This chapter concludes “From Institutions Curse to Resource Blessing,” a book that aimed to make several inroads into the political economy of development. These include challenging the belief that natural resources are an exogenous, randomly assigned variable; advancing the contention that there is no such thing as a natural resource curse; arguing that, instead, it is preexisting institutional legacies that have impelled many countries to cultivate extractive industries as default sectors whilst also condemning them to state weakness, authoritarianism, economic stagnation, and other ills unduly attributed to minerals and oil; and demonstrating that natural resources are a blessing that improve fiscal capacity and promote capitalism, industry, and democracy. This chapter summarizes these contributions and introduces new sets of questions for future research. The first is about the possibility of a race-to-the-bottom dynamic. Do oil and mineral producers that grow wealthier and more democratic over time, and that develop better legal institutions, outgrow their dependence on natural resources? If so, what does this mean for multinational firms involved in extractive industries? Are states that grow stronger abandoned for weaker ones? The second set is about how to make sense of the fiscal contract paradigm. What should we make of the claim that the preparation for and waging of war drove democracy and development in Western Europe as representation and public goods were exchanged by rulers for tax revenues and patriotism?
This chapter introduces “From Institutions Curse to Resource Blessing,” a book that aims to make several contributions to the political economy of development. The first is to challenge the belief that natural resources are an exogenous, randomly assigned variable. Second, and relatedly, to debunk the natural resource curse, a ubiquitous and influential view that evolved from this flawed premise. It is not oil and minerals that cause a host of undesirable political, economic, and social outcomes in the developing world. Rather, preexisting institutional legacies have impelled many countries to cultivate mining and hydrocarbon extraction as default sectors. The former are also responsible for condemning these nations to suffer from state weakness, authoritarianism, economic stagnation, and other ills unduly attributed to natural resources. Third, to introduce the institutions curse, a theory that draws this claim out: dysfunctional rules and practices explain why modern and diversified economies have failed to take root in the developing world; they have instead incentivized rulers to court capital for commodity industries that are easier to tax. Fourth, to argue that oil and minerals are in fact a blessing. They improve fiscal capacity and promote capitalism, industry, and democracy.
Check out this interview with Mark A. Menaldo, discussing his recent book, “Leadership and Transformative Ambition in International Relations.” 0
From the interview: “This book is deeply challenging to leadership studies, which is a good thing. It is complex, which is a good thing, and it forces us to reexamine some of our core assumptions about leadership. That is another good thing” (Michael A. Genovese, Loyola Chair of Leadership Studies at Loyola Marymount University)
Book Description: This enriching book explores a theoretical gap in the study of international relations. It brings leaders’ ambition back in. Some leaders transcend political constraints and, as a result, they fundamentally reshape their domestic polity while at the same time introducing fundamental change to the international system. Drawing on classical and modern political thinkers, Mark Menaldo studies leaders who have ‘transformative ambition’. Through the force of their initiative, personalities, and the skilled practice of statesmanship, leaders with transformative ambition try to accomplish great goals for their states, despite formidable international and domestic constraints. In support of the argument, Mark examines historical case studies that include Otto Von Bismarck, Woodrow Wilson, Charles de Gaulle, and Pericles.
Is there a resource curse or resource blessing? Do natural resource rents displace regular government revenues or bolster the state’s capacity to extract them? Do they retard democracy or promote it? Do they undermine the quality of institutions or enhance them? Does their presence destroy the private market or help to preserve it? This chapter reevaluates the relationship between oil and a host of political and economic outcomes across the globe since 1930 after isolating the exogenous variation in fuel income as instrumented by geological endowments, and after controlling for exploratory efforts. These outcomes include non-resource public revenues, regime type, the quality of a country’s institutions, the government’s ability to credibly commit to its promises, and the size and sophistication of the market economy. Across the board, I find evidence for a resource blessing. This is even after exploring the effects of oil on democracy in the post 1980 period, in the wake of a wave of oil firm nationalizations. I also adduce considerable evidence for the mechanisms that explain a positive association between resources and a country’s political economy in Latin America over the long run. This chapter therefore shatters the consensus that oil is a curse, including recent claims that it is conditional on the time period.
