Natural resources are the life-blood support of the world economy. A world without oil, gas, metals, crystals, and other elements that can be found in nature is unconceivable. Currently, natural resources seem to serve three different purposes. First, metals, crystals, stones and other material have functional properties that are necessary for construction and manufacturing purposes (e.g. houses, electronic devices, etc.). Second, oil, gas, coal, and uranium allow us to generate (electrical) energy which basically keeps societies running. Third, some natural resources, like diamonds or emeralds, satisfy “higher” human needs like prestige, social standing and aesthetics. However, the majority of natural resources have one thing in common, namely they are scarce. By definition, the allocation of scarce goods and commodities leads us into the world of economy which is composed of supply and demand.
Unfortunately, natural resources are unequally distributed world-wide and therefore create dependencies between those states that legally possess access to extraction deposits and those countries that demand resources for manufacturing and consumption. Hence, trade has incredible important implications for both supplying states and buyers. In this blog post, let us focus on the effects of natural resource trade on the supply side. In fact, persistent observers have noticed that there are two types of states whose economies are heavily dependent on natural resources exports. On the one hand, some suppliers are able to harness the cash inflow to create stable institutions, raise the living standard in their countries and allocate investments to diversify their domestic economies. The prime examples are the Gulf states, but countries like Norway or Botswana should not be forgotten.
On the other hand however, the common notion is that a large faction of states is unable to manage the income on behalf of its people. Many natural resource rich countries in Africa, South America and Asia mismanage the cash inflow and develop states with weak institutions, high corruption rates, poor living standards and weak manufacturing economies. Researchers termed this relationship the resource curse. The underlying notion is that the higher a country is dependent on natural resources, the higher are the chances that the countries suffers from lower living standards and higher corruption due to resource trade related effects.
Let us see first if we can find evidence when someone invokes the resource curse as a factor contributing to overall poverty (not speaking about poor governance). Below in Figure 1, you can see a plot that shows natural resource dependence of economies1 on the x – axis and the score on the human development index2 (HDI) on the y – axis, both respectively for 2014.3 Before we turn to the description, it has to be clear that I do not imply causation yet. If I have had intended to do so, then I would have lagged the resource dependence variable for one or two years since effects are slowly unfolding over time and not instantly. I just want to use the most up-to-date data, so that everyone can see whether the resource course can be visually determined.
At a first glance, the plot supports what we commonly know about resource dependence and living standards. European countries (blue) score very high on the HDI index, while in Sub-Saharan Africa (green) only the two best performing countries (Mauritius and Botswana) surpass the poorest European country (Moldova). The majority of countries in the Americas (black) and Asia (red) are somewhat in between those blocs. The overall living standard of the MENA (yellow) countries is very high, in particular for the Gulf states.
Regarding the dependence on resources, one can observe that Europe barely relies on natural resource exports, with the notable exceptions of Ukraine, Norway and Russia. Many Sub-Saharan countries, as well as states in the MENA region and Central Asian countries (except Kyrgyz Republic) rely strongly ( >20%) on natural resource exports for their GDP.
Unfortunately, this graph does not truly support our notion of the famous resource curse. It is misleading to think that Europe performs well because (!) it has no resources, in contrast to Sub Saharan Africa that depends much on natural resource exports. This graph explicitly shows that there is a large group of states that is able to harness natural resources in order to create higher living standards. However, what it does not show is that on large scale higher dependence on natural resources automatically translates into harmful effects on living standards. I made various bivariate regression analyses for each region (as well as for the general dataset) and could not find any significant and substantial effect.
Of course, some will raise their hands now and say: “what about alternative explanations?” and “where are my control variables!” And truly, very likely, there is something masking the effect of the resource curse. But what the graph tells us is that resource curse seems to be conditional to regions. For any reason, there is/are some contributing factor(s) that somehow keep in particular Sub-Saharan Africa as a whole away from its potential to perform as its Asian and MENA counterparts. Unfortunately, such a list of possible explanations (there are plenty proposed) would require me to dedicate one blog post for each one separately and hence cannot be covered here.
Furthermore, I have not explained yet what kind of the various proposed mechanisms are behind the resource curse. For instance, one of them is the famous Dutch disease which in a nutshell postulates that natural resource exports appreciate one’s own currency above its “normal” value which in turn makes it harder for domestic manufacturing industries to export their products with the effect that wealth creation is difficult for a potential middle class. However, such a mechanism is thought to be generally applicable and not just to Sub-Saharan Africa! Therefore, there is much work to be done in order to decipher this mystery (and in fact, some researchers are already doing just that). In further blog entries, I will show the common wisdom held by the professional community within this topic and explicate in detail how natural resources correlate to governance, political violence, civil wars, insurgencies, and power politics.
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1Source: World Bank
2Source: United Nations Development Programme
3Countries for which there was no data available in 2014 receive values for 2013. This pertains to Angola, Cuba, Malta, and Yemen. States below a population of 500.000 are excluded from the analysis because microstates often follow a different economic logic than larger economies