By Victor Menaldo
Over 1.5 billion people live in countries whose economies are dependent on the revenue from natural resource exports. With growing demand from China and other emerging markets, the demand for minerals and oil will continue to increase. And prices will increase even further in response to the accelerated depletion of these non-renewable resources. What effect will mushrooming reliance on oil and minerals have on commodity exporters’ politics, legal institutions, and economics?
Conventional wisdom says that, over the long run, the results will be devastating. Increased natural resource reliance will promote authoritarianism, corruption and the weakening of the rule of law, economic stagnation and even war. This definitely seems like more than what these countries bargained for when they were ostensibly blessed by the gods of oil and precious metals.
The idea of a resource curse can be found in academic writings ranging from country case studies of oil and mineral reliant states, such as Iran and Nigeria, and large-n statistical analyses. It has also spread beyond academia. Several country case studies, policy papers produced by multilateral aid organizations, popular books on world politics and economics, and articles in the mass media, have been seduced by the idea that there is a resource curse. While well-respected magazines such as The Economist continue to run frequent special reports on this phenomenon, perhaps the most well-known popularization is New York Times columnist Thomas Friedman’s so-called first law of petropolitics: the claim that recent turns toward authoritarianism in Russia, Venezuela, and Iran have been induced by big increases in the price of oil. Moreover, the scope of the policy prescriptions espoused by resource curse advocates has been ambitious, matching the sweeping claim that oil and mineral wealth is universally bad for countries’ political and economic development. Some scholars have gone as far as to recommend that countries that discover oil and precious metals are better off leaving their resources in the ground—a policy that, unsurprisingly, resource rich countries have eschewed so far. Many have a good reason to do so: they are poor, and can ill-afford to simply leave the “big bills” associated with minerals and oil “on the sidewalk.”
Despite overwhelming consensus, there is reason to be skeptical of the resource curse theory. Over the past few years, Stephen Haber and I have researched this issue extensively. Unlike other research on this topic, we have looked at the historical trajectory of resource-reliant countries and conducted before-and-after comparisons, in order to see if the discovery and increased production of oil and minerals had any effect on countries’ political institutions; we have also compared these countries to non-resource reliant countries that were similar to them on the eve of resource discovery, save for reliance on oil and minerals. We were surprised to learn that, upon closer inspection, there really is no there there!
Indeed, take a look at the time-series graphs for Australia, Canada, and the United States below: they have historically enjoyed some of the highest levels of income from natural resources per capita (well-above the historical global mean).
Source: Haber and Menaldo (2010). Total Natural Resources Income is: Total Fuel Income plus Total Metals Income in Real 2007 dollars.
We know that these countries have been consistently liberal democracies, even in the face of increased income from natural resources. On the economic front, Gavin Wright (and coauthors) has written extensively about the fact that the United States’ industrial revolution was bankrolled by its absurdly generous endowments of copper, iron ore, antimony, magnesite, mercury, nickel, silver and zinc, and, of course, petroleum. He further argues that these endowments did not fall from the sky like manna from heaven; US resource wealth was instead engendered by a conspiracy of political and legal factors: a favorable legal environment, engineering prowess, and a favorable business climate that rewarded otherwise risky investments in knowledge and technology.
Also, consider Chile, the world’s largest copper producer. A consolidated democracy, it is the wealthiest country in Latin America (it’s fast approaching $15,000 Real Per Capita GDP). These attributes undoubtedly contributed to its ability to rescue the 33 miners that were trapped inside one of its modern and productive copper mines.
Percent of the Global Copper Market, 2006
Source: Haber and Menaldo (2010).
When it comes to the claim that there is a Resource Curse, does the Emperor have no clothes?
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