In this review article I discuss how recent books on the political economy and political ecology of natural resources address multiple issues concerning the causes and effects of natural resources in the developing world. The Oil Curse, Subterranean Struggles, Resources for Reform, and The Empire Trap each shine light on important problems and puzzles in the study of natural resources. They highlight a vibrant debate; between one camp, the resource curse, which views natural resources, and most particularly oil, as the cause of several political, economic, and social ills, versus another, heterodox camp, which sees both as symptoms of an underlying disease. Namely, weak states that are desperate for revenues and foreign exchange must negotiate against powerful multinational corporations that are often attracted to the natural resource sectors of developing countries because of this weakness. This latter camp therefore views institutions as the true curse.
ABSTRACT: Is there really a resource curse? Or is it an institutions curse? Drawing on recent findings that challenge the view that there is a causal relationship running from oil to political and economic underdevelopment, this chapter seeks to identify what determines a hydrocarbons sector in the first place. I argue and find that revenue starved states with low capacity are more likely to launch oil exploration efforts, goose the production of extant wells, export oil to a higher degree, tax it more heavily, and attract higher levels of capital in hydrocarbons. While National Oil Companies have increasingly shouldered more of the heavy lifting to make this happen, private investors also continue to play a prominent role. They exploit huge advantages in power, money, and information to protect their property rights in host countries across the developing world; International Oil Companies increasingly engage in regulatory arbitrage to sidestep stringent environmental regulations in their home countries, as well as higher taxes. A series of statistical analyses yield results that support these claims after controlling for geological endowments, oil prices, and production costs. They hold no matter how I operationalize oil, or state capacity, and across a host of specifications that address endogeneity bias. These include static, fixed effects models, Autoregressive Distributed Lag models, estimated via Structure Generalized Method of Moments, and instrumenting state capacity with relevant lags, or Two-Stage Least Squares that use factor endowments and the country’s age as instruments.
What explains why some countries are more politically, legally, and economically advanced than others? Why do countries like Denmark, South Korea, and New Zealand have a thriving economy, a stable, democratic political system, and public policies that benefit the majority of the population? Why are countries like Congo, Myanmar, Venezuela, and Sudan poor, unstable, authoritarian, and a hotbed of patronage politics that fosters endless rent-seeking, corruption and virulent civil strife?
This question matters greatly. Countries that are democracies and governed by the rule of law, and that generate consistent economic growth based on the provision of public goods, e.g., infrastructure and education, have smarter, healthier, and happier citizens. Their citizens tend to live beyond hardscrabble subsistence. Their children often grow up to be engineers, doctors, and lawyers, rather than corrupt politicians, warlords, or landless peasants. They therefore contribute to scientific progress, have the leisure time and personal security to express themselves artistically, and engage in philanthropy.
Indeed, given these important stakes, “what determines development?” is arguably the most important question in social science. Sometimes, it also produces perplexing answers.
One of the most predominant of these answers is counterintuitive. One way that countries can develop is, paradoxically, to eschew the exploitation of their natural endowments. This means abstaining from extracting and exporting oil and natural gas, on the one hand, and precious metals and gemstones, on the other. Many experts assert that forbearance of this type, although exceedingly difficult, would be better for their political system, economy, and society over the long run. Even if this comes at the expense of forfeiting their comparative advantage in the world market and billions of dollars in lost revenues.
This is a strange idea in many ways. Natural resources are responsible for modern life as we know it. The large-scale, commercial conversion of hard rock minerals and precious metals into industrial applications—e.g., uranium, gold, silver, copper, iron, zinc, nickel, and chromium—helps explain why we are wealthier and healthier than our ancestors. Readily available fossil fuels and minerals have drastically reduced the price of transportation, fertilizers, and the chemicals that allow us to produce almost every modern good around us. They have helped fuel globalization. In turn, greater international trade and investment has reduced the price of food, medicine, clothing, and amenities.
While about two billion dollars of oil is traded daily, oil constitutes the biggest share in energy consumption for exporters and importers alike. It is for this reason that the price of oil and other internationally traded commodities affects all countries’ balance of payments, savings, inflation, and growth. Large, unexpected spikes in the oil price can bring economies crashing to the ground; reductions in the price due to a more readily available supply can stimulate economic activity and tame price increases elsewhere in the economy. They can even make politicians more popular.
