Resource Curse or a Leadership Crisis?
Updated: Jan 29, 2022
Several countries endowed with natural resources are said to have a resource curse that is why many of their citizens live in abject poverty. But this curse is not a natural phenomenon neither is it automatic, at best it is a myth. Is it really a resource curse when the leadership of a country deliberately abandon all other industries and focus on a single industry such as mining or oil production? Is it really a curse when the benefits are not accruing to the population because their corrupt leaders continue to siphon funds into their own pockets? It seems there is more of a leadership and institutional crisis than the so called "resource curse".
Africa is home to 12% of the world’s oil reserves, 42% of its gold, 80-90% of the chromium and platinum, 60% arable land and vast timber resources (Africa Union, 2021). However, these resources have not yielded sustainable growth and development for most countries in Africa due to a lack of visionary, ethical leadership which has led to political instability and extractive institutions which facilitate corruption.
When a country has a resource that attracts foreign buyers such that there is a huge inflow of foreign currency, the real exchange rate appreciates making domestic goods costly on the global market thereby reducing their demand and stifling export-led growth. The less competitive domestic production and export of the manufacturing sector will lead to an investment decline in the sector. This will lead to low levels of economic growth as there is one booming sector in the economy and may in the long run lead to high unemployment due to the increase in imports. The Dutch Disease thus results in a distortion of the economy.
The Dutch Disease is however mainly a problem when a country focuses on extraction and does not diversify. While natural resources provide a stepping stone for growth relying on commodities especially when sold in raw state will not lead to development. The Dutch Disease can be cured if countries increase beneficiation and revenues from natural resources are used for the structural transformation of the economy; moving capital and labour from low to higher productivity sectors and investing in infrastructure for industrialization.
Institutions to a large extent explain why the experience of countries differ as to whether their natural resources are a curse or boon. When sound institutions are in place challenges of socially inefficient rent extraction, corruption and instability are reduced allowing for the country to experience growth from its resources and also improve the standard of living of its citizens.
When a country is endowed with a profitable natural resource it is in the absence of strict institutional constraints susceptible to power struggles as natural resources can be easily appropriated by the governing elite than other sources of wealth. The more appropriable the resources, the more resource rents government elites gain when in power and this high return of election thus provides an incentive for engineering instability through civil wars or coup d’états. This makes it impossible for real economic activity to take place thereby stifling growth.
Natural resources can lead to extractive institutions which facilitate corruption as revenue is not accounted for adequately. Nigeria despite its oil endowment and arable land has been faced with high poverty rates and low average incomes with 40 percent of its population living on less than $1 a day. On the other hand, we have Botswana whose diamonds account for approximately 40 percent of the country’s output, which at independence had a per capita GDP of $70, ranking among the poorest but is now among upper middle-income countries due to its producer friendly institutions.
What resource rich countries therefore need are ethical leaders, sound institutions and fit-for-purpose policies. The African Union has developed a consolidated continental strategy to increase the Continent’s bargaining power through integration, encouraging interconnected and competitive product value chains based on local commodities. Implementation of this strategy to harness African resources for the benefit of the continent will effectively increase development.