Please read the attached article and answer the following.in your review of the articles mention the followingWhat are the main arguments presented by the author? Mention at least threeWhy does the author use the term natural resource trap? How are countries trapped?Are natural resources related to conflict? How? Mention three reasons.
the_natural_resource_trap_collier.pdf

Unformatted Attachment Preview

CHAPTER 3
The Natural Resource Trap
Conflict is not the only trap. A much more paradoxical trap
has been the discovery of valuable natural resources in the context of
poverty. You would hope that the discovery of natural resource wealth
would be a catalyst to prosperity, and sometimes it is. But these are the exceptions. Sometimes resource wealth has contributed to the conflict trap.
But even where the country stays at peace it typically fails to grow; indeed,
the surplus from natural resource exports significantly reduces growth.
Economists term the excess of revenues over all costs including normal
profit margins “rent,” and rents seem to be damaging. Over time, countries
with large resource discoveries can end up poorer, with the lost growth
more than offsetting the one-off gain in income provided by the rents.
Obviously if you have enough natural resources you can afford to forget about normal economic activity. The whole society can live as rentiers,
that is, on unearned income from wealth. This is the situation in Saudi
Arabia and Persian Gulf states such as Kuwait, which have enormous oil
revenues. But these wealthy rentier states are rare. A much larger group of
resource-rich countries have enough income from resources to take them
to middle-income status, but not beyond. To fully develop they would
need to harness the resource wealth for growth. This has proved difficult,
and the normal pattern has been stagnation, or rather booms and busts
around a pretty flat trend. This describes much of the Middle East and Russia. What I have to say about the problems of resource wealth is pertinent
THE NATURAL RESOURCE TRAP
39
for this group of stagnant middle-income countries. However, my main
concern is with a third group of resource-rich countries: those that are
poor. Resources loom large in such economies because the economies are
so small, but they do not even bring the society up to middle-income status. The societies of the bottom billion are disproportionately in this category of resource-rich poverty: about 29 percent of the people in the bottom billion live in countries in which resource wealth dominates the
economy. Thus resource wealth is an important part of the story of the
poverty of the bottom billion.
So why is resource wealth a problem?
Curses, Curses . . .
The “resource curse” has been known for some time. Thirty years ago
economists came up with an explanation termed “Dutch disease,” after the
effects of North Sea gas on the Dutch economy; it goes like this. The resource exports cause the country’s currency to rise in value against other
currencies. This makes the country’s other export activities uncompetitive. Yet these other activities might have been the best vehicles for technological progress. We are going to meet Dutch disease again when we
look at the effects of aid, so it is worth understanding it.
Take a country that neither has natural resource exports nor receives
aid. Its citizens want to buy imports, and the only way they can pay for
them is through exports. Exporters generate foreign exchange, and importers buy the foreign exchange off them to purchase the imports. It is
the need to pay for imports that makes exports valuable to the society that
produces them. Now, along come natural resource exports (or aid, for that
matter). The resources are sources of foreign exchange for the society. Exports lose their value domestically. Another way of saying the same thing
is that items that cannot be traded internationally, such as local services
and some foods, become more expensive and so resources get diverted
into producing them. Take Nigeria in the 1970s. As oil revenues built up,
the country’s other exports—such as peanuts and cocoa—became unprofitable, and production rapidly collapsed. The loss of these agricultural
activities hurt the farmers who had produced them, but it probably didn’t
of itself curtail the growth process because traditional export agriculture
40
THE TRAPS
was generally not a very dynamic sector with many opportunities for technical progress and productivity growth. However, Dutch disease can damage the growth process by crowding out export activities that otherwise
have the potential to grow rapidly. The key activities are labor-intensive
manufactures and services, the sort of exporting now done by China and
India. A low-income country with abundant natural resources is unlikely
to be able to break into these markets because the foreign exchange they
generate is not sufficiently valuable within the society.
