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The Truth about the Resource Curse

By: Nick Zaiac - @NickZaiac - Apr 7, 2015, 10:59 am

EspañolNatural resources are traditionally considered a boon to any country. They’re pools of “free” value that can be dug up and sold, often under the promise of helping the entire population.

Yet we know that resources are not a golden ticket to prosperity: some of the world’s poorest, most miserable nations have been blessed with valuable stocks of recoverable minerals and fossil fuels.

Mexico's 1938 expropriation of foreign oil assets sowed the seeds for petroleum dependence. (Wikimedia)
Mexico’s 1938 expropriation of foreign oil assets sowed the seeds for petroleum dependence. (Wikimedia)

Of the 19 nations that produced more than 1 million barrels of oil per day in 2013, only 3 could be considered to enjoy particularly “good” governance: the United States, Canada, and Norway.

The remainder, including Saudi Arabia, Venezuela, and Mexico, have endured decades of one-party or autocratic rule, weak development in other sectors of the economy, and general dependence on oil revenues for a major share of state spending.

The “Resource Curse” theory has long held that countries with natural resource endowments, such as oil or minerals, tend to have worse development outcomes than those without them. There are many reasons for this, from currency exchange rates (the so-called Dutch disease) to the fact that resource revenues are highly dependent on volatile world market prices.

While the issues of currency or volatility are very real, I would argue that there’s something more insidious that goes on in resource-dependent states.

Money for Nothing?

It comes back to the idea of treating resources as inherently “national” endowments. When resources are treated as though they should benefit everyone in a nation, government’s are encouraged to use them as a means to provide handouts to the population at large, and claim credit for the services provided.

By building a culture around the “rents” that the resource endowment provides, otherwise bad governments can look like they are succeeding by delivering public goods and services that they could never provide without the “free” money from mining or pumping oil.

Yet this cannot be maintained indefinitely. Searching for more natural resources is an important part of the long-term production process: governments can’t just sit back and let the money roll in.

And this is where the problems start. When states claim significant and growing portions of revenue from companies working in their nation, it discourages said firms from looking for more reserves of resources. This means that extracting resource rents in the short term makes it harder to maintain them in the long term.

Mexican Malaise

Mexico’s proved petroleum reserves, 1980-2015.  (US Energy Information Administration)

We’ve seen this happen in the last decade in Mexico, a petro-state that few seem to acknowledge is as dependent on oil as it is.

In 1938, the Mexican government expropriated foreign oil assets and set up what would become Petróleos Mexicanos (PEMEX).

It would take more than 60 years, and the maturation of world oil markets, for the problems of rent extraction, bureaucracy, and falling reserves to finally catch up with the Mexican authorities.

For those 60 years, the Institutional Revolutionary Party (PRI) ruled nation on the backs of the drillers in the bountiful fields of the Gulf of Mexico. Yet 60 years of poor investment would eventually cause reserves and production to fall.

Last year, the nation was finally forced to end the PEMEX monopoly and reform the company in order to stem the fiscal bleeding caused by years of inefficiency and under-investment.

What lessons can we take from this example? Countries cannot bank on resources of any sort to last forever, and using them for short term spending only pushes spending cuts or tax increases to the future, making them more painful in the process.

In the US, state lawmakers have floated extraction taxes as a source of easy revenues to fund short-term spending goals. Doing so could end up hurting them in the long run, just as it has in Mexico. Lawmakers need to understand that slapping drillers with extra taxes is not a golden ticket to prosperity, and the higher the tax, the greater the risk that something goes wrong and puts the state at risk of ever more pain.

So yes, resources can indeed be a curse. But that curse that can be controlled by simply keeping politics separate from the “blessing” of natural resources. Governments defy the warning at their peril.

Edited by Laurie Blair.

Nick Zaiac Nick Zaiac

Nick Zaiac is a public-policy researcher in Washington, DC. He also serves as a policy analyst at the Maryland Public Policy Institute. His column, The DC Leviathan focuses on the often-ignored bureaucratic agencies, from the Department of the Interior to the General Services Administration. He has been published in the Baltimore Sun, City AM, CapX, and other outlets. Follow @NickZaiac.