Blessing and a curse: countries struggle with oil resources
Where drilling used to be in established areas, like Texas, Saudi Arabia, and Russia, it is now moving offshore, leaving some to wonder whether the institutional capacities of these countries and regions are sufficient to avoid the resource curse.
A Complex Issue
A couple of months ago, Robert Rapier, Sam Avro, and I had an interesting debate about the resource curse in the context of a Tom Friedman column about how countries that aren’t blessed with natural resources succeed because they are forced to invest in their people. I believe, as my post (Oil – Easy to Produce, but Not Easy to Buy) said, that countries blessed with natural resources like oil “don’t have to learn how to build factories” because they can sell oil to the world instead. Robert and Sam cited countries like Norway, the US, and the U.K. as examples of countries that have thrived even with resources.
The new edition of The New York Review of Books features an article, “What Makes Countries Rich or Poor?” written by Jared Diamond that is a review of Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson. This is another book to add to my ever-growing list of ‘must-reads’ – but Diamond’s review gave some interesting points that are very relevant to our previous discussion about the resources curse and what causes countries to grow or fail. The truth, as shown by the article, is complicated: there are many determinants to growth, and it is difficult to separate out individual causes.
What Determines Growth: Geography or Institutions Built by Society?
Diamond, the author of Guns, Germs, and Steel and Collapse: How Societies Choose to Fail or Succeed, is probably the leading voice, along with economist Jeffrey Sachs, of the school that argues that countries are most affected by their geography. Essentially, they argue that tropical countries are cursed by their location. This “Geography is Destiny” school argues that tropical countries, especially those in Central and West Africa, are undone by a combination of poor soil quality, lack of access to world markets (few good ports or navigable rivers), and endemic disease that makes it virtually impossible for them to sustainably grow out of poverty.
On the other hand, the authors Acemoglu and Robinson, along with economist William Easterly, are leaders in what could be called the “Institutional” theory of growth. They argue that it is the governments and institutions that our societies create which determines how successful a society becomes. Essentially, it’s our government, not our environment that decides our wealth over the long term.
I would recommend reading Diamond’s article in its entirety, as he does an excellent job of showing the differences in opinion between the two sides, without falling into pointless argument (something Easterly and Sachs are unable to do with each other). His article does show some interesting debate about the “resources curse” which Robert and I debated.
The ‘Resources Curse’
Acemoglu and Robinson’s book argues that resources like oil, diamonds, or minerals ironically make endowed countries end up worse-off than countries with no natural resources. Diamond writes: “the result of the many ways in which national dependence on certain types of natural resources (like diamonds and oil) tends to promote bad institutions, such as corruption, civil wars, inflation, and neglect of education.”
They note that forward-thinking countries like Norway, Botswana, or Trinidad and Tobago have avoided these problems by investing the proceeds in separate accounts marked for economic development or education. The key part, however, that they note is that the very nature of their institutions means that they wanted to share the proceeds of the country broadly. In other words, because they had strong institutions, they have been able to avoid the resource curse. Diamond specifically identifies that the US does not count for the resources curse because of how large and diverse the economy is; oil production is too small relative to total production to cause a ‘resource curse’.
This argument is relevant today because we are drilling for oil and mining for minerals in more remote countries and environments than ever before. Where drilling used to be in established areas, like Texas, Saudi Arabia, and Russia, it is now moving to offshore Brazil, the Arctic, and Mozambique. Whether the institutional capacities of these countries and regions are sufficient to avoid the resource curse will be one of the deciding factors in which countries thrive in the 21st Century.
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