Natural resources: blessing or curse?

This blog post appeared in Dutch on the Oikocredit Netherlands website.

Ghana, Uganda and Tanzania have recently discovered oil, gas and minerals. While a blessing at first sight, history teaches us that many countries hardly benefit from their natural resources. Nonetheless, a few countries (such as Norway) have experienced spectacular economic growth. Why do some countries succeed while others fail?

Source: The Economist 

I’ve just spent a month in Bergen, Norway, for work. While I was staring out of the bus window on the way to university, a thought sprung to my mind: “If only I had been born here.” Norway is a welfare state pur sang, which takes good care of its citizens. While the social safety net in The Netherlands is being torn down, Norwegians don’t need to worry when they get sick, unemployed or pregnant.

My enthusiasm is being supported by official statistics such as the UN Human Development Index, which has ranked Norway first since 2000. It is also one of the richest countries in the world, which is mainly a result of oil and gas exports. “Yeah, that’s easy” you might think. Of course you take good care of your people if you have a money tree growing in the backyard.

Intuitively, it seems a blessing to find oil or the like in your soil. However, Paul Collier shows in his book ‘The Bottom Billion’ that this is not always the case. Countries with natural resources do not automatically perform well socially and economically. Even more, they often perform worse than countries without such richness. Collier calls this the ‘Natural Resource Trap’ (also commonly called the ‘resource curse’), in which conflict becomes more likely and governments are less accountable. In addition, economic problems are looming, such as the Dutch disease (and, no, this is not an allergy for Gouda cheese).

Norway managed to avoid these problems by investing the oil money in the Government Pension Fund Global (or Oil Fund). With 760 billion Dollars in the bank, it is the largest of its kind and an important international investor. The Oil Fund invests in a careful manner. First of all, money is only invested abroad in order to keep the Norwegian economy from overheating. Secondly, an ethical committee checks whether investments are directed at ‘proper’ organizations, which do not sell weapons, violate human rights or harm the environment (click here for a list of excluded companies).  

Countries like Sierra Leone, Nigeria and Congo fared a lot worse: their discovery of diamonds, oil and minerals only helped the political elites. Why did it work out in Norway, while so many others fell prey to the resource curse? An obvious explanation is that Norway is a rich country and therefore better organised. But then we would forget that Norway’s wealth is a consequence – rather than a cause – of its resource management. For years, it was one of the poorest countries in Europe. Only in the 1960s did the economy start to grow as a result of the discovery of oil. By the way, also non-European countries – such as Chili and Trinidad and Tobago – avoided the resource trap. Hence, geographical and cultural factors cannot be the sole explanation of the Norwegian wonder.

So what is the explanation of Norway’s success? This question touches upon one of the most important questions in economics: Why are some countries poor and others rich? Daron Acemoglu and James Robinson give a compelling answer in their book ‘Why Nations Fail’. In their view, economic success is not determined by culture or geography, but by political and economic ‘institutions’ in a country. Institutions can be regarded as laws and practices in a country. These institutions don’t magically appear: they are manmade and often the result of a long history.

Institutions (or the lack thereof) affect how a country deals with the profits of its natural resources. Norway has democratic institutions, which means that political leaders can be held accountable for their decisions. As a result, revenues are being invested responsibly and to the benefit of all Norwegians. Such institutions lacked in other countries, which enabled officials to loot without consequence.

Countries like Ghana, Uganda and Tanzania are now standing at a crossroads. They have just discovered an abundance of minerals, oil or gas. Will they choose the road towards Norway or will they go towards Sierra Leone? Let’s hope that their institutions will push them in the right direction.