Dutch disease is still an important idea in economics. As you will see, it
is the basis of the latest critique of aid produced by the International
Monetary Fund—the chief economist of the IMF thinks that aid is killing
growth by killing exports. However, by the 1980s Dutch disease did not
seem a sufficient explanation for the problems of resource-rich countries,
so economists added concerns about shocks: natural resource revenues
were volatile and this led to crises. This was the approach that I focused
on when I first began my academic work in economics. I started with the
Kenyan coffee boom of 1976–79 and went on to investigate other trade
shocks around the world.
Volatile revenues are obviously difficult to manage. During a price
boom government ministries, scenting the money available, put in outrageous bids for more spending. In Kenya one ministry raised its proposed
budget thirteenfold and refused to prioritize. Probably it reckoned that
other ministries were likely to do the same, so behaving responsibly was
likely to leave it at the back of the line. With this sort of behavior, rational
public investment is liable to go out the window. Worse, although public
spending can be increased very rapidly during the boom phase, it proves
very difficult to reduce during the subsequent crash. What gets cut is often not the frivolous items that went up during the boom, but whatever is
politically the most vulnerable. So maybe employment in the diplomatic
service goes up during the boom, whereas basic investment gets cut during
the crash.
The boom-and-bust phenomenon also makes it very hard for electorates to sort out when a government is making mistakes. In the first half
of the 1980s Nigeria enjoyed a huge oil boom. The government made a
catastrophic mess of this boom, borrowing heavily and spending money
on massively wasteful projects saturated with corruption. Yet inevitably,
THE NATURAL RESOURCE TRAP
41
during the boom some of the good times trickled down to ordinary people. In 1986 the world price of oil crashed, and the Nigerian gravy train
came to an abrupt end. Not only was oil revenue drastically reduced, but
the banks were not willing to continue lending; they actually wanted to be
paid back. The swing from big oil and borrowing to little oil and repayment
approximately halved Nigerian living standards. Ordinary people were going to notice this catastrophic decline whether or not they understood why
it was happening. At this point the government launched some limited
economic reforms, with the much-trumpeted support of international financial institutions. The reforms were dressed up into a high-profile political package and called a structural adjustment program. Although the reforms were modest, they were remarkably successful: output grew more
rapidly than at any time during the oil boom. But these few percentage
points of growth in non-oil output were completely swamped by the fall
in the value of oil and the switch from borrowing to repayment, with the
consequent contraction in expenditure. The reform-induced growth only
helped slightly to offset the misery of falling living standards. That is what
happened, but it is not what Nigerians think happened. Unsurprisingly,
Nigerians think that the terrible increase in poverty they experienced was
caused by the economic reforms that were so loudly trumpeted. Until reform, life was getting better; then along came reform, and poverty soared.
Given that belief, Nigerians go on to ask the obvious question: why did we
undergo such devastating “reform”? The answer they arrive at, which is inescapable given the previous steps, is that the international financial institutions conspired to ruin Nigeria. Once when I visited Nigeria using the
UN passport I then had, the initially beaming immigration officer caught
sight of the words “World Bank” and his smile evaporated. “I’m not shaking
your hand,” he said. “The World Bank hates poor people.” This understandable misreading of a boom-bust cycle has made it extremely hard to
build a constituency for economic reform in Nigeria. Ordinary people—
who would be the big beneficiaries of reform—long for the days of mismanagement because they were the days of boom. Marxists used to have a
handy term for this sort of mass miscomprehension—false consciousness.
So volatility was what you would have learned about in the 1980s. By
the mid-1990s there was more evidence to go on, and economist Jeffrey
Sachs revived concern about the problem of natural resource rents. Since
42
THE TRAPS
then political scientists have joined in, suggesting that resource revenues
worsen governance. Without discounting the older economic explanations, I think the evidence points to governance as the key problem. However, I believe that the political scientists have not gone far enough in their
analysis. They have generally seen the problem of resource rents as being
proneness to autocracy: oil induces Saddam Hussein. There is good evidence
for this, but the real problem is even worse.
