International Resource Politics 101: Economic Illnesses

Foreword

International Resource Politics is characterized by three terms: International Relations, Geopolitics, and Resources. It explains the influence of natural resources, particularly energy, on state behavior and international politics. Resources have a tremendous impact on the world stage as resource-rich states have power over obtaining, securing, and limiting access to their energy assets, hence shaping interstate relations. Taking into account the three terms formerly mentioned, this series of articles explains the geopolitical advantages and disadvantages provided, namely, by energy while focusing on the development of resources as economic engines and their role in various political events that occurred in the late 19th century up to present times.

The International Resource Politics 101 series is divided into six chapters:

1. International Resource Politics 101: Foundations of Resource Politics

2. International Resource Politics 101: Oil’s Emergence and Historical Implications

3. International Resource Politics 101: Economic Illnesses

4. International Resource Politics 101: Political Implications of Renewable Energies

5. International Resource Politics 101: Terrorism and Geopolitics

6. International Resource Politics 101: Blessing Or Curse?

International Resource Politics 101: Economic Illnesses

Is the abundance of natural resources in the earth's bowels a curse or an opportunity? Theoretically, natural resources constitute a significant percentage of a country's actual wealth and provide revenue and economic growth (Organisation for Economic Co-operation and Development (OECD), 2011, p.5). The recourse-rich states have a great prospect to accelerate economic activity and generate a substantial amount of income from resources. It is considered that natural resources such as oil and gas, also known as black and blue gold, will continue to play a vital role in the international arena amidst the rapidly emerging economies entering the world market (OECD, 2011, p.9). Norway sees natural resources as more of an opportunity than a curse as a result of effective resource management and policies. The government of Norway avoided the effects of the Dutch disease after significant oil deposits there were discovered in the 1970s (Cappelen & Mjøset, 2009).

According to Kenneth Mohammed (2021), a senior adviser at Intelligent Sanctuary, natural capital is 'assets that should bring wealth and stability but instead lead to corruption and poverty.' Practically, a peculiar phenomenon exists that economists refer to as the resource curse since nations with substantial natural resource endowments operate worse than nations with smaller endowments (Stiglitz, 2004). Consequently, the possession of huge reserves of natural resources does not entirely reflect economic growth (Stiglitz, 2004). For instance, Nigeria is Africa's greatest oil producer, the sixth-largest global exporter, and the world's tenth-largest proven oil reserve (Kenneth, 2021). However, according to the World Bank report 'A Better Future for All Nigerians: Nigeria Poverty Assessment 2022,' four in ten Nigerians live below the national poverty line (Nasir, 2022). Also, the unemployment rate has tripled from 2013 to 2021 (O'Neill, 2022). Hence, there is no straightforward answer to the correlation between resource abundance and economic growth. Over 50 developing and emerging economies, described as resource-rich economies by the International Monetary Fund (IMF), are located in Africa, which is home to a sizable portion of the world's impoverishment (2021). This article seeks to present economic illnesses faced by resource abundance known as Dutch disease and the resource curse.

Figure 1: On average, the resource rich-states perform worse than resource-scarce states

It appears that only living creatures are vulnerable to disease, but the nation's economy could also undergo illnesses. The first and most well-known economic disease is a Dutch disease. The name itself makes a clear reference to a relationship with Dutch history. Following the discovery of sizable natural gas reserves in the North Sea in the 1960s, the Netherlands experienced significant growth in its wealth (Ebrahimzadeh, 2020). Paradoxically, this allegedly favorable outcome had negative effects on the economic sectors caused by the stronger Dutch guilder rose the price of the country's non-oil exports, thus making them less competitive. The increase in wealth in the Netherlands instantly influenced the demand for goods in a positive way. Inflation, however, was a natural consequence of this. According to Christine Ebrahimzadeh (2020), a surge in imported commodities was also seen throughout the nation. The local market suffered as the Dutch started to purchase more products from abroad. Due to this, the industrial sector collapsed as the residents were switching to the oil and gas sectors. The rest of the industry's workforce saw a dramatic decline in size. Unemployment, as well as stagnation, emerged.

