Natural Resource Curse and the “Arab Spring”

The “Natural Resource curse” thesis, contrary to common sense, states that resource-rich countries experience less economic growth in the long run than those deprived of natural riches. Since Jeffrey Sachs and others economists documented this negative relationship in 1995, many empirical studies have been conducted to explain the paradox, and though mixed results have been found so far, what seems to be clear is that high dependency on natural resources is not a good platform for development.

Evidently natural resources have not been a curse for all countries, as several notable experiences contradict this thesis. Australia, with a per capita GDP close to US$ 40,000, is a country where primary exports account for almost 60% of its GDP, but nobody can deny its achieved socioeconomic development. Likewise, Norway after discovering oil in 1969 has become the fourth richest country in the world.  Both Nations, according to the UN possess the highest Human Development Index, but to achieve this economic success they have certainly done more than simply extract and export their resources.

Source: FT

Where reality seems to confirm this thesis is in the Middle East, Africa, and Latin America. Jeffrey Sachs and Joseph Stiglitz published an interesting book (Escaping the Resource Curse, 2007) focused on oil-rich countries in which they documented the negative effect that this illness has on economic growth, as well as on political and social development. Natural resource abundance seems to corrode institutions, weaken democracy, corrupt governments, hinder education, and encourage social unrest and political instability.

The truth is that due to resource abundance, governments have grown accustomed to the “easy rents”, which reduce incentives for reform and deprive them of developing more diversified production structures (“Dutch Disease”) with greater value-added and sophisticated export baskets. With few exceptions, most of the Arab countries have concentrated their trade structures on oil: the “Devil´s Excrement”, as dubbed by Moises Naim, accounts for 30% to 70% of their GDPs. This configuration has low spillover effects on other sectors and little potential to upgrade the economic structure. The export boom sector, on the other hand, is capital intensive, which means that it generates little employment. So, even though the economy appears to be on the rise, in most of those countries the vast majority of the population cannot feel the growth because the “trickle-down” mechanism does not work.

If we add to this worrying scenario the fact that most of these countries have made important strides in the improvement of social indicators, the situation becomes explosive. According to the 2010 Human Development report, among the ten countries that have made the greatest improvements in their Human Development Index, five are Arab (Oman, Saudi Arabia, Tunisia, Algeria, and Morocco).

The case of Tunisia sheds some instructive light on this fact. If we refer to South Korea as an economic miracle, Tunisia is a perfect example of a Human Development miracle.  In 4 decades the life expectancy rose 20 years, from 54 in 1970 to 74 in 2010.  Social policies in education and health had significant impacts, but empowering women seems to have played a major role. Tunisia raised the minimum age for marriage, revoked the colonial ban on importing contraceptives, instituted the first family planning program in Africa, legalized abortion, made polygamy illegal, and gave women the right to divorce as well as the right to vote in national elections.

But unfortunately in Tunisia, as in many other Arab countries, improvements in education and health show a weak positive correlation with economic growth. This is where the “Resource Curse” comes into play.  This equation is at the core of the Arab Spring´s origin, and may also help to explain what is happening in other regions such as Latin America, where minerals, hydrocarbons, and other natural resources represent more than 50% of the region´s exports, and in extreme cases like Venezuela, Chile and Peru, more than 80% of the export total. So if the production structure of these countries is not transformed, the Arab Spring will remain an important 2011 event that changed the political face of the region, but not their destiny.

To conclude, as the economist Dani Rodrik has stated and history confirms, “Developing” is nothing more than moving away from a primary agricultural structure into a more diversified and sophisticated economy. How quickly a country accomplishes this endeavor explains its success.