Natural resources are also the most capital intensive sector of the world economy. Annual global investments in natural resource extraction are close to $1 trillion dollars. For example, between 2007 and 2013, Middle Eastern countries invested over $340 billion dollars in their oil and natural gas sectors. This is the lion’s share of the region’s gross domestic product. Moreover, the capital invested in natural resources can be converted into profitable rent streams at relatively low marginal costs, which can in turn generate foreign exchange and taxable income. Rents from natural resources exceed $4 trillion, or 7 percent of global GDP.
Yet, for decades, parallel literatures in political science and economics have blamed natural resources for a host of problems and pathologies across time and space. The extraction, transportation, and export of hydrocarbons and minerals is said to vitiate the rule of law and property rights, hinder economic diversification, slow growth, stimulate unproductive rent seeking, foment corruption, and fuel civil strife and authoritarian government.
Before we launch into the systematic evidence for and against these claims, consider a set of powerful anecdotes. Spain’s prolonged economic decline, which began in the 17th Century, is often blamed on its sequestration of Latin America’s precious metals (e.g., Drelichman and Voth 2008). Spain’s “rentierism” is contrasted to England’s commercial and industrial development. Pronounced underdevelopment in the Middle East and North Africa (see Galal and Selim 2012) has also been blamed on natural resources. The terrible governance that bedevils Subsaharan African countries such as Angola, Chad, Nigeria, Equatorial Guinea, and Congo is often attributed to natural resources. Venezuela, Iran, and Russia’s Anti-American, and oft belligerent, foreign policy is blamed on oil.
Consider Saudi Arabia. The Great Arid Belt of Afro-Eurasia, which stretches from North Africa (the Sahara) to Eastern Central Eurasia (the Gobi), contains the lion’s share of the world’s conventional hydrocarbons. With about one fifth of the world’s reserves, Saudi Arabia is the world’s largest oil producer and exporter. This is often seen as the culprit behind its abject underdevelopment. Despite a relatively high level of Per Capita Income, it lacks a modern industrial and service sector (Mazaheri 2011). Its government is unable—or unwilling—to tax the population (Alkhathlan 2012). Instead of the rule of law, there is the rule of a monarch who avers that Islamic jurisprudence inspires his draconian decrees. Saudi Arabia is one of the few places on earth where citizens have no say over their political destiny, and women are treated as second class citizens under an Apartheid-like system.
The notion that there is a resource curse has had an impact well beyond the academy. The resource curse is taken as a self-evident truth at multilateral aid organizations, presented as a robust fact in popular books on world poverty, and is disseminated widely in the media. Indeed, New York Times columnist Thomas Friedman has gone so far as to decree a “first law of petro-politics”: the price of oil and the spread of political freedom are inversely correlated. And some researchers have even suggested that developing countries should consider leaving their resources in the ground, in order to avoid their pernicious effects. One possibility is to instead adopt a “development strategy” that fosters the substitution of manufactured imports from the developed world. To make cars and refrigerators, in other words – and perhaps let someone else provide the raw materials and fuel needed to do so.
More importantly, the policy implications associated with the resource curse are non-trivial. Oil and gas taxes are a major income generator for more than 90 countries (Tordo 2011 et al., ix). Over 1.5 billion people live in countries whose economies are dependent on the revenue from natural resource exports. And poor countries cannot simply wave a magic wand and conjure a modern industrial economy into existence. Therefore, they can ill-afford to simply leave the “big bills” associated with minerals and oil “on the sidewalk.”
Commodity prices are forecast to rise indefinitely in response to the accelerated depletion of nonrenewable hydrocarbons and minerals. Over the past few decades, growing consumption by China and other emerging markets has hastened the rapid depletion of the Middle East’s easy-to-extract, high quality crude. This has raised the price of oil. For this reason, oil companies have thus redoubled their exploration efforts offshore, venturing into deeper waters, and revved up investment in previously neglected onshore fields once written off as marginal. This has increased the costs of developing additional supplies of oil. This often involves bringing oil to the surface from more remote reservoirs. Two examples are the very deep waters in the Gulf of Mexico and Brazil’s offshore oil fields, which are 5,000 to 7,000 meters below the surface and underneath a 2,000 meter layer of salt (Barma et al., 2012: 19).
