The Devil’s Excrement

That’s how Juan Pablo Pérez Alfonzo, Venezuela’s oil minister in the early 1960s and one of the founders of the Organisation of the Petroleum Exporting Countries, characterized black gold in 1975:

“I call petroleum the devil’s excrement. It brings trouble…Look at this locura—waste, corruption, consumption, our public services falling apart. And debt, debt we shall have for years.”

He, like many others, contends that natural resource wealth is a curse for developing countries. It’s a hot issue, and it seems that not a day goes by without a new article about squandered wealth or the mismanagement (to put it mildly) of natural resources.  Seriously, if I had a penny for every time I read something that opens with: “In spite of its vast wealth in natural resources, [insert poor “cursed” country name] is still poor”…

And, indeed, the “devil’s excrement” has been a curse for a number of developing countries: causing or fueling protracted conflicts, resulting in entrenched corruption and institutional greediness, all the while precipitating environmental destruction and often leading to political and social unrest.

In 2007, a report by Global Witness noted that “Although it is now universally accepted that revenue from natural resources provided the logistics for war in countries such as Angola, Cambodia, Liberia and Sierra Leone, the international community has yet to address this problem effectively and systematically.” Over the years, reports that detail the links between natural resource extraction and commercialization and protracted conflict have accumulated. The Global Policy Forum maintains a database of key UN and NGO documents that describe these links in painstaking detail.

Beyond fueling all out armed conflict, natural resource wealth is also linked to underdevelopment and systemic corruption. In a recent op-ed in the Financial Times, Moises Naim contends that

Oil is a curse. Natural gas, copper and diamonds are also bad for a country’s health. Hence, an insight that is as powerful as it is counterintuitive: poor but resource-rich countries tend to be underdeveloped not despite their hydrocarbon and mineral riches but because of their resource wealth. One way or another, oil – or gold or zinc – makes you poor. This fact is hard to believe, and exceptions such as Norway and the US are often used to argue that oil and prosperity for all can indeed go together.

Oligarchies and despotic regimes have been built on the wealth generated by the exploitation of natural resources, and looking at countries as different as Russia, Venezuela or Equatorial Guinea, it is clear that, as Paul Collier argues, poor management of natural resource wealth leads not only to protracted conflict, but also to stunted political, economic and social development.

What I find troubling about the natural resource curse argument is that it it is inherently pessimistic, and, to a certain extent, deterministic. In his op-ed Naim notes that “the rarity of such exceptions [U.S. and Norway], however, not only confirms the rule, but shows what it takes to avoid the misery-inducing consequences of wealth based on natural resources: democracy, transparency and effective public institutions that are responsive to citizens.”

Indeed, while it’s true that nations endowed with natural resources have historically squandered the wealth generated by exploiting them, it is not always the case, and it certainly doesn’t need to be so. Naim cites the examples of Chile and Botswana in his op-ed as countries that have “mysteriously” managed to avoid the natural resource curse. I would argue that there is nothing “mysterious” about what these countries did to avoid turning their natural wealth into the “devil’s excrement”. Naim cites “democracy, transparency and effective public institutions” as pre-conditions for effective natural resource management. I agree – but by looking at examples of successful natural resource wealth management, we can also find some valuable – practical – lessons that go beyond the vague policy prescriptions of “democracy” or “transparency.”

How can developing countries benefit from natural resources without falling victim to the “curse”?

Much has written about the topic, and the next few posts will be a round-up of insights regarding how some countries have successfully avoided the “curse” or have managed to extricate themselves from it. This topic is full of nuances: for example, Peru’s strong economic performance over the last decade has been in large part due to the commodity boom. And while the country has experienced sustained economic growth (even this year), the gap between rich and poor continues to grow and many resent the exploitation of natural wealth by multinational corporations. In spite of lagging human development indicators and a still young and somewhat inefficient decentralized administration, Peru is succeeding – at least to some degree – in managing natural resource wealth to benefit the country.

There is no silver bullet. The exploitation of natural resources is extremely lucrative, and it’s no surprise that corrupt governments, armed groups, and remorseless corporations are vying for a piece of the pie. In spite of the relentlessness of these greedy actors, there are ways to avoid or break the curse. Stay tuned…

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