Cursed with Riches: Scholarship and Case Studies of the “Resource Curse”

Diamond polishing in Botswana

I‘ve been interested in the phenomenon of the “resource curse” (both its political and economic effects) for a long time, but I wrote this essay as part of a political economy course I took in fall 2019. This essay borrows from the work of noted resource curse scholar Michael Ross, a UCLA professor and major influence on my own educational development. WordPress would not let me include the footnotes I’d written for the original paper, but if you message me over “Contact” I’d be happy to provide my sources. As always, feel free to reach out with comments or questions.

When a poor nation discovers an untapped wealth of natural resources, that nation might at first seem destined to rise to power and prosperity.  Interestingly, however, the exact opposite tends to occur: in a phenomenon known as the “resource curse,” resource-rich countries often remain not only economically poor, but also politically unstable.  Paradoxically, resource riches can fail to solve a poor state’s economic problems and can even intensify them.  

The resource curse, responsible for the decline and stagnation of economies around the world, has important implications for development studies, economics, political science, and international relations.  This paper will examine competing theories surrounding the proliferation of the resource curse, focusing on case studies and offering critical analysis of existing scholarship. It will account for both political and economic aspects of the “curse,” examining the effects of variables such as resource type, economic institutions, and the presence of democratic governance.

International Overview: Political and Economic Theories Behind the Resource Curse

Numerous types of resource curse exist, and political scientists and economists alike have attempted to pinpoint the causal mechanisms behind the autocracy, political instability, and interstate conflict associated with resource-rich states.  Research has found, for instance, that oil-dependent economies often function as “rentier states” in which governments appropriate vast amounts of oil wealth, abrogating their role as tax collectors in the process. As a result, such governments are less likely to respond to their citizens’ interests and often more likely to embrace authoritarianism (Middle Eastern “petrostates,” many of which rely on authoritarian rule, offer numerous examples).  Oil-dependent economies also suffer from “Dutch disease” and find themselves dependent on a “boom and bust” cycle of growth, rapidly accumulating wealth when oil prices are high and experiencing economic disaster when oil prices fall.  Venezuela offers a pertinent example: formerly a wealthy democracy with a mainly oil-dependent economy, this nation descended into poverty and authoritarian rule when oil prices plummeted.

Numerous theories have proliferated surrounding the relationship between oil, state collapse, and political violence.  Some scholars argue that oil can attract the attention of foreign states, increasing the likelihood of invasion. Others have even argued that oil tempts rebels within resource-rich states themselves (what Michael Ross calls the “honeypot effect”).  The temptation of the honeypot, they argue, incentivizes “greedy rebels” to wage wars and raid oil fields in the process.  Other scholars have contradicted this argument (by pointing out, for instance, that small rebel groups often lack the technological means to commandeer oil fields and that both states and intrastate groups have low incentives to go to war solely over oil).  Regarding the relationship between warring states, some scholars have argued that revolutionary states with high economic dependence on oil (such as Saddam Hussein’s Iraq) are more likely to behave aggressively on an international level.  Oil, they argue, provides radical governments with a treasury with which to build their militaries and wage war against other states.

Clearly, numerous causal mechanisms link oil to political violence.  Even discounting any theories linking political violence to the presence of oil or other resources, there is no doubt that resource reserves — seemingly an economic boon — can at the very least lead to unanticipated economic slowdown.  There is no doubt within the scholarly community that economic overreliance on primary commodities can work to states’ detriment rather than their benefit.  The Prebisch-Singer hypothesis, for instance, points out that over the long term, the prices of manufactured goods outstrip those of resource-based primary commodities.  Hence, countries that rely primarily on resource exports will have difficulty competing with countries that produce manufactured goods.  Because of Prebisch-Singer, as one United Nations report describes it, developing countries find themselves unable to “import the equivalent amount of what they exported.”  As such, these countries fail to develop “enough financial resources to invest in the development of their productive capacities.”