The heart of the resource curse is that resource rents make democracy
malfunction. You might think that democracy is precisely what resourcerich societies most need. After all, in such societies the state inevitably has
lots of resources to manage, and democracy should provide some sort of
discipline that dictators lack. That is, you might expect that democracy is
at its most useful for the economy when there are lots of natural resources
around. You might think so, but you would be wrong. I am going to propose a new law of the jungle of electoral competition in the presence of
natural resources: the survival of the fattest.
Let’s focus on oil, which is the big natural resource. Until recently, an
oil democracy seemed almost an oxymoron. The Middle East, where oil
supplies are concentrated, was uniformly autocratic, and this reflected a
global pattern: oil rents have substantially reduced the likelihood that a
society is democratic. Things are changing. Democracy is spreading to the
oil economies, and oil is spreading to the low-income democracies. The
spread of democracy to the oil economies is an explicit agenda—indeed,
apparently the overarching agenda of the United States in the Middle East.
In other regions democratization of important oil economies has occurred
even without such explicit pressure, for example in Indonesia, Mexico,
Nigeria, and Venezuela. The spread of oil to democracies is a side effect of
the attempt to free U.S. oil supplies from dependence on the Middle East.
New discoveries have been made in a range of low-income democracies,
such as Gambia, São Tomé and Principe, Senegal, and East Timor.
There is quite a bit of institutional variation among resource-rich societies. Although institutions are affected by resource riches, usually countries got their institutions before they discovered their resources, hence
the global variation in institutions is pretty well reflected among those with
resource wealth. So it is possible to tease out statistically how political
institutions interact with resource wealth.
THE NATURAL RESOURCE TRAP
43
Anke Hoeffler and I started by estimating the rents (that is, the excess
of revenues over all costs) generated by natural resources, country by
country and year by year. Estimating the rents on primary commodities is
an important advance on just counting their value: the rent on $1 million
of oil exports is much greater than the rent on $1 million of coffee exports
because the costs of production are much lower. So data on primary commodity exports, which is what people had used when they had bothered
to look at the numbers, are a poor guide to how valuable the resources really are. And even $1 million of oil exports generates a bigger surplus if it
is coming from an easy-to-exploit onshore location than if it is deep offshore,
and if the price per barrel is $60 rather than $10.
We then matched these surpluses with the political institutions of each
country. Political scientists have classified the different gradations of democracy across the globe and over time, and we used this standard classification.
We then tried to explain a country’s growth over a given period in terms of
the characteristics prevailing at the start of that period.
We found a consistent pattern, and it’s not particularly good news for
countries such as Iraq. Oil and other surpluses from natural resources are
particularly unsuited to the pressures generated by electoral competition.
Without natural resource surpluses, democracies outgrow autocracies.
(This is itself quite an encouraging gloss on the economic consequences of
democracy: the usual academic assessment is that democracy has no net effect on growth, and we think that is because studies have not controlled for
natural resources.) In the presence of large surpluses from natural resources
it is the other way around: autocracies outperform democracies, and the effects are large. In the absence of natural resource surpluses a fully democratic polity outperforms a despotic autocracy by around 2 percent per
year. By the time natural resource rents are around 8 percent of national
income, the growth advantage of democracy has been eliminated. Beyond
this the net effect of democracy is adverse. Taking a country with resource
rents worth 20 percent of national income, the switch from autocracy
to intense electoral competition would lower the growth rate by nearly 3
percent.
