Natural resources – boon or curse?

Additional (updated) content from One Billion Hungry: Can we feed the world?

In recent years, it has become fashionable to argue that the less developed countries of Sub-Saharan Africa should emulate Brazil and the eastern tigers with rapid industrialization, in many cases on the back of the exploitation of rich mineral, oil and other resources. Around one third of the growth in GDP in Africa between 2000 and 2008 (4.9%) has come from these resources and the associated government spending they generated. The rest has come from internal structural changes (e.g. Nigeria privatized more than 116 enterprises between 1999 and 2006) and from other sectors. Africa is projected to continue to profit from the rising global demand for natural resources given that it comprises 10% of the world’s oil reserves, 40% of its gold and 80 to 90% of the chromium and platinum metal group. But so far, the experience has not been accompanied by much trickle down and indeed has reversed progress towards reduction in poverty and social freedoms. Moreover, countries both with and without significant resource exports have had similar GDP growth rates between 2000 and 2008.

Although in  the short term the export of natural resources such as oil and minerals can give an economy a boost, generating higher incomes, allow greater consumption of both imported and domestically produced goods, and provide governments with greater resources for investment in development, the long-term impacts may offset, if not exceed, these positives. In 1977 the Economist published an article entitled The Dutch Disease that described the situation whereby a country’s export performance is reduced as a result of an appreciation of the exchange rate after a natural resource such as oil has been discovered.

The transition of an economy to the production of natural resources, despite mixed evidence of the nature (i.e. positive or negative) of its impact on economic growth, has been deemed the ‘resource curse’.

The transfer of capital and labour to the natural resource sector can lead to declines in productivity in other sectors, such as agriculture, that will be important sources of growth when the natural resource is depleted. Further impacts can include volatility in public spending associated with volatile prices and thus revenue from natural resources, as well as over borrowing, when commodity prices are high, leading to high debt levels, when commodity prices fall.

The adverse impact on long-term growth that natural resource booms can have, are exacerbated by bad governance, fiscal policies and inefficient institutions. Fears of a resource curse in Uganda are currently in the press as the country plans for commercial production of oil in the next few years. Despite a wealth of technical expertise through donor and civil society partnerships, the quality of governance will be a key factor in ensuring the industry’s impact is positive.  Paul Collier and Benedikt Goderis of the University of Oxford found that once negative impacts of a resource boom, such as the neglect of productive activities and the incentives for non-productive activities i.e. rent seeking or public sector employment, were controlled for, non-agricultural resource abundance can have a positive effect on average cross-country growth rates. Research from Indonesia, Botswana, Chile and Norway points to four long-term factors that are critical for successful long-term resource management: broadly shared aspirations for peaceful development, strong apolitical constituencies able to counsel and restrain government, significant technical expertise, and popular buy-in to plans for spending the resulting revenues.

What tends to be missed in these arguments is the role of agricultural development. It is forgotten that the United Kingdom began its development journey with a major agricultural revolution in the 18^th century and more recently the eastern tigers, such as Vietnam, have similarly invested heavily in agriculture as part of the development process. As Michael Lipton of the University of Sussex said “no country has achieved mass dollar poverty reduction without prior investment in agriculture.”

There is a strong case for including the attainment of food security as an intermediary outcome in the development process and for the development of agriculture as one of the key routes to overall development. Experience has amply demonstrated the power of agriculture as an engine for economic development. Increased production and employment in agriculture can generate, directly or indirectly, considerable employment, income, and growth in the rest of the economy.

Very few countries have experienced rapid economic growth without preceding or accompanying growth in agriculture. This is partly because of its size, but also because it has a capacity for fast and inclusive growth. In the least developed countries the agricultural sector typically accounts for over 80% of the labour force and 50% of the GDP; even modest rates of growth have a considerable multiplier effect, increasing rural incomes which in turn create consumer demand and hence growth in the non-agricultural sector.

Even when agricultural innovation and development stimulate economic growth, this does not necessarily lead directly to a reduction in poverty. Much depends on the nature of the innovations and how broad based is the agricultural development they generate. While the introduction of irrigation and new crop varieties can create employment and incomes, certain kinds of mechanisation associated with agricultural intensification can destroy jobs. For equitable economic growth, agricultural innovation needs to be deliberately focused on increasing production while, at the same time, creating employment both in agriculture and in related, rural-based industry.

In addition to these benefits, vigorous agricultural growth can stimulate world trade, providing significant benefits for all countries, developed and developing. The share of world exports going to the developing countries has grown from 13% in the early 1970s to 33% by 2008. This also means greater prosperity for the developed countries. It is this eventual mutual prosperity that Per Pinstrup-Anderson of Cornell University and the International Food Policy Research Institute have referred to as a ‘win-win proposition’.