The Resource Curse Paradox - Research Proposal Example

Running Head: THE RESOURCE CURSE PARADOX AND THE OIL AND GAS PRODUCING COUNTRIES 1 THE RESOURCE CURSE PARADOX: ITS APPLICABILITY TO OIL-PRODUCING STATES WITH WEAK SOCIAL AND POLITICAL FORCES Name Course Date INTRODUCTION The resource code, also known as the “paradox of plenty,” is a social and economic phenomenon in which abundance in natural resources is being equated to stunted economic growth as well as susceptibility to conflict and failure in attaining democratic ideals. Karl (2005) clarified, however, that the theory does not apply to mere possession of natural resources but an overwhelmingly dependence on it, which is usually determined by comparing oil or gas exports to exports of a state in general. One origin of this theory is perhaps, the fact that between 1965 and 1998, OPEC states had decreased their per capita GNP by 1.3 per year on the average whilst other countries that are not oil-producing grew by 2.1% on the average for the same period (Karl 2005). New players are joining the ranks of oil-producing and exporting nations, and many of them are fragile and have weak economies, such as countries in Africa. It is of great concern that these new players may be exposed to the ill effects of the resource curse. It is submitted, however, that the resource curse theory cannot be used as a blanket theory applicable to all states that are dependent on wealth generated by oil. The oil-producing countries that are afflicted by it are those with weak social and political forces that do not have strong persuasive powers over the shaping of their country’s economic policies. LITERATURE REVIEW Many researchers have pointed out the association between natural resource abundance and poor economic growth. This phenomenon is called the resource curse thesis. The issues afflicting countries suffering from resource curse have been identified as including the areas of socio-economic development, governance, democracy and human rights, peace and security. The theory of ‘crowding-out’ ascribes neglect of human resources by these natural resources-wealthy nations because of being blinded by their resource wealth. Oil rich countries, together with other with extractive economies, are called rentier states or states that are primarily on the receiving end of the profits engendered by the earnings of the extracted natural resources. These countries are also characterised by their frail democratic institutions and even repressive systems as well as the persistent involvement in conflicts (Basedau 2005, pp.1-20). Many oil-producing states are exhibiting symptoms of the resource curse phenomenon. Notwithstanding the amount of wealth generated by oil production and export, many of these oil producing states are experiencing economic underdevelopment political mismanagement, facts which are recognized by economists from the World Band and the IMF. OnE cause of this economic underdevelopment in oil-generating countries is traced to the so-called Dutch disease, which is the suppression of the growth of non-oil industries in the oil-rich state due to the large volume of foreign exchange inflows that drive export prices up of manufacturing and agricultural goods. Although Botswana, Chile and Malaysia do not show signs of the resource curse, these states are primarily mineral-producing countries and are not into oil (Frynas and Paulo 2006). In addition, these oil-producing states are embroiled in conflicts hosting one-third of the world’s total conflicts (Ross 2008). Instead of empowering them towards greater economic prosperity, wealth generated from oil has affected oil-producing states with a “sense of unease” (Duruigbo 2006, p. 2). Although not all oil-producing states are afflicted with resource curse, oil-dependence is believed to have serious detrimental effect on “the quality of domestic institutions and through this channel on long-run growth” (Martin & Submaranian 2003, p. 24). Moreover, “100 billion barrels of oil (approximately the initial endowment of Iraq) pushes a country’s democracy level almost 20 percentage points below trend after three decades” (Tsui 2010, p. 89). The case of Nigeria is a classic example why the resource curse paradox is persistently hounding oil-rich countries. From US$35 in 1965 to US$325 in 2000, Nigeria’s oil revenues per capita should have by now springboarded Nigeria’s economy. On the contrary, however, Nigeria has become one of the 15 poorest countries in the world with 70% of its population forced to survive on less than US$1 per day between 197o and 2000. This contrasted sharply with the growth of its physical capital, which averaged 6.7% since it declared its independence in 1960 (van der Ploeg 2010). In a study done by Ikeglebe (2005), he found that it was not the oil-dependence of Nigeria that led to the conflict in the Niger Delta region, but it was the fuel sustaining it as conflicts centered on the struggle for resource opportunities as well as engendering rampant theft cases of refined and crude oil. A comparison between oil-rich countries and resource-poor countries showed that the latter are outpacing the former in economic performance. The states of Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan have not exploited their oil-generated wealth as a buffer for reforms and achieve economic progress, but instead the money generated by oil have been squandered by the countries’ elites (Esanov et al 2003) It is refuted, however, that wealth engendered by abundance of natural resources, such as oil and gas, leads to instability and conflict. In a study of 37 countries, Basadau & Lacher (2006) concluded that countries with high oil-income are stable politically because of its ability to spend for security measures as well as implementing policies on a large-scale that benefit the country. On the other hand, states with low oil-income are able to appease their constituents through patronage networks, which encouraged instability. However, Basadau & Lacher 2006) claimed that civil repression in these countries are not influenced by oil wealth, but by other factors. In a later study, Besadau and Lay (2009) clarified that it is not oil-wealth that is creating a negative impact on countries that are producing oil, but rather it is dependence on that wealth. Moreover, there is a distinction between oil exporters and per capita wealth of oil production: the former is prone to violence whilst the latter is “spared from internal violence” (p. 774). This view was reinforced by other studies. Goldberg et al (2008) reviewed data that spanned 73 years in Texas and Louisiana and concluded that these data proved that dependence on natural resource abundance had the effect of slowing down the economy and tends to undermine democratic processes because the one holding the power was inclined to make his stay in power longer using all the means at hand even in democratic settings. There are other studies that deny even resource-dependence as anything to do with undermining democratic principles and establish dictatorship. Haber and M.aldo (2011) conducted a longitudinal study on states that are resource-dependent before they became one and after. They arrived at the conclusion that not only do resource-dependence not tend towards the establishment of dictatorship, but they in fact, encourage democracy. Some researchers criticise the resource curse paradox as an over-simplistic and sweeping theory that do not hold true in all cases. Hertog (2010) pointed to the Gulf States to prove that the resource curse theory does not affect all oil-dependent states or that it necessarily leads to economic stagnation. The economy in such states can still work by putting a line between politically motivated distribution and profit-oriented economic planning. It is posited, thus, that mere abundance of natural resources does not in itself lead to a negative impact such as economic doom or violence. This is illustrated by the case of Norway, Botswana and Chile, which are countries that have managed well the wealth generated by their natural resources as opposed to the case of Nigeria, Bolivia and Congo. Rather it is the policies that resource-rich countries will adopt that will determine how such resource-generated wealth will affect them (Frankel 2010). The divergence in findings of the impact of natural resource or oil resource on states is attributed to Mehlum et al (2006) to the quality of institutions of states. States with producer-friendly institutions succeed in using oil-generated wealth to jumpstart their economy whilst those with grabber-friendly institutions coupled with over-reliance on oil can lead to low economic growth. This study refuted the Dutch Disease as the primary underpinning of resource curse. METHODOLOGY To be able to attain its objective, which is to prove that the resource curse theory is not a blanket theory applicable to all states that are oil-dependent for their revenues but only to those states with weak social and political forces, the research will have to look into the background of oil-producing states and their social and political institutions before and after they engaged in oil production and exportation. This means studying these states one by one and comparing their structural framework as states as well as looking at how these structural frameworks changed after the states went into oil production. For this purpose, this