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By Andrew Holland on May 22, 2012 with 8 responses

Are Countries With Vast Oil Resources Blessed or Cursed?

A Complex Issue

A couple of months ago, Robert Rapier, Sam Avro, and I had an interesting debate about the resource curse in the context of a Tom Friedman column about how countries that aren’t blessed with natural resources succeed because they are forced to invest in their people. I believe, as my post (Oil – Easy to Produce, but Not Easy to Buy) said, that countries blessed with natural resources like oil “don’t have to learn how to build factories” because they can sell oil to the world instead. Robert and Sam cited countries like Norway, the U.S., and the U.K. as examples of countries that have thrived even with resources.

The new edition of The New York Review of Books features an article, “What Makes Countries Rich or Poor?” written by Jared Diamond that is a review of Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson. This is another book to add to my ever-growing list of ‘must-reads’ – but Diamond’s review gave some interesting points that are very relevant to our previous discussion about the resources curse and what causes countries to grow or fail. The truth, as shown by the article, is complicated: there are many determinants to growth, and  it is difficult to separate out individual causes.

What Determines Growth: Geography or Institutions Built by Society?

Diamond, the author of Guns, Germs, and Steel and Collapse: How Societies Choose to Fail or Succeed, is probably the leading voice, along with economist Jeffrey Sachs, of the school that argues that countries are most affected by their geography. Essentially, they argue that tropical countries are cursed by their location. This “Geography is Destiny” school argues that tropical countries, especially those in Central and West Africa, are undone by a combination of poor soil quality, lack of access to world markets (few good ports or navigable rivers), and endemic disease that makes it virtually impossible for them to sustainably grow out of poverty.

On the other hand, the authors Acemoglu and Robinson, along with economist William Easterly, are leaders in what could be called the “Institutional” theory of growth. They argue that it is the governments and institutions that our societies create which determines how successful a society becomes. Essentially, it’s our government, not our environment that decides our wealth over the long term.

I would recommend reading Diamond’s article in its entirety, as he does an excellent job of showing the differences in opinion between the two sides, without falling into pointless argument (something Easterly and Sachs are unable to do with each other). His article does show some interesting debate about the “resources curse” which Robert and I debated.

The ‘Resources Curse’

Acemoglu and Robinson’s book argues that resources like oil, diamonds, or minerals ironically make endowed countries end up worse-off than countries with no natural resources. Diamond writes: “the result of the many ways in which national dependence on certain types of natural resources (like diamonds and oil) tends to promote bad institutions, such as corruption, civil wars, inflation, and neglect of education.”

They note that forward-thinking countries like Norway, Botswana, or Trinidad and Tobago have avoided these problems by investing the proceeds in separate accounts marked for economic development or education. The key part, however, that they note is that the very nature of their institutions means that they wanted to share the proceeds of the country broadly. In other words, because they had strong institutions, they have been able to avoid the resource curse. Diamond specifically identifies that the U.S. does not count for the resources curse because of how large and diverse the economy is; oil production is too small relative to total production to cause a ‘resource curse’.

This argument is relevant today because we are drilling for oil and mining for minerals in more remote countries and environments than ever before. Where drilling used to be in established areas, like Texas, Saudi Arabia, and Russia, it is now moving to offshore Brazil, the Arctic, and Mozambique. Whether the institutional capacities of these countries and regions are sufficient to avoid the resource curse will be one of the deciding factors in which countries thrive in the 21st Century.

  1. By Kalam on May 22, 2012 at 11:56 am

    what makes a country blessed?

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    • By Andrew Holland on May 22, 2012 at 12:04 pm

      Kalam – Economic growth. 

      Having a natural resource like oil should provide a windfall that can be re-invested into the country to promote economic growth. On the other hand, if the proceeds from selling that natural resource is only wasted – either stolen by elites, wasted by the government, or expropriated by foreigners – then it can be worse to have natural resources than not.

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  2. By Samuel R. Avro on May 23, 2012 at 2:01 pm

    Interesting how you brought the two economic theories into this debate, Andrew. But have you moderated your position since the previous article on the subject?

    countries blessed with natural resources like oil “don’t have to learn how to build factories” because they can sell oil to the world instead

    Diamond specifically identifies that the U.S. does not count for the resources curse because of how large and diverse the economy is; oil production is too small relative to total production to cause a ‘resource curse’.

