June 4, 2014
WASHINGTON—Countries blessed with abundant natural resources surprisingly often fail to achieve either prosperity or political stability. A new Peterson Institute book explains the frequently negative impact of natural resources on development of poor countries, a situation summed up by the phrase "resource curse," and how potentially to avoid that curse.
The book, Confronting the Curse: The Economics and Geopolitics of Natural Resource Governance, by Cullen S. Hendrix and Marcus Noland, studies several examples of how countries have tapped mineral and other wealth only to weaken their domestic institutions and democratic governance. All too often, such actions lead to corruption, the enriching of elites, and even devastating violence and war.
"Purely economic explanations neither describe nor explain the prevalence of the resource curse," said Adam S. Posen, president of the Peterson Institute. "Hendrix and Noland develop a persuasive new analysis of how the effects of natural resource wealth are largely determined by preexisting governance, commodity price levels, and with the anchoring of domestic good behavior by relationships with leading economies."
The resource curse is more likely to emerge when preexisting institutions are weak and commodity prices high, the authors say. Even for well-intentioned young democracies such as Ghana, commodities pose formidable challenges of price volatility which can complicate budget policy planning and risks. That volatility undermines other segments of the economy which may experience a sudden decline in investment. The resulting distortions can lead to domestic instability and also undesirable cross-border spillovers such as terrorism, drug trafficking, and human trafficking.
China's rise as a commodity importer—and particularly as an investor in resource rich poor countries—has drawn increased scrutiny of its activities. The authors do find that China's outward foreign direct investment is highly-concentrated in extractive resources (though China is certainly not alone in this regard). Their analysis finds only weak evidence, however, that China's official development assistance and arms transfers are associated with recipient-country resource wealth, contrary to what conventional wisdom suggests. In short, while Chinese investment without international oversight is as likely to induce the resource curse as others' similar investments, it is not distinctively more dangerous for recipients.
Strengthening institutional capacity and democratic accountability, and encouraging the accumulation of human capital in the most severely affected poor states should be at the top of the international agenda, the authors conclude. The authors also encourage more partnerships between Western and non-Western entities for joint exploration and development, which would trigger some Western regulatory oversight, and help dilute influence from individual countries prone to meddling on behalf of their national champions.
International good governance efforts, such as the Kimberley Process, have achieved some success with respect to internal political stability. But leading economies—including but not just China—should recognize the importance of good governance while securing access to extractive resources.
Confronting the Curse: The Economics and Geopolitics of Natural Resource Governance
Cullen S. Hendrix and Marcus Noland
ISBN paper 978-0-88132-676-5
May 2014 | 188 pp. | $25.95
About the Authors
Cullen S. Hendrix, nonresident senior fellow at the Peterson Institute, is assistant professor at the Josef Korbel School of International Studies at the University of Denver. He has consulted for the US Department of Defense, Food and Agriculture Organization, Political Instability Task Force, World Food Programme, and Asian Development Bank. His research has been funded by the US Department of Defense Minerva Initiative and the National Science Foundation.
Marcus Noland, executive vice president and director of studies at the Peterson Institute, has been associated with the Institute since 1985. He is also senior fellow at the East-West Center. He was a senior economist at the Council of Economic Advisers in the Executive Office of the President of the United States. He has held researcher teaching positions at Yale University, Johns Hopkins University, the University of Southern California, Tokyo University, Saitama University (now the National Graduate Institute for Policy Studies), University of Ghana, and Korea Development Institute.
About the Peterson Institute
The Peterson Institute for International Economics is a private, nonprofit institution for the rigorous, open, and intellectually honest study and discussion of international economic policy. Its purpose is to identify and analyze important issues to making globalization beneficial and sustainable for the people of the United States and the world and then to develop and communicate practical new approaches for dealing with them. The Institute is widely recognized as nonpartisan. It receives its funding from a wide range of corporations, foundations, and private individuals from the United States and around the world, as well as from income on its endowment.