research will use both primary and secondary resources. Primary resources will be constituted by research, studies and direct observations by authors while secondary sources will come from articles and books. RESULTS This research will show that the resource curse is not a blanket theory that can be made applicable to all oil-dependent states. Oil-dependent states mean in this context states whose primary generator of income comes from oil exportation. More importantly, this research will also show that only those states with weak and defective political, economic and social institutions suffer from the negative impact of oil-generated wealth. IMPLICATIONS This research is important because many states that are poor and are fragile are now joining the ranks of oil-dependent nations, many of them coming from the African continent. There are researchers who refuted the credibility of this theory, but it is also a fact that there are oil-rich countries that are surprisingly cellar dwellers when it comes to economic progress and a classic example of this is the state of Nigeria. It is surprising because Nigeria is one of the top oil exporting countries of the world, in fact ranked the sixth, selling oil to other states at 2,051,000 barrels/day as of 2009 figures (The World Factbook 2013). The theory of resource curse must be scrutinised from all angles to reveal the extent of its credibility and applicability to the states now joining the ranks of oil-producing countries. A better understanding of this hypothesis is significant so that new players in the oil industry can learn from it and devise ways and measures to ensure that they do not fall into the same trap that some of their predecessors did. REFERENCES Basedau, M. (2005). Context matters – rethinking the resource curse in Sub-Saharan Africa. Working Paper, Global and Area Studies. Hamburg, Germany. www.duei.de/workingpapers Basedau, M. and Lacher, W. (2006). A paradox of plenty? Rent distribution and political stability in oil states. GIGA Working Papers. Hamburg, Germany. www.giga- hamburg.de/workingpapers Basedau, M. and Lay, J. (2009). ‘Resource curse or rentier peace? The ambiguous effects of oil wealth and oil dependence on violent conflict.’ Journal of Peace Research, vol. 46, no.6, 2009, pp. 757–776. Duruigbo, E. (2006). ‘The World Bank, multinational oil corporations, and the resource curse in Africa.’ Univ. of Pennsylvania Journal of International Law, vol. 26(1): 1-67. Esanov, A., Raiser, M. and Buiter, W. (2003). ‘Nature’s blessing or nature’s curse: The political economy of transition in resource-based economies.’ Successes and failures in real convergence, National Bank of Poland, 23-24 October 2003. www.willembuiter.com/curse.pdf Frankel, J. (2010). The natural resource curse: A survey faculty research working paper series. http://www.nber.org/papers/w15836 Frynas, J. and Paulo, M. (2007). ‘A new scramble for African oil? historical, political, and business perspectives.’ African Affairs, 106/423, 229–251. Oxford University Press. Goldberg, E., Wibbels,E. and Mvukiyehe, E. (2008). ‘Lessons from strange cases democracy, development, and the resource curse in the U.S. states.’ Comparative Political Studies, Volume 41 Number 4/5, April/May 2008 477-514. Haber, S. and Menaldo, V. (2011). Do natural resources fuel authoritarianism? A reappraisal of the resource curse. American Political Science Review, Vol. 105, No. 1. Hertog, S. (2010). ‘Defying the resource curse explaining successful state-owned enterprises in rentier states.’ World Politics, Volume 62, Number 2, April 2010, pp. 261-301. Ikeglebe, A. (2005). ‘The economy of conflict in the oil rich Niger Delta region of Nigeria.’ Nordic Journal of African Studies 14(2): 208–234. Karl. T.L. (2005). Understanding the resource curse. New York, NY: Open Society Institute. Martin, X. and Subramanian, A. (2003). Addressing the natural resource curse: An illustration from Nigeria. Discussion Paper Series, Department of economics, Columbia University. www.econ.upf.edu/docs/papers/downloads/685.pdf. Mehlum, H., Moene, K. and Torvik, R. (2006). ‘Institutions and the resource curse.’ The Economic Journal, 116 (January), 1–20. Ross, M. (2008). ‘Blood barrels: Why oil wealth fuels conflict.’ Foreign Affairs, May/June 2008: 1-7. The World Factbook (2013). Country Comparison-Crude Oil-Exports. Central Intelligence Agency. https://www.cia.gov/library/publications/the-world- factbook/rankorder/2242rank.html Tsui, K. (2010). ‘More oil, less democracy: evidence from worldwide crude oil discoveries.’ The Economic Journal, 121: 89-115. van der Ploeg, F. (2010). Natural resources: Curse or blessing? CESifo working paper Resources and Environment, No. 3125: 1-65. Read More