Similarly, both mining and hydrocarbon firms have increasingly looked to developing countries to exploit hitherto underexploited bounties. While resource endowments per square kilometer in 2000 were worth $114,000 dollars in the OECD, they were worth only $23,000 in Africa (Collier 2010). This partially explains why, between 2000 and 2008, Sub-Saharan Africa’s rents from natural resources experienced an increase of 600 percent. Similarly, the share of total natural resource rents in East Asia and the Pacific grew from 9 to 17 percent (From Rents to Riches, p. 23). Many new developing countries have therefore become producers and exporters of natural resources since the new millennium. They include Mongolia, Vietnam, Afghanistan, Brazil, and Papua New Guinea.
These new oil and mineral producers have joined the ranks of most of the world’s developing countries. According to Haber and Menaldo (2011, Data Appendix), countries that are resource dependent, in that oil and minerals make up 5 percent or more of their government revenues, include Algeria, Angola, Azerbaijan, Bahrain, Belarus, Bolivia, Bosnia and Herzegovina, Botswana, Brunei, Cameroon, Chile, the Republic of Congo, the Democratic Republic of Congo, Ecuador, Egypt, Equatorial Guinea, Estonia, Gabon, Guinea, Guinea-Bissau, Indonesia, Iran, Iraq, Jamaica, Kazakhstan, Kuwait, Kyrgyzstan, Liberia, Libya, Lithuania, Malaysia, Mauritania, Mexico, Mongolia, Morocco, Namibia, the Netherlands, Niger, Nigeria, Norway, Oman, Papua New Guinea, Peru, Qatar, Russia, Saudi Arabia, Tajikistan, Trinidad and Tobago, Tunisia, Turkmenistan, Ukraine, United Arab Emirates, Venezuela, Vietnam, Yemen, and Zambia.
Importantly, power and influence has shifted to National Oil Companies (NOCs). More than 100 NOCs are estimated to control about 80 percent of proven oil reserves and generate about three quarters of the world’s production (McPherson 2003). Most of these companies are located in the developing world. That means that a larger share of the rents associated with the exploration, extraction, distribution, refinement, and export of natural resources now remains in the developing world, rather than being repatriated to developed countries by International Oil Companies (IOCs).
Suffice it to say, the stakes could not be any higher. If natural resources indeed curse countries, then they are harming billions of citizens who are the most in need of development. Indeed, it is not an understatement to declare that this would be among the most perverse and large scale human tragedies in human history. Natural resources, which give so many citizens so much prosperity—if not life itself—might be subjecting so many others to doom and despair. This book therefore has some very good news to share. It strongly disagrees with the consensus about the effect of resources. Simply put, there is no resource curse.
In this book I argue that both a natural resource based economy and the pathologies attributed to the resource curse are jointly determined by weak state capacity and low quality institutions. Revenue starved states with short time horizons are more likely to launch oil exploration efforts, goose the production of extant wells, export oil and tax it at high rates. And because they face high fiscal transaction costs and cannot make credible promises, they are unlikely to curate vibrant and diversified economies. This book finds evidence for these claims after controlling for geological endowments, oil prices, and production costs. It also finds that, besides overly relying on natural resources, weak states indulge in crony capitalism, urban bias, and macroeconomic populism. In other words, they are cursed by their institutions.
Indeed, the effects of rapid industrialization through import substitution reveal the institutions curse perhaps better than the development of the nature resource sector in weak states that lack the rule of law. Overvalued exchange rates and financial repression engineered by governments in developing countries to protect so-called infant industries or “strategically” important ones often culminate in economic crises and disfigured economies. While a strong currency can stimulate a consumption boom in the short run, overvalued exchange rates tend to culminate in current account crises engendered by an unsustainable rise in imports. Fixed exchange rates make these crises worse. The inevitable currency devaluation exacerbates banking sector problems because borrowers and investment banks are usually exposed to debt denominated in foreign currency.
The costs associated in the banking sector can be crushing. It is expensive to recapitalize insolvent banks, stem bank runs via open-ended and inflationary liquidity support for ailing banks, extend government guarantees of financial institutions’ debts (bailouts), and grant banks forbearance from prudential regulations (e.g., suspending accounting standards that otherwise force banks to write down their debt). Not to mention the costs related to reestablishing trust across financial markets. Additionally, the associated misallocation of capital into banks and firms that are too politically connected to fail may deter the exports and foreign investment needed to spur economic recovery after a crash.
