The on-going debate on natural resources and development

Erwin Bulte , Christa Brunnschweiler 28 May 2012

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Prices of natural resource commodities have increased a lot in recent years. While the current commodity price index is not as high as it was during its peak in the spring of 2008, commodity prices have increased by 10% over the past 6 months, by 56% over the past 5 years, and by no less than 249% over the past 10 years. For certain specific commodities, price hikes are even larger. In 2002 a single DVD recorder cost as much as a hundred tons of iron ore. The current exchange rate is about one ton of iron ore per DVD recorder.

Several factors explain the reversal of fortune for miners –– conditions have been favourable both on the supply side (e.g., market power in the mining industry) and on the demand side (e.g., economic development in India and China). An important question concerns the degree to which these economic gains trickle down beyond the shareholders of international mining companies. Do high commodity prices translate into enhanced prospects for peaceful economic development for poor resource-exporting countries? This turns out to be a contested issue.

The so-called resource curse

The so-called resource-curse hypothesis suggests that resource booms are bad for development. Proponents argue that countries richly endowed with natural resources tend to have slower economic growth and tend to see more armed conflict than resource-poor ones. The curse theory emerged in the 1990s with pioneering contributions by Sachs & Warner (1995) and Collier & Hoeffler (1998), and has been debated by economists, political scientists and policymakers ever since. Dutch Disease was initially suggested as a culprit for slow growth, while rent-seeking behaviour by greedy rebel factions seemed to offer a plausible explanation for the link between resources and conflict. Later, the focus shifted to weak institutions as the favourite causal channel for both ills, brought on by the supposedly nefarious effects of resource wealth up for grabs. According to one theory, resource wealth weakens institutions through a so-called rentier effect, i.e. the easy money provided by resource rents and the independence from tax revenues distances the ruling elite from the rest of the population, and enables autocratic regimes to hold a firm grip on power. Especially point resources such as oil – clustered in space so that grabbing and controlling are relatively easy – are regularly implicated as problematic for development and stability.

Because of its attractive paradoxical nature –– something good turning into something bad –– the resource curse regularly finds its way into the popular press (see for example a recent article in The Economist (2012) titled “The oil barons have a ball”). The hypothesis seems blessed by an extraordinary longevity, defying not only expectations, but also gradually increasing evidence to the contrary. One important hurdle facing empirical work linking resources to development and conflict has been, and continues to be, the lack of exogenous variation in measures of natural resource wealth. This makes it hard to convincingly determine the causal relationship. Early publications relied mainly on measures of resource dependence, such as the ratio between primary exports and GDP, as a proxy of resource abundance. However, dependence is only a very rough proxy for abundance. Worse, dependence is arguably an endogenous variable in most of the curse models. The anticipation of conflict lowers investment and income, and might make a country more dependent on resource exports as the only remaining economic activity. Similarly, dependence may be the outcome of an ill-conceived economic development strategy, instead of the root cause of slow growth.

A classical chicken-and-egg story is the result. The fact that resource dependence is correlated with the onset or incidence of conflict and slow economic growth does not imply that the former causes the latter. Similarly, a negative correlation between resource dependence and institutional quality (a key determinant of peace and economic performance) does not imply that resource dependence invites institutional erosion. Countries with bad institutions may simply fail to attract investment in manufacturing or service sectors, and so remain dependent on primary exports. Recent research has criticised the naïve econometrics underpinning the early curse studies and suggested alternative measures of resource wealth based on estimates of economic values of resources (e.g., Brunnschweiler & Bulte 2008, 2009). These and other studies argue that resources could be a blessing for both growth and peace, and they have consequently re-invigorated the debate.

In fact, since the mid-1990s most African economies, with the notable exception of the Democratic Republic of Congo, have performed remarkably well. This applies to both mineral exporters and non-mineral exporters (Pinkovskiy and Sala-i-Martin 2010), so again there is no evidence of a resource curse. Income and welfare levels have increased, poverty rates are falling, and inequality is decreasing. While it is evident to observers that resource discoveries have enhanced corruption and inequality in some countries, the aggregate pattern holds promise for the future.

