Natural wealth: Is it inevitably a curse?

4 July 2012

An abundance of natural resources is intuitively expected to be a blessing. Nonetheless, it has been argued for some decades that large endowments of natural resources—oil, gas, and minerals in particular—may actually become more of a curse, often leading to slow economic growth and redistributive struggles. The World Bank has started a breakthrough in national accounts toward capturing the span of assets in order to measure development progress. A set of wealth accounts covering a 10-year period, 1995 to 2005, for more than 120 countries is now available. This note presents an analysis of these data to revisit some of the conclusions reached in the literature on the relationship between natural resource abundance and economic growth. The findings are in alignment with the view that there is no clear deterministic evidence of natural resource abundance as a curse or a blessing; therefore, the effect on a country depends on other determinants.

Natural wealth indexes: what do they say?

The set of wealth accounts established by the World Bank includes produced capital (machinery, structures, and equipment); natural capital (agricultural land, protected areas, forests, minerals, and energy); and intangible capital. Measuring natural wealth is an initial step toward capturing its potential contribution to the overall capital accumulation and corresponding income growth.

Produced capital
First, the share of produced capital in wealth moves upward from low levels in low-income countries, but remains reasonably modest thereon. It appears that cumulative savings used for investments in physical assets accompany and support the rise in income levels, but typically at a proportionate speed. Table 1 reproduces wealth and per capita wealth by type of capital and income group in 1995 and 2005 (World Bank 2011, 7).

Intangible capital
Secondly, intangible wealth is the largest single component of total wealth at all levels of income, but increasingly so as it moves to the upper-middle- and high-income levels. Increased educational attainments, as well as improvements in institutions, governance, and other intangible forms of wealth are imperative if a country is to overcome “middle-income traps”. The nexus with savings and investments is not as straightforward as in the case of produced capital, because the dynamics of intangible wealth accumulation depend on quality of education, institutional evolution, collective knowledge, and non-research-and development-derived technical progress.

Natural capital
It follows that natural assets comprise a substantial portion of total wealth at low-income levels, decreasing in relevance if the economy succeeds in moving up the income ladder. In all cases, however, if the use of nonrenewable natural capital leads to support just consumption, there will be no income-generating assets to replace it when it is exhausted.
Natural capital also varies over time for reasons other than its use. The fact that it diminishes in relative terms does not preclude it to rise in absolute terms as a result of technological changes or new discoveries. As Collier (2010) has highlighted the OECD square kilometer had $125,000 of known subsoil assets, as of 2000. In contrast, this amounted only $25,000 in Africa. It is probably a consequence of massive failure in the discovery process in Africa.

Values of natural capital may also change as a result of heterogeneity among natural resources. The value of existing assets may rise if increases of global production have to be based on less efficient sources at the margin. Such “rents” tend to be reflected in the value of natural capital in countries well endowed with high-quality resources.

One may then guess that abundance of natural capital—as measured by per capita natural wealth—is in principle favorable to raising per capita income levels. Furthermore, the average archetype of wealth-cum-income progression may take place with different shares of natural wealth in different countries. This is illustrated by the different wealth compositions as of 2005 among high-income countries (the United States, Japan, Norway, Canada, and Australia), as well as among middle- and low-income countries (table 2).

So, where can one locate a possible “natural resource curse”?

Some analyses explain how certain conditions could result in situations where natural resource booms become a curse. Weak governance and corresponding poor economic policies underlie the misallocation and mismanagement of resources. Resources shift out of productive activities into unproductive rent-seeking activity. It is not by chance that resource curse cases can be primarily associated with extractive industries because these are “concentrated ‘point source’ resources that can easily become the object of rent-seeking and redistributive struggles”.

Consumption use of tax revenues derived from natural resource extraction through public spending is also a typical manifestation of poor governance. In fact, the handling of macro-management challenges that typically accompany natural resource booms in natural resource–rich countries can in most cases be traced back to governance quality.

However and regardless of whether natural resources are dominant or not, it just seems that in most cases new capital translates into more income. In fact, as shown in figure 2, there is no regular pattern between relative abundance of natural wealth and income levels, and thus no kind of natural resource curse can be depicted. Intuitively, as confirmed by these results, the potential blessing associated with natural resource discoveries exists because they expand the country’s stock of total capital.

In this sense, nations can take advantage of the additional source of richness from the period of exploration until the complete depletion, lifting the GDP per capita. Clearly, the real challenge is to invest those rents in other productive assets, thereby generating other kinds of abundance for future generations and sustaining income per capita at corresponding higher levels.

Conclusion

Using the data on the natural wealth of countries recently made available by the World Bank, our recent empirical analysis could not find significant deterministic evidence of a direct negative relationship between the abundance of natural resources and income per capita levels, or the so-called “natural resource curse” (Canuto, and Cavallari, 2012). We align with others who have stressed that intangible wealth in the form of governance quality is a key determinant to the outcome of natural resource abundance as a blessing or a curse.

Three types of policies have been emphasised in the literature as the safest way to make sure the bang from the natural resource buck is maximised, especially in the case of low-income countries for which the use of natural resources may be crucial for a leap upward in the income per capita ladder. Ensuring high transparency and strengthened checks and balances for all phases of natural resource extraction and use are critical for a favorable outcome, as well as to minimise risks of rent capture by patronage networks and avoid premiums on rent-seeking behavior. By the same token, adopting fiscal rules to ring-fence investments from proceeds of overtime depletion of natural resources and to mitigate the effects of the usual volatility associated with natural resource prices can reinforce the dynamics of wealth accumulation toward the upper scales of the income ladder. Reforms to improve public sector capacities in terms of public investment management, monitoring and evaluation, budget processes, and so forth will also help transform natural wealth into produced capital and intangible wealth.

Authors: Otaviano Canuto is the Vice President and Head of the Poverty Reduction and Economic Management (PREM) Network, and Matheus Cavallari is a Consultant for the PREM Network.

References:
World Bank, 2011. The Changing Wealth of Nations: Measuring Sustainable Development in the New Millenium.

Canuto, O., and M. Cavallari. 2012. “Natural Capital and the Resource curse”,
Economic Premise, n.83, May. http://bit.ly/NFYcTH

Brahmbhatt, M., O. Canuto, and E. Vostroknutova. 2010. “Natural Resources and Development Strategy after the Crisis.” The World Bank. http://go.worldbank.org/TPPWANWXR

This article is published under
4 July 2012
According to a recently published study by consultancy Oxford Policy Management, the number of commodities-dependent countries with low and middle incomes has risen by more than 30 per cent between...
Share: 
4 July 2012
The resource paradox Prior to the RIO +20 conference, African leaders adopted the "African Consensus Statement on Rio +20" in which they noted that Africa is largely dependent on natural resources to...
Share: