Humphreys et al - What is the Problem with Natural Resource Wealth?

Humphreys, M., Sachs, J.D., and Stiglitz, J.E., “What Is the Problem with Natural Resource Wealth?” in Escaping the Resource Curse, Humphreys, M., Sachs, J.D., Stiglitz, J.E., eds. (New York, Columbia University Press, 2007)

 

This introductory chapter to a publication aimed at distinguishing the dire effects of vast natural resource wealth on producing countries, sets the stage for a comprehensive understanding of the ‘Resource Curse.’ The authors introduce the social, political, micro and macro-economic, and contractual realities associated with the developmental failures often connected with the realisation and extraction of natural resources. The dilemma of the natural resources, in the authors’ view often stems from the fact that on one hand, majority of the resource rich countries have unacceptable developmental growth, whereas on the other hand, the lack of natural resources, it seems, for many countries (especially according the author’s the ‘Asian Tigers’) has not translated to a complete stall in growth of their economies. In fact, the opposite has occurred, spurring drastic economic growth.

Furthermore, along with this reality, they argue that there is evidence to show that some resource rich countries have performed better in terms of resource management than others (See: Nigeria and Indonesia), and those that perform worse further create the added burden of extreme internal inequality. To understand what is exactly meant by the resource curse the authors set the scene by explicating the concept of the “Dutch Disease,” where the principle effect of petroleum exports leads to radical appreciation of currency due to the growing economy, setting the stage for the decline of the non-resource based sectors. They argue, that the ‘Dutch Disease’ reality often exists when high resource rents are introduced to the economy, which when inadequately managed creates unfavourable results especially when volatility creeps in, (volatility with regards to rates of extraction, timing of payments and fluctuations in the market value of the resources produced). The authors argue that in such case, the government expenditure rates should ideally reflect this, it is suggested that governments rather transform the rents into financial assets where national expenditure is derived from interests generated and not from the capital; essentially recognizing rents as assets. They do also realise the political pressures that may be present in any given context to spend money towards national infrastructure and development, nonetheless, they suggest governments use resource wealth to cover foreign exchange needs while assembling tax revenue for domestic development. All these suggestions they argue, ought to be implemented in tandem with sufficient educational investment, adequate and implementable strategies to curtail corruption, strong State institutions with relevant accountability provisions, effective civil society engagement and transparency, all underlined by strong legal and economic provisions.

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