Blood diamonds?

In this column we focus on the link between resources and conflict in more detail, but similar points apply to the theme of resources and economic growth. Cross-country evidence on resources and conflict is continuously being enriched with case-study evidence. For example, Ross (2004) documents very little evidence that links resources to the onset of violence. Even poster-child cases of the curse hypothesis provide a nuanced picture when granted more than a cursory glance at the data. Consider Sierra Leone and its abundance of 'blood diamonds'. Last month, the International Criminal Court via the Special Court for Sierra Leone convicted former Liberian President, Charles Taylor, for aiding and abetting war atrocities committed in the Sierra Leonean war. It is well-known that diamonds played a role in this process, and thus may have aggravated and prolonged the bloodshed. However, diamonds did not play a large role in the onset of violence – they did not ignite the fighting. This is evident from testimonies of former rebels, and from simple comparisons of locations where the fighting took place in the early days of the conflict and the (known) locations of where diamonds could be found. Rather, it appears as if processes of marginalisation, exclusion and exploitation of social groups played a key role (Mokuwa et al. 2011). In other words, grievances and social injustice mattered more than the presence of diamonds. We conjecture that, to promote sustainable peace, addressing such grievances through institutional reform will matter more than regulating international trade in diamonds.

Nevertheless, the debate on 'classical' manifestations of the resource curse continues. In addition, parallel theories implicating other geophysical factors have cropped up. Most recently, a special issue of the Journal of Peace Research (January 2012) was dedicated to the question of whether variations in weather patterns, perhaps induced by a changing global climate, could be driving conflict.

The underlying concern is that resource scarcity, rather than abundance, might invite a scramble over resources. Again, the evidence seems mixed and far from robust – temperature and rainfall do not seem to matter much for the onset of violence. While agronomic and technical fixes (heat-resistant crops, more sophisticated irrigation systems) might be developed for changing climatic conditions, it appears as if the priority of the international community should be elsewhere.

Policy conclusions

To promote sustainable and peaceful development across Africa and elsewhere, institutional reform should take centre stage – policymaking should be fairer, more transparent, and more inclusive. Unfortunately, our understanding of institutional reform is not nearly as well developed as our understanding of agronomy and land-use management in the tropics. Development researchers and practitioners should strive to obtain a better comprehension of the dynamics of institutions. This will be a serious challenge.

References

Brunnschweiler, C.N. and E.H. Bulte, 2008. The Resource Curse Revisited and Revised: A Tale of Paradoxes and Red Herrings. Journal of Environmental Economics and Management 55: 248-264

Brunnschweiler, C. and E.H. Bulte, 2009. Natural Resources and Violent Conflict: Resource Abundance, Dependence and the Onset of Civil Wars. Oxford Economic Papers 61: 651-674

Collier, P. and A. Hoeffler, 1998. On Economic Causes of Civil War. Oxford Economic Papers 50, 563-73

Mokuwa, E,.M. Voors, E. Bulte and P. Richards, 2011. "Peasant Grievance and Insurgency in Sierra Leone: Judicial Serfdom as a Driver of Conflict", African Affairs 110: 339-366

Pinkovskiy, M. and X. Sala-i-Martin, 2010. "African poverty is falling… much faster than you think!" Massachusetts Institute of Technology, Discussion Paper

Ross, M.L. 2004. What do we Really Know about Natural Resources and Civil War? Journal of Peace Research 41, 337-56.

Sachs, J.D and A. Warner, 1995. Natural Resource Abundance and Economic Growth, NBER Working Paper n. 5398.

The Economist (2012) “The oil barons have a ball”, 18 February.

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Topics:  Development Energy

Tags:  natural resources, resource curse, institutions and growth