New discoveries of natural resources in several African countries — including Ghana, Uganda, Tanzania and Mozambique — raise an important question: Will these windfalls be a blessing that brings prosperity and hope, or a political and economic curse, as has been the case in so many countries?
On average, resource-rich countries have done even more poorly than countries without resources. They have grown more slowly and with greater inequality — just the opposite of what one would expect. After all, taxing natural resources at high rates will not cause them to disappear, which means that countries whose major source of revenue is natural resources can use them to finance education, healthcare, development and redistribution.
A large literature in economics and political science has developed to explain this “resource curse” and civil-society groups (such as Revenue Watch and the Extractive Industries Transparency Initiative) have been established to try to counter it.
Three of the curse’s economic ingredients are well known: Resource-rich countries tend to have strong currencies, which impede other exports; because resource extraction often entails little job creation, unemployment rises; volatile resource prices cause growth to be unstable, aided by international banks that rush in when commodity prices are high and rush out in the downturns (reflecting the time-honored principle that bankers lend only to those who do not need their money).
Moreover, resource-rich countries often do not pursue sustainable growth strategies. They fail to recognize that if they do not reinvest their resource wealth into productive investments above ground, they are actually becoming poorer. Political dysfunction exacerbates the problem, as conflict over access to resource rents gives rise to corrupt and undemocratic governments.
There are well-known antidotes to each of these problems: a low exchange rate, a stabilization fund, careful investment of resource revenues (including in the country’s people), a ban on borrowing and transparency (so citizens can at least see the money coming in and going out).
However, there is a growing consensus that these measures, while necessary, are insufficient. Newly enriched countries need to take several more steps in order to increase the likelihood of a “resource blessing.”
First, these countries must do more to ensure that their citizens get the full value of the resources. There is an unavoidable conflict of interest between (usually foreign) natural-resource companies and host countries: the former want to minimize what they pay, while the latter need to maximize it. Well-designed, competitive, transparent auctions can generate much more revenue than sweetheart deals. Contracts, too, should be transparent, and should ensure that if prices soar — as they have repeatedly — the windfall gain does not go only to the company.
Unfortunately, many countries have already signed bad contracts that give a disproportionate share of the resources’ value to private foreign companies. There is a simple answer: renegotiate; if that is impossible, impose a windfall-profit tax.
All over the world, countries have been doing this. Of course, natural-resource companies will push back, emphasize the sanctity of contracts and threaten to leave. However, the outcome is typically otherwise. A fair renegotiation can be the basis of a better long-term relationship.