• Are Natural Resources a Curse or a Blessing?

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    Some countries benefit greatly from their resource wealth while others do not. An increasing number of studies suggest that good institutions and policies are decisive in determining whether natural resources are a curse or a blessing.

    The presence of natural resources, including mineral wealth, has been touted as both a blessing and a curse in economic research. The answer to this paradox is of tremendous importance to world’s poorest nations, since natural resources may be the greatest asset that they have for economic growth and poverty reduction.[1]


    Why resources might slow growth

    Researchers have suggested that an abundance of natural resource wealth has the potential to slow economic growth, a theory known as the “resource curse.”

    The main economic effects are also sometimes referred to as “Dutch disease.” This occurs when resource exports grow and the exporting country’s exchange rate goes up (i.e., the currency appreciates). As a result, other sectors that depend on exports, such as manufacturing, may shrink, leading to lower economic growth.[2] Also, as workers and investment shift to the resource sector, that move can drive up overall prices and dampen other sectors important for growth. [3]

    Researchers have also looked at whether the exploitation of natural resources can slow growth indirectly by weakening governance and economic and political institutions. Institutions can be thought of as the formal and informal rules that shape economic and political actions such as laws, the political system, tax systems, and property rights.[4] High revenues from natural resources can support corrupt and inefficient governments, making them less accountable and slower to reform, leading to increased corruption and suppression of political rights.[2] Destabilized governance and weakened economic and political institutions in turn lead to lower economic growth. [2]


    The role of institutions

    Despite decades of study, there is no consensus among researchers about whether resources benefit or harm economic growth. Research findings typically depend on the type of natural resources considered, how they are measured, the time period reviewed, and the type of analysis used.[2, 5]

    While there is no consensus on the impact of natural resources on economic growth, there is growing evidence that the quality of institutions is important.[2, 6] Nations with quality economic institutions are better able to manage their resource revenue and turn it into positive economic growth. Quality institutions, such as strong rule of law, also lead to transparency and accountability, reducing incentives for corruption.


    Institutional Quality Matters

    Over the past decade, a number of studies have supported the determining role that institutions play in turning resources into a blessing. For example, Boschini et al. (2007) found that the effect of natural resources on economic growth depended on the type of resources and quality of institutions, and that good institutions could turn resources into a blessing.[7] Similarly, Mehlum et. al. (2006) determined that institutions were decisive in whether or not resources are a curse.[6] Brunnschweiler and Bulte (2008) used a complex model that distinguished between resource dependence and resource abundance. They found that improved institutional quality can decrease dependence on natural resources; and that an abundance of resources benefits both economic development and institutions.[8]


    Strengthening Institutions

    Béland and Tiagi (2009) also found that institutions matter for economic growth and that strong institutions can turn a resource curse into a blessing.[9] They used an index that measures economic freedom and found that resources can positively influence a nation even with relatively low levels of institutional quality, with 22 of 26 countries analyzed scoring high enough to benefit from mining. They recommended that institutions be strengthened in developing countries to improve the returns from exporting metals and ores by focusing on: 1) improving the rule of law (to protect property rights, encourage investment and reduce corruption); 2) removing trade barriers (to open smaller markets to trade and access larger markets); and 3) simplifying business regulations (to encourage investment and entrepreneurship).


    Case Study: Improving Institutions through Transparency: Extractive Industries Transparency Initiative (EITI)

    Proponents of transparency argue that government revenue received from mining and other extractive resources should be disclosed publicly. Transparency is promoted as a way to improve institutions by reducing opportunities for government corruption and allowing citizens to hold their governments accountable for sound management of resources and their revenues.[10]

    The international community launched the Extractive Industries Transparency Initiative (EITI) in 2003 in order to encourage transparency in government revenues received from oil, gas and mining. EITI has two pillars. The first is the full publication and verification of company payments and government revenues from oil, gas and mining. The second is to create in-country multi-stakeholder groups that discuss ways to manage the wealth being generated from the extractive industry.[11]

    Participation in EITI is voluntary, however, companies operating in EITI-compliant countries must disclose payments made to government.[12] EITI represents a coalition of participating countries, international organizations, companies, institutional investors and NGOs. Canada is one of the developed countries supporting EITI and Canadian mining companies and institutional investors also participate.

    It is too early to tell whether EITI has improved institutions or government management of resource revenues, although some early successes have been achieved in identifying government corruption and failures to report revenues.[10, 13] Challenges also remain with the process, including a lack of transparency for sub-national flows which limits the ability of mining regions to know if any taxes or royalties have been returned to the regional level.[13] Institutions also develop in specific contexts and may be linked, casting doubt on whether revenue transparency alone can improve institutional quality.[14] EITI should therefore not be regarded as a silver bullet for ending corruption or for effective management of revenues, but rather as an initial step towards improved institutional quality.[10, 13]



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    References



    1Collier, P., Cursed by Nature? The Politics of Natural Assets, in The Plundered Planet: Why We Must-and How We Can-Manage Nature for Global Prosperity2010, Oxford University Press: New York. p. 37-62.

    2Karabegović, A., Institutions, Economic Growth, and the "Curse" of Natural Resources, in Studies in Mining Policy, F. McMahon, Editor 2009, Fraser Institute.

    3Van der Ploeg, F., Natural Resources: Curse or Blessing? Journal of Economic Literature, 2011. 49(2): p. 366-420.

    4North, D.C., Institutions. The Journal of Economic Perspectives, 1991. 5(1): p. 97-112.

    5Lederman, D. and W.F. Maloney, In Search of the Missing Resource Curse, in Policy Research Working Paper 4766 2008, The World Bank.

    6Mehlum, H., K. Moene, and R. Torvik, Institutions and the Resource Curse. The Economic Journal, 2006. 116(508): p. 1-20.

    7Boschini, A.D., J. Pettersson, and J. Roine, Resource Curse or Not: A Question of Appropriability. Scandinavian Journal of Economics, 2007. 109(3): p. 593-617.

    8Brunnschweiler, C.N. and E.H. Bulte, The resource curse revisited and revised: A tale of paradoxes and red herrings. Journal of Environmental Economics and Management, 2008. 55(3): p. 248-264.

    9Béland, L.-P. and R. Tiagi, Economic Freedom and the “Resource Curse” An Empirical Analysis, in Studies in Mining Policy, F. McMahon, Editor 2009, Fraser Institute.

    10Haufler, V., Disclosure as Governance: The Extractive Industries Transparency Initiative and Resource Management in the Developing World. Global Environmental Politics, 2010. 10(3): p. 53-73.

    11Nigam, S. Is the EITI a vehicle for corporate social responsibility? Canadian Lawyer, 2011.

    12Extractive Industries Transparency Initiative [EITI], EITI Rules, 2011 Edition including the Validation Guide, 2011, EITI International Secretariat Oslo.

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