In a world where settlements are formed around discovery of natural resources, conventional wisdom dictates that high economic rents – in the form of high commodity prices – would be earned by commodity rich countries. The land of UAE was formed around the mineral discoveries in the area, and Dubai became one of the business capitals of the world.

However, this is not always the case. Recent discovery of natural resources in Ghana, Mozambique, Uganda, and Tanzania has raised questions about whether this will bring economic prosperity to these economies. Many would expect these African nations to embark on a path to development, but much research has established that commodity rich countries tend to grow more slowly and with greater inequality. We avoid countries under sanctions like North Korea and Iran, or countries under occupation like Afghanistan, to exclude outside political factors.

Empirical research has found a very low (32%) correlation between commodity trade reliance in an economy (represented by Commodity Revenue as a Percentage of Total GDP) and the income of a country (GDP per capita).

Table 1: Resource-Dependent Countries: Descriptive Statistics

Commodity Rich but Income Poor Countries
Commodity Rich but Income Poor Countries
Source: Pixabay

The figure on the right graphically illustrates how few commodity rich and commodity dependent economies have achieved high development levels (Human Development Index or HDI). These include the nations of Kuwait, Libya, Iran, Venezuela, and Saudi Arabia.

Many nations have flourished, due to smart management of their commodity resources. Such is true of Australia and Canada, which are the best examples of well-managed, financially wealthy countries, with abundant commodity resources. Australia is rich in iron ore and Canada in oil – both have formed strategic alliances with core buyers. China is dependent on Australia for its Iron Ore supplies, and Alberta’s oil resources have strategic importance for the US.

On the other hand, most African and Latin American nations have failed to achieve optimum levels of growth. Managing the resources effectively is the primary issue issue, due to which they are unable to reap the benefits of resource reserves. A number of authors refer to this phenomenon of ineffective management as the ‘resource curse’ of economies, and offer possible explanations for this such as Dutch Disease, impact of volatile prices, limited absorptive capacity, rent-seeking behavior, and poor institutions.

Dutch disease refers to the phenomenon of large commodity exports, leading to an appreciation of real exchange rates, which leads to slowdown of productivity growth in the economy. The reduced competitiveness of other sectors in the economy, means that the country becomes increasingly reliant on income from natural resource exports and becomes less diversified over time. Commodity extraction often tends to be a capital intensive process which means that reliance on this sector also creates unemployment and inequality in the economy. As a result, the earnings from commodity trades are often shifted out of the country by corrupt leaders and greedy companies.

Another major challenge for resource rich countries comes from the impact of volatile commodity prices. The history of commodity price fluctuation is well-documented. Although commodity prices have been somewhat stable since the Great Recession, especially in the oil and petroleum sector, prices are very sensitive to global and local factors. Agricultural commodity markets encounter this instability in times of climatic or global demand changes.

Furthermore, when natural resources are discovered, poor countries are often in an inferior bargaining position, when in talks with international resource companies. At this point they enter into unfavorable long-term contracts and are often stuck with these for a long time. Resource-rich countries must renegotiate their resource contracts to obtain better terms, as was done by Bostwana, Bolivia, and Venezuela in recent years. Venezuela signed ‘dark side’ agreements with Russia, for Russian companies to develop Venezuela’s oil-and-mineral resources in 2010.

Greater investment in physical and human resources is critical to maintain and increase competitiveness. Structural reforms in a flexible fiscal framework are important to enhance growth.  Exchange rates have to be carefully monitored and maintained, in order to maintain economic competitiveness. Furthermore, domestic institutions need good governance and transparency that ensure effective management and distribution of resources. Good governance is best found in East Asian nations, which profited from the opening of global manufacturing to their low-cost, skilled work forces.

As Joseph E. Stiglitz stated, ‘Companies will tell Ghana, Uganda, Tanzania, and Mozambique to act quickly, but there is good reason for them to move more deliberately. The resources will not disappear, and commodity prices have been rising. In the meantime, these countries can put in place the institutions, policies, and laws needed to ensure that the resources benefit all of their citizens. Resources should be a blessing, not a curse.’