Classical economic theory suggests that an abundance of natural resources is expected to benefit states in the long run via gains to gross domestic product (GDP) and decreased trade dependency. While this theory applies to states like Norway, studies have shown that many other states have experienced the opposite; instead of spurring broadly shared economic growth and development, revenues from resources are often linked with poverty, tyranny, and alienation – the precursors to civil conflict. Scholars have addressed this paradox and named it the ‘resource curse,’ which can be defined as, “the perverse effects of a country’s natural resource wealth on its economic, social, or political well-being” (1). The resource curse contributes to the threat of civil conflict via three pathways: creating unfavorable economic conditions, weakening state institutions, and financing rebel groups. This essay reviews these three pathways and discusses what the international community can do to break the curse for resource-rich regions like those in Africa, the Middle East, and Latin America.
The resource curse creates unfavorable economic conditions by causing unpredictability in commodity prices, poverty, and lack of investment in non-resource sectors. The global price of resources is highly unpredictable, and when a state is dependent on the export of resources for income, that state is exposed to the unpredictability of the global resource market. This means that commodity prices are subject to change drastically, which creates a precarious foundation for economic growth (2). Unpredictability also has an effect on poverty and the health of societies. This is because states are less likely to make long-term investments like those necessary for education and health care when their ability to pay is uncertain (3). This contributes to atypically high poverty rates and adverse development outcomes. For example, there is evidence of lower human capital investment (i.e. investment in health, education, and wellbeing of an individual that may contribute to their skills or productivity) in resource-rich states, and there is a strong correlation between greater dependence on oil and mineral exports and higher child mortality rates (4).
There is also evidence of the so-called “Dutch Disease,” where high resource revenues raise a state’s exchange rate only to hurt competitiveness in non-resource sectors (5). This results in under-developed agriculture and manufacturing sectors, which would normally provide most of the jobs in the economy. The term “Dutch Disease” was coined after the discovery of gas and petroleum in the Netherlands in 1959 led to a rise in the currency and competitiveness of the resource sector and the near collapse of non-resource sectors in the 1960s and 1970s (6). These economic patterns are concerning in their own right, but they also contribute to a state’s susceptibility to civil conflict because unfavorable economic conditions increase the likelihood of civil conflict (7). It is important to note that, while the resource curse is a well-established theory, some of the economic pathways of the resource curse are less established and sometimes receive mixed results in econometric studies. This is because every state is different, and there is no such thing as a universal theory that can explain all of the heterogeneity of observed outcomes. For this reason, greater attention is given to the political pathways of the resource curse, such as its effect on institutions and rebel groups.
Governments should, in theory, be able to alleviate some of the economic effects of the resource curse through policy. However, the resource curse tends to obstruct a government’s ability to address these issues by creating weak institutions and fostering corruption. The main factor contributing to weak institutions in resource-rich states is the lack of a tax system. According to Rentier State Theory, states with abundant revenue from resources have atypically weak institutions because there is no incentive to create a strong tax system when a state does not require revenue from taxation (8). Therefore, such states also lack the legal, fiscal, and bureaucratic institutions that accompany a tax system and are necessary for effective governance.
In addition to the problems posed by weak institutions, resource-rich states also contend with high levels of corruption. Governments can only absorb and track a limited amount of money at a time, and highly volatile resource revenues tend to flood governments with more revenue than they can track effectively. This opens the door for corrupt officials to skim from the top instead of distributing revenue to citizens. Studies have indeed shown a strong correlation between resource dependence and corruption (9). The ability to profit greatly from resources also heightens the incentives for corrupt officials to prevent democratization, as it would be a threat to their future power and wealth. The links between democracy and resource wealth do not end there. One study has shown that resource-dependent governments become less democratic and more likely to use revenues to stifle dissent than states that rely on other sources of revenue (10).
Weak institutions and tyrannical government combined create ripe conditions for civil conflict by inciting rebel groups. Resource-inspired rebel groups frequently have three things in common: a grievance regarding the allocation of resource revenue; a common identity (whether ethnic, religious, occupational, or otherwise) that differentiates that group from the rest of the population; and a need for financing of their group activities (11). Not only does resource abundance create ripe conditions for rebel groups, it can also finance group activities and increase the benefits of war if victory is achieved (12). For example, millions of dollars in black market oil made ISIS one of the wealthiest terrorist groups in history (13). Likewise, revenue from the illicit diamond market in Sierra Leone and the timber market in Cambodia provided the finances to support the Revolutionary United Front and Khmer Rouge, respectively (14). Thus, resources fuel rebel groups by providing them a sustained source of wealth to finance their group operations, which raises the threat of civil conflict significantly.
