Sunday,24 March, 2019
Current issue | Issue 1434, (14 - 20 March 2019)
Sunday,24 March, 2019
Issue 1434, (14 - 20 March 2019)

Ahram Weekly

The natural-resource curse

Africa’s profusion of natural resources could lead to the continent’s economic revival, but they have not always been well-managed, writes Magdi Sobhi

An abundance of natural resources is usually viewed as a blessing, increasing a country’s national income, improving living standards, and bringing about an economic revival and leading to public consent and political stability. However, this outlook does not present the full picture, particularly in Africa.

Over the past two decades and due to the increase in world demand for primary commodities, African natural resources such as metals, oil, natural gas, water, pasture and forests have become factors that have contributed to the eruption of conflicts both within African countries and between them.

A long list of civil, regional and international wars has erupted due to conflicts over the ownership of resources or the means of distributing their revenues among different regions or to different strata of their inhabitants, whether those differences are ethnic, linguistic or religious.

The UN Economic Commission for Africa has said in a report that “border disputes, some of which were dormant since the departure of the colonial powers, have become rife [in Africa], recently leading to demands and counter-demands from countries sharing in border-crossing resources over these resources’ ownership.”

African natural resources are primarily viewed as important incentives for economic development and reform. If well-managed, revenues from exporting natural resources can help the African continent shift from economies exporting primary commodities to economies relying on labour-intensive transformative industries with high added value.

However, in the view of many economists, and as multiple world experiences have shown, natural resources can also play a negative role. This has become widely known among researchers as the “natural-resource curse”. 

For instance, there is the “Dutch Disease” that takes place when a country exports natural resources and receives large sums in return in the form of foreign cash flows, leading to a quick rise in the local currency against international ones. This weakens the capability of the country’s productive sectors, especially industry and agriculture, to compete in foreign and local markets, because the high exchange rate of the local currency limits the competitive edge of products from the country on the international market. In addition, the prices of imports are in most cases cheaper than those of equivalent local products. 

This phenomenon is called the “Dutch Disease” because its characteristics were first seen in the Netherlands and led to the weakening of the country’s productive sectors. The phenomenon has also been seen in a number of countries exporting natural resources, at the top of which are the oil-rich countries. Such findings have been summed up in a study reporting that “there exists an inverse relationship between economic growth and the availability of natural resources, especially metals and oil.”

Perhaps the most important aspect of the phenomenon is that the curse works through destroying the local economy and political institutions, for the discovery of oil or metals can lead to the emergence of behaviour that induces corruption. This negatively affects the investment and growth climate. All these factors not only contribute to weakening rates of growth, but they can also destroy the entire experience of development. 

The light at the end of the tunnel concerning the “Dutch Disease” is that the Netherlands at some point bounced back. And there are several other examples of countries succeeding in developing their productive sectors in spite of having abundant natural resources. 

It cannot be ignored that fluctuations in the export prices of natural resources lead to consecutive cycles of prosperity and depression in countries relying on such revenues. Of course, when there is a prosperity cycle all goes well. But when prices decrease, financial problems ensue. This is only logical, since finance in countries relying on exporting natural resources plays a greater role than it does in other countries because of its significance to economic activity as a whole.

It is relatively difficult to intervene in cases of disputes over natural resources within a country, unless they grow and border on civil war. Intervening in settling disputes around cross-border natural resources, in other words those shared by more than one country, is the duty of the African Union. 

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