Four countries that have successfully navigated the potential pitfalls of natural resource wealth provide examples of how best to avoid falling victim to the “paradox of plenty.”
A quick look at emerging powers and the world as a whole reveals the importance and power that certain resources can bring. Whether it’s Russia using its significant natural gas holdings as leverage in international disputes or regional and international investors refocusing on Nigeria as a result of oil, resources make and shape the globalized world in important ways. Yet, with the riches often come significant problems.
Over the last two decades, scholars have identified and argued over a ‘resource curse’ that often seems to befall countries possessing great reserves of resources, be it crude oil, rubber, natural gas or rare earth commodities. The phenomenon, also known as the paradox of plenty, is particularly associated with point source non-renewable resources such as fuels and minerals which are seen as exacerbating and creating problems for the countries that have them.
Countries experiencing the curse can expect an appreciation of real exchange rates that negatively affects other economic sectors (especially manufacturing exports in the case of the ‘Dutch disease’), greater volatility as revenues become increasingly linked to swings in global markets, marked increases in corruption and mismanagement and many other ailments. Some have even alleged that an abundance of non-renewables is often tied to a propensity for violent conflicts.
While some academics debate whether such a curse even exists or whether the ailments are the result of other issues such as weak institutions or cultural norms, a variety of countries have seemed to fall victim to the paradox of plenty. Yet as newfound oil wealth in Africa and elsewhere provokes worry and prompts creating a strategy to prevent and treat the disease, four countries offer examples that could provide a cure:
When it comes to natural resources, Canada is a powerhouse. The country is a major net exporter of natural gas and coal. If one includes the Alberta oil sands (which were pre-shale considered cost prohibitive to develop), the country holds what is estimated to be the world’s second largest oil reserves (Saudi Arabia being number one). The country is also a major mining power, being the third largest producer of primary aluminum and diamonds, and in the top five for cadmium, molybdenum, nickel, platinum group metals, salt, titanium concentrates, elemental sulphur and uranium.
Despite this, Canada has so far managed not to become a victim of its own resource abundance. Some of this may have to do with the way regulations and oversight are implemented and applied. Much of the royalties, taxes, incentives, permits and licensing for oil and natural gas are done through provincial bodies, while a federal National Energy Board oversees regulation and is partnered with respective provinces in offshore drilling. Importantly, the NEB also reports to Parliament.
The Chilean economy has long benefited from rich mineral deposits in key areas of the country. The country is the world’s number one copper producer, controlling an estimated 20 percent of the world’s copper reserves and accounting for 11 percent of total global production. While the importance of copper to the economy certainly leaves room for susceptibility to commodity booms and busts, Chile has largely managed to overcome many issues of concern that come with non-renewable resource wealth.
The South American country has benefited from a great degree of transparency. Information on both operations and revenues are published regularly by the Finance Ministry, along with comprehensive looks at royalties, taxes, mining export values and production volumes. The Chilean Commission on Copper and the Mining Ministry further publish information on a regular basis, which includes environmental assessments and licensing petitions. While receiving generally high marks for transparency, the country does not publish information about mining contracts.
The Norwegian approach to vast reserves of oil and gas found originally in the 1960s has been novel and much talked about. Aware of the problems associated with an abundance of non-renewable resources, the Norwegian government has undertaken an approach that seeks to extend the benefits that these resources confer beyond short-term gains.
This mindset — along with concerns about currency appreciation and the prospect of cash inflows becoming too tightly intertwined with the government — led the country to set aside 100 percent of its oil earnings. Every year, 4 percent is taken out from this fund and used for public services. This creative approach has encouraged countries such as Israel, Chile and Colombia to adopt similar measures with the aim of preventing wealth concentration, currency appreciation and mismanagement and corruption by public officials.
Botswana is the world’s largest producer of diamonds, a status its held the 1970s. In marked contrast to many other African countries, which are resource rich and prone to conflict and corruption, Botswana has managed to avoid the resource curse. Given that minerals account for three-quarters of its exports and over 40 percent of its GDP, this is a remarkable feat.
The sub-Saharan country has managed to greatly diversify its economy (which is still prone to market swings; 40 percent is a lot) and is one of the least corrupt countries on the continent. Rather remarkably, the country has also remained conflict-free, an aspect which along with stable governance has encouraged business growth, regional investment and FDI.
Botswana has managed to avoid the problems associated with resource wealth via what the African Development Bank characterizes as a ‘three pronged’ approach: First, with foresight, the country pursued economic diversification. Second, it divested revenues, seeking to make the economy less susceptible to global markets. Third, it invested surplus revenues.
As non-renewable resources continue to be discovered, they bring potential to the countries in which they’re discovered. Whether this potential is for harm or good seems largely an issue of governance. Four countries from different areas of the world, each with different cultures and histories, may offer insights into how to better manage and avoid the resource curse.