Civil conflict creates economic, social, and political legacies that are not easily reversed when the fighting stops. It is also devastating for civilians, who have no choice in the matter but suffer direct atrocities as a result. As such, it is imperative that preventative policy is used to stop conflicts before they begin. In the case of resource-related conflicts, there are many ways of doing this. Scholars and human rights advocates know enough about the resource curse and the pathways by which it contributes to civil conflict to forecast where and how likely conflict is to occur. Targeted policies can be employed immediately to address the situation in vulnerable states. Some of these policies can be undertaken by individual states, but because the resource curse hampers the state’s ability to effectively employ its economic and political institutions, the international community also has a role to play.
State-driven policies to mitigate the economic and political implications of the resource curse include export diversification, which would reduce states’ dependence on resource revenues and provide a more stable foundation for economic growth. Methods for promoting export diversification will be different in every policy environment. Some resource-rich states would benefit from trade liberalization – which would remove high tariffs and trade barriers between states – while other resource-rich states would benefit from protecting the non-resource sectors of the economy from the full weight of global competition. Although these methods are opposites, they could both result in export diversification across states.
Another state-driven policy to mitigate the resource curse is implementing a sovereign wealth fund – i.e. a state-owned investment fund – like the Norwegian Government Wealth Fund, established in 1990 (15). After discovering oil in 1969, Norway created the fund to distribute resource wealth to citizens and protect the Norwegian economy from the resource curse (16). It is largely considered a success, and some scholars suggest that it be replicated in other states like Nigeria and Iraq (17). However, it is important to note that not all states would be capable of implementing a similar institution, given the organizational, institutional, and fiscal costs of such a large endeavor.
Other policies to address the economic implications of the resource curse put more responsibility on the international community. Namely, the international community should do more to regulate foreign corporations’ efforts to exploit resource-producing states. One of the many ways that resource-producing states are exploited is through the use of “time inconsistent” contracts. These contracts acknowledge the price of the resource when the contract is signed but do not acknowledge fluctuations in the price of the resource. This means that when the world price for resources increases, the foreign corporations get all the additional profit. Conversely, when the world price drops, they might pull out of the agreement to avoid making a loss. Because resource revenues are highly unpredictable, time-inconsistent contracts make the resource-producing state constantly at risk of exploitation. The simple policy solution is to require transnational corporations to index their contracts to global prices. This ensures that when global prices increase or decrease, the gains or losses are split between both parties (18).
Addressing the political ramifications of the resource curse falls heavily on the shoulders of the international community, rather than individual states. A policy recommendation would be to promote mandatory revenue transparency for all resource-related revenue. There are initiatives that promote this from the side of the international corporation, including the Publish What You Pay campaign, which has set out to create a global standard for reporting corporate resource payments to host states as a condition for stock market listing (19). Other initiatives that focus on the role of international corporations include the Follow the Money initiative launched by Inclusive Development International (20). This initiative works to expose corporate actors who profit from investments in harmful development projects by mapping supply chains and revealing opportunities for advocacy and accountability. These campaigns provide a way for citizens and the international community to hold states accountable.
Literature on the resource curse often portrays the curse as inevitable and hopeless. When resource-rich states do overcome the curse, they are viewed as miracles rather than the result of deliberate policy decisions. On the contrary, the effects of the resource curse typically flow through pathways that are highly amenable to policy change, which means that policy can be a powerful tool for improving the lives of people in resource-rich states. This essay has explored the three pathways by which the resource curse contributes to the threat of civil conflict and detailed some policy prescriptions for states experiencing the resource curse. By engaging with these policy prescriptions alongside many others, the international community can eventually break the resource curse by helping resource-rich states better manage their resource endowments and turn them into drivers of broadly shared economic growth and development.
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Leila Yow is a Senior Economics major, minoring in Human Rights Studies and Political Science at UNC Asheville. Leila is a founding member of Dignity, serving as the Co-Editor-in-Chief of the Journal.