Why does democracy undermine the ability to harness resource surpluses? One possibility is that resource surpluses induce an excessively
large public sector—the opposite of the “minimal state” fashionable with
44
THE TRAPS
conservatives during the 1980s. We tested this by controlling for the share
of public expenditure in national income. But this does not reduce the
adverse effect of democracy on the use of natural resource surpluses. The
reason the resource-rich democracies underperform is not simply that
governments spend too much. We then turned to the composition of
expenditure—was the problem one of spending on the wrong things? The
most basic influence on economic growth is investment. Once we controlled for the share of investment, the remaining adverse effect of democracy became smaller. This suggests that the resource-rich democracies underinvest. In fact, this is no surprise. Other researchers have found that
quite generally democracies tend to underinvest: governments are so fixated
on winning the next election that they disregard what might happen afterward, and so neglect investments that only come to fruition in the future. In
resource-rich societies investment is evidently particularly important since
this is how the resource surplus can be transformed into sustained increases
in income; underinvesting becomes an even more important mistake. However, the main story turns out to be not the rate of investment but the return
on investment. The resource-rich democracies not only underinvest but
invest badly, with too many white-elephant projects.
Why Do Resource Surpluses Mess Up Politics?
To see how democratic politics goes wrong in the context of resource riches,
the concept of democracy has to be unbundled into its component parts.
Democracy is not just about elections. Some of the rules of democracy do
indeed determine how power is achieved, and that’s where elections come
in. But other rules of democracy limit how power is used. These rules are
concerned with checks and balances on government abuse of power. Both
sets of rules get undermined by resource rents.
An abundance of resource rents alters how electoral competition is conducted. Essentially, it lets in the politics of patronage. Electoral competition forces political parties to attract votes in the most cost-effective manner. In normal circumstances this is done by delivering public services
such as infrastructure and security more effectively than rivals can. The
extreme alternative to public service politics is the politics of patronage:
voters are bribed with public money. One of the reasons for secret ballots
THE NATURAL RESOURCE TRAP
45
was to prevent bribery. But in some societies there are ways around secret
ballots—for example, a party can start a rumor that the ballot is not really
secret, or it can buy registration cards off the supporters of other candidates
so that they cannot vote. The tragedy is that where bribery becomes acceptable it can be effective, because using your vote to support a party offering
public services rather than selling it to the patronage party is not in your individual self-interest. Why not sell your own vote and leave it to others to
vote in the national interest? Patronage starts to look cost-effective for a political party if votes can be bought wholesale by bribing a few opinion
leaders; from the perspective of a cynical politician, the very universality
of public services starts to look wasteful. Just as it is rational for fashion
companies to focus their marketing efforts on opinion leaders, so it is rational for a political party that is going to buy its votes through patronage
to concentrate its money on buying community leaders. Voting in blocs at
the behest of such leaders is most likely where voter loyalty to ethnic communities is strong and where the objective information available to the
typical voter is weak. These are, unfortunately, typical in the societies of
the bottom billion. Indeed, we found that the more ethnically diverse the
society, the worse the performance of a resource-rich democracy. Similarly,
the less free the press, the worse democracy’s performance in resource-rich
countries.
Suppose, then, we accept that in the context of ethnic loyalties and the
absence of press freedom, patronage politics is more cost-effective than
the provision of public services as a strategy for winning elections. This
still leaves open the question as to why it is disproportionately a problem
in resource-rich societies. After all, many societies have ethnic diversity
and limited freedom of the press.
In many societies patronage politics might be a more cost-effective use
of public money to attract votes than the provision of public services, yet
it is too expensive to be feasible. For this strategy to be feasible, the ruling
political party has to be able to subvert public funds. Obviously, a key difference between using resource revenues to supply public services and using them to supply private patronage is that patronage breaks all the rules
of how public resources should be managed. To finance patronage the
government first needs to embezzle public money out of the budget and
into slush funds. If the restraints upon embezzlement are sufficiently
46
THE TRAPS
tight, then patronage politics is simply too expensive to be feasible. This,
we believe, is where resource rents play such a subversive role. If there are
effective checks and balances on power, the society is saved from patronage politics even though, were they given the chance, political parties
would be driven by electoral competition to play that game. Happily for
societies with effective checks and balances, this is reinforced by the selection of politicians according to their intrinsic motivation to serve the public. Where patronage politics is not feasible, …
Purchase answer to see full
attachment