The Political Economy of The Resource Curse
The article is an examination and survey of literature on political economy of low growth despite of an abundant resource, which is called resource curse. The author tackles the issue in three parts. In the first part, he reviews the economic explanations of resource curse. In the second part, he discusses the political explanations of the resource curse. In the third part, he discusses two other explanations for the curse to be explored.
The author reviews four main economic explanations.
1. Decline in the terms of trade for primary commodities. Ross notes that the terms of trade for most primary commodities have fallen since the 1980s due to the disintegration of the USSR and fall of commodity agreements. Some research has found robust statistical evidence that the terms of trade are the sound determinant of economic growth. However, the author also cites some evidence that the terms of trade effect is robust at global level, not at the case-study level.
2. Instability of international commodity markets. It is argued that unstable commodity markets would harm resource exporting countries. The author presents contradicting findings from various research. While some argue that export instability leads to higher economic growth, some argue that export instability either has no impact or negative impact on growth.
3. Poor economic linkages between resource and non-resource sectors. Ross shares Fosu’s findings that growth in commodity exports between 1967 and 1986 had a negligible effect on the performance of the nonexport sector. However, governments may have the capacity to foster the linkage between these two sectors but they fail to do so.
4. Dutch Disease. This is a term refers to hardships caused by resource exports. Dutch disease include two main problems: appreciation of state’s real exchange rate and tendency of a booming resource sector to draw capital and labor away from a country’s manufacturing and agricultural sectors. The author argues that Dutch Disease does not explain situation in many developing states because the model assumes that “an economy’s capital and labor supplies are fixed and fully employed before a boom begins.” But developing countries often have labor surpluses.
The author reviews three political explanations of resource curse.
1. Cognitive explanation. This explanation basically relates to the human nature and has its roots in the works of enlightenment scholars. This explanation contends that rapid increase in the wealth causes short-sightedness among policymakers. In other words, people in a country that has abundant resources will be less like to strive. People in a country that lacks natural resources have to strive more in order to gain wealth. Therefore, resource booms lead to laziness and short-sightedness of policymakers.
2. Societal explanation. According to this explanation, certain sectors, classes or interest groups who are privileged with the natural resource boom will be reluctant to growth because they will not prefer to lose their privileges.
3. State-centered explanation. This explanation contends that resource booms weaken the state institutions. According to the author, state-centered explanations are mostly hybrid of cognitive, societal and institutional explanations. The best example of this sort is the concept of rentier state, mostly used for the Middle Eastern states. Petro-dollar states share the rents from oil. These explanations assume that states are revenue “satisficer” not revenue “maximizer”.
After reviewing economic and political explanations, Ross discusses two alternative directions that, according to Ross, receive little attention.
First alternative explanation Ross suggests is the state ownership of the resource industries. In most less developed countries, resource industries are run by state-owned companies. Presence of foreign companies, however, serve like a buffer against export instability.
Second alternative explanation is the failure of states to enforce property rights. Noting that this explanation works for relatively poor and unstable countries, if the property rights are not enforced well, profits of the resource extracting and exporting company may not be sufficient for investment costs and risks. However, extraction and export may continue because the company may pay for criminal gangs, private militias or rebels etc.
In conclusion, the author emphasizes that more research is needed in this field and that political scientists, rather than economists, need to test their hypotheses as well.