transparency. But 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 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 minimise what they pay, while the latter need to maximise it. Well-designed, competitive auctions can generate much more revenue than sweetheart deals. Contracts, too, should be transparent and should ensure that if prices soar, 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 foreign companies. 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, emphasise 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 US has imposed a windfall-profits tax.

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 like 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.

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. Meanwhile, 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.

(The author is a professor of economics at Columbia University)