While the “oil curse” persists as the most thoroughly studied type of resource curse, numerous other varieties of resource curse — those surrounding “blood diamonds” and other forms of “conflict minerals,” for instance — exist as well.  Drugs, not a “resource” in the traditional sense, can fund political violence; so can timber, minerals, and natural gas.  Scholars have found, too, that not all resources wield the same types of “curses”; a great deal depends on rebels’ and governments’ “ease of access” to the resource.  Michael Ross has argued, for instance, that the “type of impact that a resource has largely depends on whether or not it is ‘lootable’ — that is, whether it can be easily appropriated by individuals or small groups of unskilled workers.”  Ross finds that while “non-lootable” resources (such as oil and natural gas, which require extensive infrastructure to extract) tend to benefit governments, lootable resources are more likely to “benefit a rebel group.”  Another important variable, the resource’s “obstructability” — whether or not rebel groups could block its transport from one place to another — influences the extent to which various groups can profit from them.  Ross notes, for instance, that drugs are often transported by air, rendering them more difficult to obstruct than oil or natural gas (which often travel by pipeline, “presenting rebel groups with an unceasing flow of extortion opportunities”).

Burning oilfield in Kuwait during Operation Desert Storm

According to Ross, African states — Angola, Sudan, Congo, Liberia, and Sierra Leone, for example — often find themselves especially susceptible to resource curses.  Knowing that some type of “resource curse” afflicts numerous countries at various stages of development, would states on the brink of resource discovery be better off leaving such resources untapped?  In fact, not entirely — under the right political and environmental circumstances, states can develop their resource reserves in a controlled manner for the benefit of the economy.  This paper will examine the causal mechanisms behind resource curses by focusing on a specific comparison: the cases of Botswana and Sierra Leone, two diamond-rich states whose diamond reserves led them down drastically different paths.

Botswana and Sierra Leone: A Resource Curse Case Study

The widespread and pernicious nature of the resource curse has driven scholars to study it in great detail.  In addition to analyzing Middle Eastern and African petrostates, scholars have compared two African states — Botswana and Sierra Leone — whose diamond-based economies have taken drastically different turns.  It would seem that Botswana, for its part, was able to thwart the resource curse; Sierra Leone, on the other hand, experienced a diamond-funded civil war in the 1990s and seems to have reaped little economic benefit from its diamond reserves.

Knowing this, what factors enabled Botswana to harness its diamonds for the good of the state, even as Sierra Leone succumbed to the resource curse?  One United Nations report, taking into account a wide variety of studies, has outlined numerous variables — institutional, economic, and environmental — that enabled Botswana to dodge the resource curse.  For one, the nature of Botswana’s diamond mines themselves played a significant role in that state’s success.  Sierra Leone’s diamonds, so-called alluvial diamonds, rest near the earth’s surface and are “spatially dispersed in sand, gravel and clay.”  This allows informal, “artisanal” miners to access them, preventing the formation of a centralized, standardized system of diamond wealth management.  Botswana, on the other hand, possessed only a handful of diamond mines containing diamonds that resided far below the surface (“kimberlite” diamonds as opposed to alluvial).  The location of Botswana’s diamonds raised the costs of diamond mining, necessitating the “coordination and effective supervision” absent in Sierra Leone.  As a result, Botswana’s diamonds offered “little opportunity for illicit mining and therefore better production and revenue opportunities.”

Scholars have also argued that Botswana’s institutions, rather than simply its geology, played an important role.  Botswana put institutional mechanisms — specifically, three separate funds — in place to ensure that even when diamond prices and the percentage of GDP that diamonds comprised fluctuated, the success of the economy would not fluctuate with them.  These initiatives, which focused on “mitigating the fluctuations in the revenues from diamonds and accumulating assets during boom periods,” “debt servicing,” and “funding development projects,” provided Botswana with the stability it needed to profit from its diamond resource.  Sierra Leone, on the other hand, made use of sparser stabilizing mechanisms largely managed at the local level.  According to the UN report, Sierra Leone’s lack of oversight led only “0.75 per cent of diamond export duties” back to local development initiatives.  Sadly, those funds that did make it back were susceptible to “hijack[ing] by local chiefs in the producing area.”

