The Resources Paradox

                                 
Richard Auty, in his 1993 publication Sustaining Development in Mineral Economies: The Resource Curse Thesis first used the term the Resource Curse to describe how countries rich in natural resources were unable to use that wealth to boost their economies and how, counter-intuitively, these countries had lower economic growth than countries without an abundance of natural resources.

The term "resource curse" refers to an economic phenomenon in which a dependence on natural resources can skew a country's political, investment, and education priorities, so that everything revolves around who controls those resources and who gets how much money from them and not on productivity and innovation that are essential for a country to maintain its competitive edge.

I have often found this phenomenon unexpectedly true. A great example is the one of Japan and Africa. Africa is the world’s most resource rich continent. It has a large quantity of natural resources including diamonds, gold, iron, cobalt, uranium, copper, bauxite, silver and most importantly oil and petroleum. On paper this looks like the dream scenario for wealth generation, yet Africa is the most underdeveloped and the poorest of all the continents in the world. In contrast Japan, a mountainous, volcanic island country, has very few  resources and is the world’s second largest economy.

This paradoxical phenomenon is true even in the case of India. The majority of our resources are in states like Jharkhand, Chattishgarh, Orissa, Bihar and MP. But these are the worst performing and most backward states in India – forming a part of BIMARU – (the term economic analyst Ashish Bose coined in the late 80’s to highlight the never ending ‘sickness’ of economic development in these states.) A state like Gujarat which has no resources to speak of is the biggest and fastest growing state in India while Maharashtra, Karnataka and Tamil Nadu are not far behind. This is a classic case where India’s resources are in the east and centre while her wealth is in the West and South.

So what gives rise to this seemingly contradictory phenomenon?

When a country is excessively rich in a certain resource and knows it can make money off it, it stops challenging itself to innovate new products and as such a staleness sets in. This staleness is fine as long as the resource exists, but once it runs out – and there are no alternatives in place - BAM! You have a crisis in your hands. What also happens is that the energy of the citizens is then spent in getting hold of the resources instead of building a knowledge base – and as a result the country’s educational, scientific and democratic systems falter.

Japan knew exactly that it had no oil wells to dig – so instead its people dug in their own brains – and came up with world beating companies such as Sony and Toyota. Likewise, Facebook was not created because a large mine of diamond was unearthed, but because Mark Zuckerberg unearthed a large mine of new ideas in his brain. On every such occasion, people came up with new ideas because they had to – that is, the market dictated that something new and innovative be found – whereas in the case of oil rich countries all you had to do was dig and sell.

This is also why it is no coincidence that the most petrol rich states are also the least democratic states. Oil-backed regimes that do not have to tax their people for revenue—because they can just drill an oil well and sell the oil abroad—also do not have to listen to their people or represent their wishes. Because the money is being pumped in from the oil exports, they do not feel the pressure to reform their systems and make themselves more accountable. Bahrain was the first Persian Gulf country to discover oil and also the first country to start running out of it. Consequently, Bahrain reformed its political system and was the first Gulf country to hold a free and fair parliamentary election, in which women could run and vote.

While the Resource Curse thesis has no proof, and there are definitely countries out there that are exceptions (most notably USA), it nonetheless offers food for thought to countries that do not have much resources as well as those that have plenty – for what truly are the pre-requisites for economic development.