The real economy also suffers. Capital flight, currency devaluation, and recessions due to plunging demand and reduced investment can precipitate acute and protracted collapses in economic growth. The spillovers that follow these crises can last well beyond what would be expected from a cyclical downturn. They include long lived credit freezes, pronounced rises in unemployment, and decreases in the capital-to-labor ratio and total factor productivity (see Crespo-Tenorio et al. 2013). Finally, these adverse consequences are often exacerbated by austerity measures—often imposed by the International Monetary Fund—to rebalance the current account and regain international competitiveness and fiscal health. It is often the poor and those exposed to the greatest risk that suffer the most when social spending and safety nets are significantly curtailed for this greater purpose.
The book also explores whether there is a resource blessing. I reject the view that resources engender a rentier effect. Oil rents do not displace ordinary government revenues; nor are they causally associated with the under-provision of public goods or similar welfare enhancing policies. Indeed, once omitted variable bias and reverse causation are adequately addressed, the effect of oil on taxation, democracy, institutional quality, and public goods is positive. In other words, despite being cursed by their institutions, weak states are blessed by their natural resources.
After making the case for these patterns globally, my book zooms in on the Middle East and North Africa (MENA), an area of the world that has been held up as a poster child of the resource curse. I demonstrate that oil has made no meaningful difference to this region’s development. Instead, variation in political stability, institutional quality, educational outcomes, and economic growth in the MENA is explained by these countries’ inveterate cultural practices and institutions. While the monarchies, which emerged and survived in extremely arid places that experienced millennia of pastoral nomadism, tribalism, and traditionalism, are stable and wealthy societies, the republics are afflicted with numerous development pathologies, despite prolonged exposure to settled agriculture, political centralization, and modernization. The Arab Spring has helped showcase this monarchical exceptionalism.
 Many of the facts in this paragraph are from Barma et al. 2012: ix and Erkan 2011, 3.
 A more restrictive definition used by the International Monetary Fund (IMF) is 25 percent or more fiscal reliance on natural resources. There are about 50 countries in this set (see Rents to Riches: 37, fn. 18).
IP2 Working Group on Intellectual Property, Innovation & Prosperity: The Economics & Politics of Regulation 0
Below is a message from the Hoover Institution’s IP² project director, Stephen Haber, a professor at Stanford University and a fellow at the Hoover Institution, about the summer institute on the economics and politics of regulation.
I am teaching there this summer, along with some stellar faculty, that include both distinguished professors at our country’s best universities, and key policymakers at the intersection of law and economics (see below):
Hoover IP² (Hoover Institution Working Group on Intellectual Property, Innovation, and Prosperity) is launching a summer teaching institute on the economics and politics of regulation to be held on the campus of Stanford University from August 4 to August 15, 2014.
The purpose of the Hoover IP² Summer Institute is to educate young policy makers and judicial clerks about key lessons from economics and political science that will enhance their ability to write sound laws and interpret them judiciously. We are therefore recruiting law school students and recent law school graduates; students in graduate programs in public policy; federal judicial clerks; Capitol Hill staffers; and young professionals working at the nexus of law and business for an intensive, two-week program taught by a group of distinguished faculty.
In order to foster interaction with other students and the instructors, we are restricting enrollment to 25 students. Students who are accepted into the program will attend free of charge. This will include transportation to and from the program, lodging on the Stanford campus, and daily meals.
Each unit of the teaching institute focuses on a particular economic domain in which property rights, and hence regulation, are key. The units to be covered include:
• Innovation and the Patent System
• Innovation and Finance
• Competition between Firms and Antitrust
• Energy and Environment
Featured instructors include:
• IP² project director Stephen Haber (Stanford and Hoover)
• Severin Borenstein (University of California, Berkeley)
• Ron Goettler (University of Rochester)
• Wes Hartmann (Stanford)
• Zorina Khan (Bowdoin College)
• Ross Levine (University of California, Berkeley)
• Damon Matteo (Xerox PARC)
• Noel Maurer (Harvard)
• Victor Menaldo (University of Washington)
• Troy Paredes (formerly of the Securities and Exchange Commission)
• Michael Tomz (Stanford)
• Joshua Wright (GMU Law School, Federal Trade Commission)
We welcome nominations of students who would benefit from this program. For more information, see the attached teaching institute description and application. You can learn more about Hoover IP2 by visiting http://www.hoover.org/taskforces/ip2.
The poster is below: