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Why Natural Resources Are a Curse on Developing Countries and How to Fix It

STEWART M. PATRICK

APR 30 2012, 9:01 AM ET

Some ideas for giving emerging economies a fighting chance against the resource curse.

A man shows crude oil on a riverbed in Nigeria. Reuters

Among the many frustrations in development, perhaps none looms larger than the "resource curse." Perversely, the worst development outcomes--measured in poverty, inequality, and deprivation--are often found in those countries with the greatest natural resource endowments. Rather than contributing to freedom, broadly shared growth, and social peace, rich deposits of oil and minerals have often brought tyranny, misery, and insecurity to these nations. Fortunately, as my colleague Terra Lawson-Remer points out in a new CFR memo, all is not lost. There are concrete steps the international community can take to help break this curse

First, a few facts. The correlation between energy dependence and authoritarianism is clear. "There are twenty-three countries in the world that derive at least 60 percent of their exports from oil and gas and not a single one is a real democracy," observes Larry Diamond of Stanford University. There are numerous hypotheses to account for this correlation, as I note in my book, Weak Links: Fragile States Global Threats and International Security. Most obviously, easy resource revenues eliminate a critical link of accountability between government and citizens, by reducing incentives to tax other productive activity and use the revenue to deliver social services effectively. The same revenues also generate staggering wealth that facilitates corruption and patronage networks. Together, they consolidate the power of entrenched elites and regime supporters, sharpening income inequality and stifling political reform. The history of the oil-rich Arab Middle East has long been a case in point--with Saudi Arabia being exhibit A.

Natural resource revenues have also been linked to slow economic growth rates, inequality, and poverty. One culprit may be the so-called "Dutch disease," whereby resource revenues raise a country's exchange rate, hurting competitiveness in non-resource sectors. Other factors may include the volatility associated with commodity prices, which can have especially negative impacts on weak-state economies; and the underdevelopment of agricultural and manufacturing sectors during boom periods in resource-based economies. And even when oil abundance produces high growth, it often benefits only a few corrupt elites rather than translating into higher living standards for most of the population. Oil-rich Angola is a case in point. Despite having one of the world's highest growth rates from 2005 to 2010, averaging some 17 percent annually, its score on the human development index remained a miserable 0.49, and its infant mortality rate was lower than the sub-Saharan African average.

Finally, the very presence of oil and gas resources within developing countries exacerbates the risk of violent conflict. The list of civil conflicts fought at least in part for control of oil and gas resources is long. A partial list would include Nigeria, Angola, Burma, Papua New Guinea (Bougainville), Chad, Pakistan (Balochistan), and of course Sudan. Econometric studies confirm that the risk of civil war greatly increases when countries depend on the export of primary commodities, particularly fossil fuels. At least three factors could explain this correlation. First, the prospect of resource rents may be an incentive to rebel or secede. Second, wealth from resources may enable rebel groups to finance their operations. Third, the high levels of corruption, extortion, and poor governance that accompany resource wealth often generate grievances leading to rebellion.

Why abundant coal may have cursed the Appalachian economy

Is coal country suffering from what economists call the 'resource curse'?

By Ryan McCarthy August 27, 2014

As Chico Harlan writes,the economy of the central Appalachian region has been tied to the highs and lows of the coal industry for decades.

Harlans piece raises the question of whether West Virginia miners are better off moving away from the troubled local coal mining industry and certainly some are trying. But is West Virginias economy better off moving away from one of its most valuable natural resources? In economics, theres a fairly sizable body of research onthe idea of a resource curse that is, the theory that countries blessed with abundant natural resources are often cursed with higher poverty levels and lower growth. Experts disagree about the extent of thecausal link between resource booms and poverty.

Heres a look at poverty levels in Appalachia from 2008-2012, via the Appalachian Regional Commission. Much of the areas with the highest levels of poverty and lower incomes are clustered around the coal-heavy regions of central Appalachia:

In 2013, scholars at Ohio State University looked at the issue of whether the Appalachian coal country suffers from a resource curse the paper was updated from a previous version, as the Harvard Kennedy School Shorenstein Centerpoints out.

Prior to 2000, the Ohio State authors found, higher rates of poverty were associated with Appalachian coal mining. After 2000, however, the authors found no statistical relationship between poverty and coal employment. Outside of Appalachia, the studys authors found, coal mining is generally correlated with lower poverty, which suggests there may have been something specific about Appalachias coal industry that hurt its overall economy.

A July 2011 report from the West Virginia Center on Budget & Policy argued that the states dependence on energy has lead to painful boom and bust cycles, particularly in mining areas. Heres a look at the volatility of personal income in West Virginia:

The report also pointed to a lack of economic diversity in mining counties. In the mining counties, 22.8 percent of private sector jobs were in mining and other extractive industries, compared to 4.7 percent in West Virginia and 0.5 percent for the United States, the report found:

Another recent paper, by Stratford Douglas of West Virginia University and Annie Walker of the University of Colorado at Denver, looked at the Appalachian coal industrys economic effects from 1970-2010 and comes to aslightly differentconclusion. The coal industry provides employment opportunities and income in abundance during good times, but those boom-time opportunities come at the price of lower of overall long-term growth, the authors found.

The paper noted that, not surprisingly, Appalachias incomes have been tied rather directly to the price of coal. Note the jump in income in Appalachian coal and non-coal counties during the high energy price era of the 1970s:

The authors also found that educational attainment levels, while low in Appalachia overall, are also hurt by the presence of coal. The researchers added, however, that the effect is a relatively small contributor to what they identified as the areas resource curse:

The authors suggested that the likelihood of employment in the regions coal industry may push local workers away from getting a better education, and discourage efforts to bring otherindustries to the area. That effect can help contribute to lower economic growth