Natural Resource Curse

E. Bijoykumar Singh *

Whenever we observe a World Population Day, we talk of excessive population growth. Is our population really excessive? Our population density is only 107 per sq.km while that of Chandigarh, a planned city, is 9252. Our area is 22 327 sq km and Chandigarh has an area of 114 sq.km. The area of Bishnupur, our smallest district is 496 sq km. The holding capacity of Chandigarh has been worked out at 16 lakh. In 2011 the population of Chandigarh was 10 lakh. Chandigarh is a planned uni-district union territory used as capital both by Punjab and Haryana and everything seems to be in order. The well laid wide roads can accommodate all types of vehicles.

I used the cycle rickshaws regularly without any fear of getting knocked down by the fast moving vehicles. Life in Chandigarh is not as fast as it is in Delhi. The well maintained gardens always give us a sense of space. The markets are not crowded because every sector has a market. Thus how many is excessive depends on how we can manage our resources both within and without. We know population growth is also a sign of better health care leading to lower death rates and better health care is an index of prosperity.

Our problem is not excessive population, ours is a problem of management. Our human resources and natural resources have not been properly managed. We talk of forests and mineral wealth yet we are poor. Is it what is known as natural resource curse? It has been observed that the possession of oil, natural gas, or other valuable mineral deposits or natural resources does not necessarily guarantee economic success. Many African countries such as Angola, Nigeria, Sudan, and the Congo are rich in oil, diamonds, or other minerals, and yet their peoples continue to be poor.

Meanwhile, the East Asian economies such as Japan, Korea, Taiwan, Singapore and Hong Kong have achieved high level standards of living despite being rocky islands (or peninsulas) with virtually no exportable natural resources. What I like most in these countries is their defiance of comparative advantage. The concern that natural resource wealth may be immiserizing is a recurring theme in both policy discussions and in empirical analysis. How could abundance of hydrocarbon deposits, or other mineral and agricultural products, be a curse? What would be the mechanism for this counter-intuitive relationship?

From a policy perspective, while it is important to know if such a curse really exists or is a figment of imagination, it is perhaps more important to know the transmission mechanism. In the theoretical economics literature, at least three channels of causation from natural resource abundance to lower growth have been identified. First, natural resources generate rents which leads to rapacious rent-seeking (the voracity effect), whose adverse manifestation is felt through political economy effects and to increased corruption which adversely affects long-run growth. This is broadly the institutional impact of natural resources.

In aggregate, these natural resources appear to have a strong, robust, and negative effect on growth by impairing institutional quality. Once institutions are controlled for, there is either very little effect of natural resources on growth or even a positive effect. In other words, owning natural resources on balance may still be a blessing rather than a curse. Second; natural resource ownership exposes countries to volatility, particularly in commodity prices, which could have an adverse impact on growth through an increase in fertility.

Finally, natural resource ownership makes countries susceptible to Dutch Disease—the tendency for the real exchange rate to become overly appreciated in response to positive shocks—which leads to a contraction of the tradable sector. This outcome, combined with the proposition that tradable (usually manufacturing) sectors are "superior" because of learning-by-doing and other positive externalities, leads to the conclusion that natural resource ownership exerts a drag on long-run growth.

The standard cross-section growth regressions show that the curse of natural resource-ownership is substantial. Natural resources are known to considerably increase the chances of civil conflict in a country. The effect of natural resources on conflict is found to be strong and non-linear. A country that has no natural resources faces a probability of civil conflict of 0.5 percent, whereas a country with natural resources-to-GDP share of 26 percent faces a probability of 23 percent. Civil conflict is a manifestation of institutional collapse.

But once the channel through which the curse operates is identified, addressing this would make natural resources more of a blessing or less of a curse. Natural resources are not homogenous with different impact on institutions. In particular, it is fuel and minerals—that typically generate rents that are easily appropriable that have a systematic and robust negative impact on growth via their detrimental effect on institutional quality.

This effect is quantitatively significant, amounting to lower growth of about 0.36 percent per year. Other resources do not seem to adversely affect institutional quality. This differential impact is significant in itself but is also consistent with the different attributes of natural resources.

The impact of natural resources is nonlinear. The negative marginal impact of resources on institutional quality depends on and increases with their level. Natural resources such as oil and minerals may or may not be a curse on balance. They are known to have a seriously detrimental impact on long-run growth via their impact on the quality of domestic institutions. In Nigeria, waste and corruption from oil rather than anything else has been responsible for its poor long run economic performance.

One proposal would be to focus on one key issue: managing the revenues from oil. The government should stop managing these revenues and turn them directly to the people. In particular, it was proposed that all Nigerians should have a constitutional right to an equal share of the proceeds. The difficulties in implementation notwithstanding, this would be far superior to the status quo. The current situation in Nigeria is the result of staggering corruption and waste over the last 40 years. The proposal could fundamentally improve the quality of public institutions and, as a result, transform economics and politics in Nigeria in the future.

If we interpret the linkage of our backwardness with our ‘natural resource', there seems to a regularity in the chaotic process of development in this region. The central government has pumped in resources in this region to alleviate our backwardness and we are yet to develop the institutions to ensure that the resources are not pilfered. Some of the states in the region have managed to register impressive growth rate but political developments suggest that it has not been sufficiently inclusive.

It is obvious when we are talking about ILP, new states and reservation so passionately. In other words the benefits of growth have not percolated to the masses. The resources have been eaten up by the rapacious rent seeking class who has perfected the art of corruption. Our backwardness is their biggest resource. If good governance happens and central funds dry up, what will happen to them? That makes development their biggest source of worry. How do we expect development to happen when the rent seeking ruling class has been growing relentlessly? Then backwardness is indeed a cherished goal.