1. The Resource Curse NS4053 Week 7.1

2. Agenda • What is the resource curse and why pay attention to it? • Resource curse: mineral vs. fuel export dependency • Impact of oil exports dependency on development • Is high level of resource export dependency always a curse? • Specifying when resource exports are a problem

3. Mineral wealth dependency

4. What is the resource curse? • Resource export dependency: found in countries with high levels of mineral and/or fuel exports relative to their overall economy. • Resource curse: resource export dependent countries experience poor economic, political and social outcomes compared to countries without this dependency.

5. Why focus on the resource curse? • Associated with autocracy, political instability, poor economic and social outcomes. • Associated with ‘order breaking’ states. • Associated with higher levels of internal conflict and international conflict. • Associated with states challenging prevailing international order or creating national or human security issues that spill over borders.

6. Commodity Prices 1996-2010

9. Special characteristics of oil • National asset • Motor of globalization • Depletability • Boom-bust cycles • Capital intensive • Enclave nature • Exceptional profits

11. Paradox of Plenty • Resource curse appears to be more acute in developing countries where oil exporting is the dominant industry. • Most oil reserves now found in developing world. • Developing states with oil exporting industries experience lower per capita GNP growth than other developing states.

12. Impact of oil exports on development • Dutch disease: oil exports  currency appreciation  other sectors of domestic economy being uncompetitive. • Rentier states: • governments do not need citizens for taxes, citizens do not have ‘skin in the game.’ • Political economy of oil exporters: • Politics of allocating oil rents shapes state and society. • Perverse incentives

13. Socioeconomic impact • Paradoxically, high poverty and income inequality • Lack of diversification in economy • Changes in society • Fewer domestic entrepreneurs and professionals. • Middle class vulnerable to boom/bust cycles. • Few jobs for working class. • High rates of urbanization and immigration.

14. Impact on State • Tendency towards weak states with broad scope: • Lack the constraints that promote efficiency and responsiveness to citizens. • Citizens expect ‘wealthy’ state to have responsibility for a wide range of activities. • Lack incentives to develop state capacity. • Experience loss of fiscal discipline. • Poor record of investing oil wealth. • High levels of corruption.

15. Political results of oil export dependency • Undermines democratization. • Patronage politics rather than representative politics. • Autocratic governments buy political peace: • Welfare spending and police state. • Internal divisions in country may increase • Civil wars and secession movements. • Resources available to fund long wars. • Westernization and failure to meet expectations lead to anti-Western backlash movements.

16. Not always a curse? • Is oil just another mineral or is it special? • Does oil undermine development or encourage it? • When education and technology are indigenously available to develop industry, encourages it. • Do US and Norway cases contradict oil curse? • Correct mix of property rights and institutions. • Poor outcomes not a result of mineral wealth but of government policy. • Sure, but why is government policy frequently poor in countries with high levels of exports of minerals? • If oil curse is correct, what is to be done about it?

17. Resource curse: correlation or causality?

18. Torvik: key explanations • Saving vs. consumption of resource income. • Mineral wealth producers have poor savings records. • Presidentialism vs. parliamentarianism. • Presidential systems tend to concentrate power. • ‘Winner take all’ and fixed terms decrease importance of consensus politics. • Parliamentary systems depend on continuous support, so more consensual approach to oil wealth. • Institutional quality • Only countries in the top 20% (n=87) of institutional quality show benefit from resource income.

19. Torvik: key explanations • Offshore vs. onshore oil: offshore is harder to do, so it drives more indigenous technological development. • Early vs. late industrialization • Early industrializers least affected by resource curse. • Tend to also have high quality institutions, which is why they industrialized first.

20. Possible solutions? Tune in Wednesday