Avoiding the Resource Curse

(Bloomberg View) -- This seems like as good a week as any to revisit the resource curse, the notion that nations with outsized natural-resource endowments are more likely to falter than succeed.

QuickTake The Resource Curse

First, the Wall Street Journal is reporting that the members of the Organization of the Petroleum Exporting Countries have become too addicted to oil revenues to actually make good on their commitments to cut production in an effort to raise prices:

Overall, OPEC on Nov. 30 agreed to cut production by 1.2 million barrels a day, a deal that took almost a year to negotiate and raised expectations for an oil-market rally. Instead, member exports in June were 120,000 barrels a day lower than October, according to Kpler, a firm that tracks tanker movements to measure oil exports.

“OPEC will have lot of difficulties to respect its commitments because of budgetary difficulties faced by some its member countries,” said Chakib Khelil, the former oil minister of OPEC member Algeria.

Meanwhile, one of OPEC's founding members, Venezuela, is continuing its headlong descent into dictatorship and destitution, holding a vote over the weekend that seems to have been boycotted by most of the population but will give current President Nicolas Maduro power to rewrite the constitution. Venezuela was once the most affluent country in Latin America. It sure isn't anymore:

It's enough to make former Venezuelan oil minister Juan Perez Alfonzo, who predicted in the 1970s that "oil will bring us ruin," seem like some kind of prophet. Indeed, as economist Ragnar Torvik wrote in 2009:

In the last 40 years there is a negative robust correlation between the share of resource exports in GDP and economic growth. This correlation remains also when many other factors are controlled for.

Torvik, though, teaches at the Norwegian University of Science and Technology. Norway is a nation endowed with huge oil reserves that hasn't visibly suffered from the resource curse. In that same 2009 paper, Torvik wrote:

The most interesting aspect of resource abundant countries is not their average performance, but their huge variation. Resource abundant countries constitute some of the richest and some of the poorest countries in the world.

You can see this dynamic at work among U.S. states, too. Here are the 10 states with the most natural-resource-intensive economies, ranked by economic growth since 2006:

Five grew faster than the U.S. as a whole, five slower. The three states with the most resource-intensive economies -- Wyoming, Alaska and West Virginia -- were among the GDP-growth laggards. But Texas, which has long had by far the biggest mining/oil-and-gas industry of any state in absolute terms (with 6.3 times the output of No. 2 Oklahoma in 2016), has been one of the country's great economic engines over not just the past decade but the past half-century.

What distinguishes places that thrive with resource bounties and those that founder? There's a growing academic literature on this, a subset of the literature on what makes nations fail and succeed in general that Massachusetts Institute of Technology economist Daron Acemoglu and University of Chicago political scientist James A. Robinson summed up for lay readers in the bestselling "Why Nations Fail: The Origins of Power, Prosperity, and Poverty." Acemoglu and Robinson argued that nations succeed over the long run when their economic and political institutions are inclusive ones that allow most people to share in economic growth and have a voice in decisions, and fail when they are extractive, keeping money and power in the hands of a few.

The difficulty for resource-rich places is that big natural-resource revenues make it easier to keep extractive institutions going. In a 2006 paper, Robinson, Torvik and Thierry Verdier of the Paris School of Economics argued that natural-resource riches help keep dictators in power and, in democracies, "encourage politicians to engage in inefficient redistribution to influence elections." They concluded:

In countries with institutions which limit the ability of politicians to use clientelism to bias elections, resource booms tend to raise national income. When such institutions are absent, the perverse political incentives may dominate and income can fall -- there is a resource curse.

The petrostates of the Persian Gulf are mostly monarchies where rulers have used oil revenues to keep subjects happy and solidify their power. Venezuela is a democracy where recent leaders have found it pretty easy "to use clientelism to bias elections" -- an approach that Torvik and two co-authors dubbed "petro populism" in a recent paper.

The U.S. has a long history of reasonably inclusive institutions and strong economic growth, although there have been strains in recent decades and both Acemoglu and Robinson have expressed concerns that President Donald Trump's disdain for institutions and norms could cause further damage. As far as the resource curse goes, I think we're OK for now. But it is important to remember, especially as oil and gas production booms in several parts of the country, that such plenty isn't always good news.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”

1. I ranked them by their location quotient for mining (which includes oil and gas extraction), as determined by the Bureau of Economic Analysis. The location quotient is an industry's percentage of state gross domestic product divided by its percentage of GDP nationally. Mining isn't the only kind of natural resource extraction, of course, but "forestry, fishing and related activities" contribute a much smaller percentage of U.S. GDP than mining and the BEA doesn't break them out by state. It does have state data on "Agriculture, forestry, fishing, and hunting," but I just don't think farming is resource extraction in the same sense that drilling for oil is. So I went with mining. And while I guess it might have been more logical to look at the states' location quotients for the start of the period over which I measured growth, it would have been the same states (the main difference being that North Dakota had a much lower quotient then) and the numbers seem more useful to know now.

2. He was at Harvard when the book came out.

To contact the author of this story: Justin Fox at justinfox@bloomberg.net.

To contact the editor responsible for this story: Brooke Sample at bsample1@bloomberg.net.

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