From Resource Curse to Blessing

http://www.nationofchange.org/print/23456

By Joseph E. Stiglitz

New discoveries of natural resources in several African countries –
including Ghana, Uganda, Tanzania, and Mozambique – raise an important
question: Will these windfalls be a blessing that brings prosperity and
hope, or a political and economic curse, as has been the case in so many
countries?

On average, resource-rich countries have done even more poorly than
countries without resources. They have grown more slowly, and with greater
inequality – just the opposite of what one would expect. After all, taxing
natural resources at high rates will not cause them to disappear, which
means that countries whose major source of revenue is natural resources can
use them to finance education, health care, development, and redistribution.

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A large literature in economics and political science has developed to
explain this “resource curse,”and civil-society groups (such as Revenue
Watch and the Extractive Industries Transparency Initiative) have been
established to try to counter it. Three of the curse’s economic ingredients
are well known:

Resource-rich countries tend to have strong currencies, which impede other
exports;

Because resource extraction often entails little job creation, unemployment
rises;

Volatile resource prices cause growth to be unstable, aided by
international banks that rush in when commodity prices are high and rush
out in the downturns (reflecting the time-honored principle that bankers
lend only to those who do not need their money).



Moreover, resource-rich countries often do not pursue sustainable growth
strategies. They fail to recognize that if they do not reinvest their
resource wealth into productive investments above ground, they are actually
becoming poorer. Political dysfunction exacerbates the problem, as conflict
over access to resource rents gives rise to corrupt and undemocratic
governments.


There are well known antidotes to each of these problems: a low exchange
rate, a stabilization fund, careful investment of resource revenues
(including in the country’s people), a ban on borrowing, and transparency
(so citizens can at least see the money coming in and going out). But there
is a growing consensus that these measures, while necessary, are
insufficient. Newly enriched countries need to take several more steps in
order to increase the likelihood of a “resource blessing.”

First, these countries must do more to ensure that their citizens get the
full value of the resources. There is an unavoidable conflict of interest
between (usually foreign) natural-resource companies and host countries:
the former want to minimize what they pay, while the latter need to
maximize it. Well designed, competitive, transparent auctions can generate
much more revenue than sweetheart deals. Contracts, too, should be
transparent, and should ensure that if prices soar – as they have
repeatedly – the windfall gain does not go only to the company.

Unfortunately, many countries have already signed bad contracts that give a
disproportionate share of the resources’ value to private foreign
companies. But there is a simple answer: renegotiate; if that is
impossible, impose a windfall-profit tax.

All over the world, countries have been doing this. Of course,
natural-resource companies will push back, emphasize the sanctity of
contracts, and threaten to leave. But the outcome is typically otherwise. A
fair renegotiation can be the basis of a better long-term relationship.

Botswana's renegotiations of such contracts laid the foundations of its
remarkable growth for the last four decades. Moreover, it is not only
developing countries, such as Bolivia and Venezuela, that renegotiate;
developed countries like Israel and Australia have done so as well. Even
the United States has imposed a windfall-profits tax.

Equally important, the money gained through natural resources must be used
to promote development. The old colonial powers regarded Africa simply as a
place from which to extract resources. Some of the new purchasers have a
similar attitude.

Infrastructure (roads, railroads, and ports) has been built with one goal
in mind: getting the resources out of the country at as low a price as
possible, with no effort to process the resources in the country, let alone
to develop local industries based on them.

Real development requires exploring all possible linkages: training local
workers, developing small and medium-size enterprises to provide inputs for
mining operations and oil and gas companies, domestic processing, and
integrating the natural resources into the country’s economic structure. Of
course, today, these countries may not have a comparative advantage in many
of these activities, and some will argue that countries should stick to
their strengths. From this perspective, these countries’ comparative
advantage is having other countries exploit their resources.

That is wrong. What matters is *dynamic* comparative advantage, or
comparative advantage in the long run, which can be shaped. Forty years
ago, South Korea had a comparative advantage in growing rice. Had it stuck
to that strength, it would not be the industrial giant that it is today. It
might be the world’s most efficient rice grower, but it would still be poor.

Companies will tell Ghana, Uganda, Tanzania, and Mozambique to act quickly,
but there is good reason for them to move more deliberately. The resources
will not disappear, and commodity prices have been rising. In the meantime,
these countries can put in place the institutions, policies, and laws
needed to ensure that the resources benefit all of their citizens.

Resources should be a blessing, not a curse. They can be, but it will not
happen on its own. And it will not happen easily.


-- 
-Laye
==============================
"With fair speech thou might have thy will,
With it thou might thy self spoil."
--The R.M


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