Global demand and prices for oil, gas and minerals have increased dramatically in recent years, not least driven by the economic successes of a number of emerging economies. These developments could provide an opportunity for mineral rich countries to push economic and social development. But past experiences have raised concerns that the current situation could result in another missed opportunity to promote economic development and social inclusion. This contradiction calls for identifying the factors that make mineral rich countries fail or succeed in promoting development objectives.
There is a substantial and well summarised body of literature highlighting differences in the economic, political and social outcomes of resource poor and resource rich countries. Much of this work has pointed out that countries that have relied heavily on the exploitation of mineral resources have generally done worse than others, at least over the past couple of decades.
Different explanations have been given for what may have gone wrong. The recent upswing in the extractive industries has provided this debate with new current and it has provoked more policy advice on how countries at risk could escape the resource curse . The recent consensus suggests that differences in economic and social performance can be explained by cross country variations in the quality of institutions . That is, countries with good institutions have been more likely to benefit from resource wealth.
However, the policy implications of this observation have remained inconclusive. The institutional resource curse literature has left the causal linkages that link institutions to positive development outcomes under specified and it has under highlighted a number of theoretical and methodological challenges. While it is a first step to propose that institutions matter, more still needs to be done to understand why institutions matter and how and when they change. It is necessary to adopt a more conceptual approach to identify the role of institutions in mineral rich countries.
Institutions are important for solving distributional conflicts and for managing the transformative processes that underlie such conflicts... Drawing on the political economy of taxation, the paper discusses the prospects for improving the development capacity of mineral rich states...
Economists noticed towards the end of the 1980s that poorly endowed economies had generally outperformed those with abundant resource wealth. They first proposed that this could have been the result of a number of adverse macro and microeconomic effects. These effects have included the well known Dutch Disease , the deterioration of terms of trade and the crowding out of investment in other economic sectors. But because many countries failed to adopt the policy responses that were designed to potentially counter such effects, it was suspected that policy makers may be deliberately pursuing poor policies. This led to greater emphasis being placed on the question whether mineral wealth induces a series of political economic effects that could be held responsible for poor policy choices.
In general the debate on the political economy of the resource curse has been guided by two core arguments. Many proponents have adopted an agency focused perspective. They have suggests that mineral rich countries are more prone to experiencing dissonance between the personal interests that guide policy makers decisions and positive collective outcomes. The core argument has been that mineral resource exploitation provides unconstrained self maximising policy makers with the opportunity to capture resource rents for private gain. This opportunity has been thought to undermine the pursuit of the public interest and therefore also the achievement of economic and social development objectives.
A second perspective has projected a similar outcome, but has pointed to the impact of structures. Proponents have suggested that the presence of resource wealth evokes distributional conflicts around the capture of resource rents which distort the relationship between ruling elites, the state and society at large. As these shape economic and social structures, they discourage other productive activities.
This model proposed that an initially skewed distribution of income and assets locks economies into a situation where the focus on transferring resource rents undermines a virtuous circle of wealth creation. It hinders economic diversification, holds back social change and undercuts the competitiveness of other economic sectors. This model was then contrasted to a competitive industrialisation model where countries unable to draw on resource rents make greater efforts to pursue development objectives that benefit broader constituencies. The lack of natural resources strengthens structures that set incentives for exploiting comparative cost advantages and enable a process of wealth creation, supported by what has been termed a developmental state.
Both perspectives however have faced an unfortunate dilemma; they have left a rather bleak policy outlook. Arguably there is little that can be done domestically, if indeed the poor economic and social outcomes of mineral rich countries are attributable to deterministic political economic mechanisms associated with the presence of resource wealth. Normative appeals for behavioural changes are also not convincing, if the incentives of politicians and policy makers are in one way or another corrupted by resource wealth.
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