Botswana’s comparatively long-standing democracy, characterized by its “record with political stability and non-violent settlements of electoral disputes,” also played a role in its success.  Botswana’s politicians, more beholden to the wishes of their electorate than Sierra Leonean politicians, made a conscious effort to invest its resource wealth in sustainable projects.  Botswana channeled “significant diamond revenues into education, health, roads and basic infrastructure while in Sierra Leone so little (only 0.75 per cent of diamond export duties) served the same purpose as they did in Botswana.”  

Knowing the factors that have set Botswana apart, what lies in store for this small and diamond-rich nation?  Botswana, evidently attempting to dodge the Prebisch-Singer hypothesis, seems to have learned from the mistakes of its resource-cursed neighbors: it has begun to invest in secondary industries capable of further developing its diamond wealth.  The United Nations reports that Botswana will install 21 “cutting and polishing” firms capable of adding hundreds of jobs and pulling the country further out of “extreme poverty.”  It would behoove political scientists and economists to continue tracking Botswana’s economic progress.  Hopefully, this small country’s democratic governance and economic safeguards will allow it to develop successful secondary industry surrounding its diamond resource.

Concluding Remarks: The Way Forward

Evidently, resource wealth is by no means an economic or political panacea.  States must carefully safeguard their democratic institutions and introduce economic safeguards to avoid the trap of the resource curse and ensure that resource wealth benefits citizens in the long term.  Scholars must acknowledge, however, that not even democracy — regarded as one of Botswana’s saving graces — can completely protect states from the curse.  Research has found that even democratic, oil-rich Ghana (a state with a Freedom House score of 83, only one point below that of the United States), suffers from its own unique strain of the resource curse.  Ghana’s “curse” is an economic one, brought on by “oil-induced borrowing” that has augmented the debt of the Ghanian government.  Pius Siakwah finds that Ghana’s oil has created a spurious perception of wealth, incentivizing the government to borrow more than it can pay back.  He argues that “While high debt to GDP ratios appears to typify underdeveloped economies and Ghana is not an exception, commercial oil production since 2011 is also mediating the rate at which Ghana’s debt is accruing since oil creates ‘hope of wealth’ to pay loans back.”  Wealthy countries — the US and China, for instance — have further enabled Ghana’s borrowing habit, lending it money to continue its development projects.  

It is true that Ghana has fared much better than its nondemocratic resource-rich counterparts — as Siakwah puts it, “although a democratic polity does not insulate a country from the problematic impacts of oil, it can mitigate them.”  Even so, Ghana’s economic difficulties demonstrate that even democratic institutions cannot offer a total solution to the resource curse.  Knowing this, what specific measures can states take to further mitigate the effects of the curse? Scholars have found that international institutions, including corporations themselves, can do a great deal to counter the resource curse.  Maconachie and Binns have found, for example, that the Kimberley Process — a vetting process through which diamond companies monitor the source and uses of their diamonds — has done a great deal to “redress the serious humanitarian and security problems associated with conflict diamonds.”  Of course, the Kimberley Process is no panacea either.  According to Maconachie and Binns, “Some industry observers suggest that up to 50% of Sierra Leone’s diamonds continue to leave the country illegally,” and Sierra Leone remains poor and underdeveloped in spite of Kimberley oversight.  Still, the existence of the Kimberley Process is a sign that multinational corporations have begun to take notice of the resource curse.  Coupled with the presence of democratic institutions, safeguards like the Kimberley Process, and economic guardrails such as those seen in Botswana could do a great deal to alleviate numerous types of resource curses.

Clearly, the phenomenon of the “resource curse” is struck through with numerous complexities; no two resource-rich states operate in the same way, and a myriad of factors can determine the potential political and economic effects of resource wealth.  Resource-rich countries, as well as states that attempt to tap such resources, would do well to learn from the comparative case studies of Botswana and Sierra Leone and remember that no one economic factor or political system can entirely insulate states from the curse.

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