Why do some countries that are endowed with a wealth of natural resources such as oil and gas fail to industrialise, and instead fall victim to conflict, corruption, underdevelopment, or inequality?
It was the scholar Richard Auty who first coined the term “resource curse” in the early 1990s. There are many potential explanations for the phenomenon, also referred to as the “paradox of plenty” Generally speaking, it is thought to be caused by a disproportionate amount of a country’s capital and labour force being concentrated in a few resource-dependent industries such as oil and mining.
By placing their eggs in one or two baskets and failing to diversity their economies, countries not only ignore other sectors, leading to underdevelopment, but also leave themselves vulnerable to fluctuations in commodity prices, resulting in long-term economic underperformance and instability.
Corruption can also be a factor, particularly in developing economies, where governments may be tempted to abuse regulatory powers by awarding lucrative contracts based on bribes, for example.
Upon the discovery of large natural resource deposits such as oil, developing countries tend to try and attract foreign investment since they lack the necessary capital, expertise and technology to extract and process it themselves. The contracts that define such arrangements are key, however.
Service agreements, joint-venture agreements or production sharing agreements with multinational corporations offer multiple advantages for sovereign nations. Under a typical production sharing agreement, a government contracts an oil company to extract the oil, the company is paid back its costs, taxes and royalties are deducted, and the proceeds from the ensuing production are shared.
In contrast, a sole risk contract may transfer huge economic benefits to the companies involved at the expense of the population by giving away the country’s right to its share of the oil produced.
Blessing or curse? Oil extraction in Venezuela and Namibia
Writing in The Zimbabwe Herald, Takudzwa Takunda Mutevedzi, a lawyer, cites Venezuela as “the perfect embodiment of the resource curse”, noting that, despite it having the world’s largest oil reserves (more than 300 billion barrels), the majority of ordinary Venezuelans live in abject poverty.
Takudzwa goes on to say that the environmental impact on local communities in countries such as Nigeria and Ghana can be intolerable. In the Nigerian communities of Goi, Oruma, and Ikot Ada Udo, as well as the western region of Ghana, for example, residents have complained of serious air and water pollution, which has “suffocated” traditional economic activities like fishing and agriculture.
In January, Canadian oil and gas company ReconAfrica began exploratory drilling in the Kavango Basin in north-eastern Namibia amid claims it could contain up to 31 billion barrels of crude oil.
However, environmental associations and local tourism operators are concerned the project may impact groundwater and biodiversity, despite ReconAfrica’s claims that it is following government procedures, is not drilling in ecologically sensitive areas, and has obtained all necessary permits.
There are also concerns that Namibia may be afflicted by the resource curse in the same way as its neighbour; Angola remains a developing country, despite considerable oil wealth. Sceptics also point to the conflict in northern Mozambique, which is tied in part to natural gas extraction.
“The discovery of oil has destabilised countries in our region and other parts of the continent,” said Frederico Links of Namibia’s Institute for Public Policy Research in an article by German broadcaster Deutsche Welle.
“You have this immense wealth being pumped from under the ground amidst poverty and inequality. When people don’t see themselves benefitting, you can see how the conditions exist that could become a security situation for Namibia if not managed properly.”
Nigeria and Angola: a study in contrasts
Another theory is that resource wealth tends to lead to underdevelopment because it entrenches autocratic rule. However, this fails to provide an explanation for the divergent political economic outcomes in both Angola and Nigeria, both of which were largely autocratic post-independence.
In his 2020 book entitled ‘Coups, Military Rule and Autocratic Consolidation in Angola and Nigeria’, Ross Harvey, senior research associate at the University of Johannesburg, analyses the recent history of the two nations to understand why the resource curse manifests differently in different contexts.
Angola and Nigeria are Africa’s two largest oil-producing nations, but have experienced contrasting political and economic outcomes since securing independence. According to Harvey, this can be explained by focusing on how the leader of the ruling coalition extracts and distributes oil rents, the term used to describe the difference between the price of oil and the average cost of producing.
Angola’s President José Eduardo dos Santos used the country’s oil wealth to consolidate power early on, and ruled for 38 years. No Nigerian leader attained the same level of consolidation over oil or power, and the country inadvertently moved towards a more open – although still unstable – political system.
In 2018, Angola’s fuel exports made up 92.4% of the country’s total exports and oil rents accounted for 25.6% of GDP. In 2019, the country ranked 148th out of 189 in the UN ’s Human Development Index. Nigeria’s oil exports in 2018 were similar, at 94.1% of total exports, but oil rents amounted to just 9% of GDP. In 2019, the West African country ranked 161st on the Human Development Index.
By focusing on how autocrats use natural resource rents to accumulate power, Harvey argues, policy practitioners may be able to help citizens spot potential power-grabs, and avoid the resource curse.
Accountability is key: Cambodia and Guyana
Conflicts over oil resources have also taken place in Mozambique, Syria, Iraq, and Azerbaijan. In Cambodia, the resource curse is a subject of debate following Chevron ’s discovery of oil in Cambodian waters, which are thought to contain approximately 400 million barrels of reserves.
Prime Minister Hun Sen said that oil is not a “curse”, but a “blessing” for Cambodia. “Now we can start raising questions on how money from our oil resource will be spent,” Sen added. “If this question is posed, I will say the money will be allocated mainly to the education and health sectors.”
Some Cambodians are more sceptical, however. Sokvy Rim of the Cambodian Education Forum compares Venezuela’s woes with Norway, which he cites as a natural resource success story.
“Norway’s ability to transform oil into economic development is not an accident, but it is through the establishment of strong institutional government that is transparent, accountable, and has zero tolerance for corruption,” Rim writes in Eurasia Review, adding that “less-developed countries such as Cambodia should learn from the Norwegian lesson to avoid the fate of the resource curse”.
In Guyana, meanwhile, the first national election held since ExxonMobil discovered oil there in 2015 was dogged by accusations of corruption in the shape of favourable contracts with foreign investors.
This delayed government approval for the next phase of the offshore oil development, which could potentially cost Guyana over $1.6bn in lost revenue, reports Amy Myers Jaffe in MercoPress.
Strong governance, a zero-tolerance approach to corruption, transparency, accountability, just some of the factors that can help ensure that natural resource wealth benefits the many, not just the few.