    Looking at these two statements together, I would say that countries blessed with vast natural resources may be led to believe that they don’t have to build factories, but if they already have a diverse economy and aren’t a “resources first” nation they would be shielded from the curse, and indeed the natural resources can then be a blessing.

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    • By Andrew Holland on May 23, 2012 at 2:41 pm

      Sam -

      Interesting question – but I actually don’t think that its the order in which you exploit your natural resources, its the scale of your natural resource exports as a portion of your total economy. So – the U.S. shouldn’t count for the simple reason that it is such a large country with such a varied economy. But – that doesn’t mean you shouldn’t count all developed countries.

      The typical example cited in the economic literature on this is the Netherlands in the 1970s. They had just found vast resources of oil and natural gas in the North Sea, and were exporting it. However, those vast exports caused their currency to rise in value, undercutting the competitiveness of their traditional industrial manufacturing base. This phenomenon, now called ‘Dutch Disease’, is common to resource exporting countries. In this case, the curse of natural resources didn’t come about because of bad governance, but because of monetary policy. To go back to Diamond’s article, however, you can argue that the Dutch overcame that setback to become one of the most prosperous countries in the world because they had such a strong history of good governance.

      So – I’d say there’s not too much of a lesson here for what the U.S. – as a 14 trillion dollar a year economy, there’s really zero chance of us pumping our way into a resource curse… But there may be some lessons for certain states or regions. 

       

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      • By Robert Rapier on May 23, 2012 at 5:32 pm

        So – the U.S. shouldn’t count for the simple reason that it is such a large country with such a varied economy.

        But it wasn’t always that way. The U.S. economy was built on the back of oil. We were once the world’s largest oil exporter. 

        RR

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        • By Optimist on May 25, 2012 at 8:56 pm

          Really? America was poor until it discovered oil?

          I don’t think so. Oil exports probably contributed significantly in the eraly 20th century, but it is not oil exports that made America rich. It was good governance.

          Some that is slowly being lost, I might add. Watch that 401(k) dive…

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  3. By Optimist on May 25, 2012 at 9:12 pm

    They note that forward-thinking countries like Norway, Botswana, or Trinidad and Tobago have avoided these problems…

    Word to the wise, Andrew, it is a banker’s myth that Botswana is better off than it’s neighbors. As a country that never saw the development that comes with being colonized, Botswana’s population density is probably has not increased since the stone age.

    The result of this low population density is that Botswana looks rich on paper (and is treated as such by many financial analysts): you divide a few diamond exports by a small population, and viòla, out pops a great GDP per capita number. Life is good, no?

    The reality is that most people in Botswana don’t have access to basic health care, neither road nor hospital exists in most of the country, and many children die of treatable diseases. Most people are uneducated. Village life continues as it did for centuries. Not a pretty sight. Most definately NOT a success story.

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  4. By Optimist on May 25, 2012 at 9:42 pm

    Essentially, they argue that tropical countries are cursed by their location. This “Geography is Destiny” school argues that tropical countries, especially those in Central and West Africa, are undone by a combination of poor soil quality, lack of access to world markets (few good ports or navigable rivers), and endemic disease that makes it virtually impossible for them to sustainably grow out of poverty.

    Jared Diamond and his cronies are full of the opposite of Sunni: The Congo river is the second biggest river on the planet. By this theory Congo and its neigbors should be the jewel of Africa. Instead, it is the hell hole of the planet.

    Endemic disease is not a deal-breaker: malaria used to be common in the southern states of the US. A good government does not accept malaria deaths as inevitable.

    The lucious rainforests of central Africa would suggest that as a minimum providing food should not be an issue. But rebel armies burning villages and crops make agriculture much harder than it needs to be. Government, or lack thereof, again.

    I found Diamond’s Guns, Germs and Steel utterly unconvincing. He argues that Africa has no domesticable species. There are several problems with that statement. First, a scientist should know that it is impossible to prove a negative. Somebody might domesticate the kudu next year, or a 150 years from now. Second, he seems to overlook domestication of the ostrich, a fine source of low cholestrol, red meat and eggs large enough to literally feed a village. There are also farmers who claim to have domesticated the Cape buffalo and the eland, neither or which fits Diamond’s description of a nervous antelope.

    Diamond speculates how an African cavalry mounted on rhinos might have repelled invaders, conveniently forgetting that Hannibal invaded Rome with domesticated African elephants, but the Roman army soon enough learned how to do the unthinkable and beat the elephants.

    Diamond is as politically correct as they come, hence his popularity. But he is not too impressive as a scientist.

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