Can the resource curse be overcome?

There have been many studies of the so-called 'resource curse': the correlation between abundant mineral resources and poor economic performance or authoritarian regimes. Many developig countries have squandered their mineral wealth; but what better way is there for them to manage it?

Combating the Resource Curse: An Alternative Solution to Managing Mineral Wealth (PDF), by Erika Weinthal  and Pauline Jones Luong, tackles this question. It was published in the March 2006 issue of Perspectives on Politics. Their main solution? Domestic privatisation:

In a recent op-ed, Joseph Stiglitz writes, “Abundant natural resources can and should be a blessing, not a curse. We know what must be done. What is missing is the political will to make it so.”  Scholars and policy makers alike have become increasingly convinced that it is possible to combat the resource curse through a broad array of policies that include natural resource funds, economic diversification, transparency and accountability, and direct distribution. These solutions, however, rely on a degree of institutional capacity that is widely absent in mineral-rich countries, and thus they are prone to suffer from the aforementioned negative economic, political, and social outcomes.

In contrast, we offer a solution that directly addresses the pervasive problem of weak institutions in mineral-rich states—privatization to domestic owners. By taking resource rents out of the state's direct control, domestic privatization simultaneously fosters the conditions under which governments have an incentive to build strong fiscal and regulatory institutions and creates a new set of societal actors with the potential to demand these institutions.

Domestic privatization, however, is not a short-term remedy for institutional weakness. Building institutions is a lengthy process, involving numerous conflicts between the government and domestic capitalists over their respective roles in the economy and the rules that define them. This process is also a highly political one and, as such, is often mired in the political priorities of the moment, which can temporarily derail economic ones.

...Domestic privatization is also not universally applicable. Like any policy prescription, the domestic context can be more or less conducive to its feasibility. First, state leaders are more likely to privatize their mineral sector where they are both able to rely on an alternative source of export revenue in the short-term and feel threatened by the emergence of a rival political cleavage.  Transferring ownership of these resources from the state to private domestic actors thus becomes a way to bolster existing supporters and/or appease emerging rivals without the immediate need for attracting foreign capital. When privatization occurs in this manner, moreover, it is more likely to lead to the establishment of clear boundaries between those who own the resource (that is, domestic capitalists) and those who regulate it (that is, the state). Second, domestic privatization is more likely to succeed where domestic entrepreneurs have an interest in developing the mineral sector, as is clearly the case in Russia today as well as the United States in the late 1800s and Romania during the interwar period.

While Stiglitz and others tend to view the problem of mineral wealth as a matter of political will alone, our research suggests that this approach fails to take the broader picture into account. Political will, like institutional capacity, is the product of incentives. Thus, even though domestic privatization can be a highly contentious process, it remains the only solution that can generate the incentives for governments in mineral-rich countries to both acquire the will and build the capacity to manage their resources effectively.

Precisely because domestic capitalists own its mineral resources, rather than the state, Russia has the potential to build a brighter future than its mineral-rich counterparts in the developing world. International actors and organizations would therefore be well advised to advocate privatization to domestic owners as another possible solution for combating the resource curse, especially for new producers of mineral wealth like Azerbaijan, Kazakhstan, East Timor, Chad, and Sudan. With time and international support, they can pursue domestic privatization as a strategy and thereby create the necessary institutions to turn their mineral wealth into a blessing rather than a curse.

It's a comprehensive and cogent piece. Pity the Bolivians didn't read it.

Comments

[Roehl Briones]

Why "domestic" privatization? Why not auction off the rights to extract the resource to the highest bidder, without nationality requirements/

[josh]

I agree. It is not so clear to me why domestic ownership will result in a bigger/better bundle of sticks than foreign ownership.

"Transferring ownership of these resources from the state to private domestic actors thus becomes a way to bolster existing supporters and/or appease emerging rivals without the immediate need for attracting foreign capital."

I do not think it is so clear that this behaviour will result in more well-defined property rights.

[spencer]

Aren't the remittences by foreign workers from the US or the Gulf oil countries just another type of the curse of natural resources in that it allows the home country to enjoy higher consumption or a higher standard of living without doing much to improve the fundamental ability of the economy to actually generate a higher standard of living.

[vak]

reverse causation anyone ?

could it be that being bad at economics and management, "weak" country turn to commodity exporting (lowest economic output) and dictatorchip (lowest gouvernance) ?

could it be that in "weak" countries (those badly governed) commodity's windfall are always miss-menaged (turning into a national curse)

[Dan K]

This thesis seems horribly underdeveloped. The Bolivians did auction their mineral rights the last time around, but (mainly because of government officials accepting bribes) did not get as good or as flexible deal as possible.

Now, with oil at $70 a barrel it is natural for the government to go back and seek to renegotiate contracts signed by a previous government and very possibly with hints of bribery (rendering said contracts null via a number of int'l treaties). Of course, Morales played all this to the hilt for political purposes but I do think that most governments would take similar actions.

Do the oligarchs really provide a democratic check on Putin or do they just augment his power within the political sphere as long as he delivers within theirs?

A better solution might be for foreign oil companies to distribute all investment payouts as stock payable to individual accounts of all national citizens. This would be a truly innovative solution that would:
1. Give voice to the propertyless in the operations of said company.
2. Develop domestic financial institutions. At a minimum so that rural peasants could cash in their ExxonMobil Class C shares.
3. Avoid most opportunities for the government to hijack resource revenues.

[Ishak]

There is a parallel "resource curse" when the Central Government subsidizes or wholly funds sub-national governmental units and local government units (LGUs). In this scenario, the bulk of taxes are paid to the Central Government, which revenues, it then redistributes to the sub-national governmental units and LGUs. The sub-national governmental units and LGUs have no incentive to be accountable for the funds that they receive from the Central Government because they are not the ones who collected it. In the worse cases, the sub-national governmental units and LGUs have poor or no tax collection, but due to redistribution policies still receive a share of Central Government revenues. In essense, the Central Government subsidy and funds are viewed as "free money", and thus becomes a source of patronage for the sub-national governmental unit and LGU officials and politicians. If you have any studies on this phenomenon and possible solutions please e-mail me.

[Pandora Braclets]

I like how the charms professor is a bearded little elf with snowy white hair & in all the other movies is ala charlie chaplin?