Economists, Max Corden and Peter Neary (1982) categorize an expanding export economy into three areas: the rising export sector, the lagging export sector, as well as traded and the non-traded goods sector. Retail trade, the service sector, and construction may all fall under the non-traded products sector. The authors demonstrate how the conventional export sector is displaced by the other two sectors when a nation contracts Dutch disease. The symptoms such as currency appreciation, the influx of foreign currency, the rise in luxury imports, and de-industrialization clearly describe the Dutch disease (Ebrahimzadeh, 2020). Not only Netherlands suffered from the syndrome, but it can be visible in the practice of Saudi Arabia which over-relied on a single export of crude oil. Crude oil became the lifeblood of Saudi´s economy; the petroleum sector makes up 46% of the Gross Domestic Product (GDP) while the manufacturing sector in Saudi Arabia contributes to only 10% of its GDP (Mordor Intellegence, 2021 & Trading Economics, 2022). However, to decrease the over-reliance on oil export and prevent the symptoms of Dutch disease, Prince Mohammad bin Salman, the crown prince announced reforms in Saudi Arabia´s economic path ranging from information technology to health care (Institute Montaigne, 2017).

Figure 2: The addiction to oil leads to harmful consequences

The next economic disease that threatens the natural resource-rich states is a resource curse. The resource curse, also known as the paradox of plenty or paradox of poverty, is described as the inability of many resource-rich nations to completely capitalize on their natural resource endowments and for their governments to successfully address requirements related to public welfare (Polterovich, et al., 2010, p.1). Alternatively, the resources become a curse than an opportunity. African countries such as Sudan, Syria, Congo, Angola, Nigeria, and many others have a lot of legal reasons to boast of their natural resource reserves. Even so, most of the poorest countries in the world are located in the African continent, experiencing low capita income and low quality of life (Ventura, 2022). In the meantime, despite importing 99% of crude oil, Japan remains one of the stable and prospering economies in Asia (Klein, 2022).

As it has been mentioned previously, the range of issues the resource curse causes varies from political conflicts over the resources to environmental pollution (Oil in Uganda, 2012). First, regional, ethnic, or religious groups' disputes over resources. Second, high inequality in the distribution of benefits —typically, when only a small group of very wealthy individuals profit while the poor remain or even fall further behind (Oil in Uganda, 2012). The curse does not exclusively affect the African continent. Venezuela was praised as being the richest nation in South America until the 1980s (Berkeley Economic Review (BER), 2019). However, approximately 40 years later, the country is currently in danger of utter collapse (BER, 2019). With 17.5% of the world's confirmed oil reserves, Venezuela has the greatest oil stockpile in the world and makes up 75% of the nation's exports (NS Energy Staff Writer, 2020 & Alves, 2022). Even so, the country's economy is in the fourth year of hyperinflation with the individual's base salary of $2.4 per month (Reuters, 2021).

Figure 3: The corruption is one of the reasons of the resource curse

Both Dutch disease and the resource curse also emerge as a result of incompetent political leadership and weak institutions. According to Kenneth Mohammed (2021), the corruption that the resource curse points to is the single biggest barrier to economic and social development, particularly in less developed nations. An estimated $2 trillion is looted annually by corruption worldwide. With this amount of money, the world's infrastructure gap could be closed, malaria could be cured, and all children could receive an education (Mohammed, 2021).

One may wonder about the solutions to overcome such economic diseases. Lawson-Remer, an American politician and economist, the possible answer to curing the illnesses is solid cooperation among capital-exporting countries, international financial institutions, and private sector companies (Patrick, 2012). She urges the United States to collaborate with like-minded nations in significant multilateral frameworks (such as the Group of Eight, Group of Twenty, OECD, and the Financial Stability Board) to forge consensus on four priorities to advance this overall goal (Patrick, 2012). Therefore, combating corruption, advancing resource management, and diversifying the economy could greatly help to fight the resource curse and Dutch disease.

Figure 4: Venezuela is on the verge of economic collapse

Apparently, the abundance of natural resources does not directly refer to economic prosperity, but instead, economic adversities such as Dutch disease or resource curse due to misuse or overuse of natural capital. The severity and healing period of illnesses depend on how the states are open to changes and reforms. In order to take advantage of the resources Mother Earth granted, authorities should put an effort to eradicate corruption, manage resource allocation efficiently, diversify exports and make the institutions transparent, otherwise, the resources will only slow down economic development, leading to low business activity and the so-called human capital drain.

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