Resource curse

LAHORE: Despite abundant resources, Pakistan is plagued with resource curse that is so common in countries where planners know the solution but lack courage to implement it due to self-interest or absence of political will.

Resource curse is a curious phenomenon that impacts countries with rich natural resources that perform worse than countries that lack or have few natural resources.

There are countries with abundant natural resources that perform better than others, while some throw the resources down the drain. Planners must probe as to why the spell of the resource curse afflicts Pakistan.

There are several examples where two countries with similar resources have performed in contrasting ways.

About 50 years back, oil rich Nigeria and Indonesia had similar per capita income, but today Indonesia is far ahead of its African counterpart.

Similarly, both Botswana and Sierra Leone are rich in diamonds but Botswana has exhibited robust growth in the past five decades, while Sierra Leone has lost all its wealth in internal strife.

There are three reasons of failures in the resource rich countries.

The first is that the prospect of riches diverts official efforts to seizing a larger share of the pie, rather than creating a larger pie. This creates tussle in the society to grab wealth, which leads to conflict.

Simple rent seeking behavior of the officials with outside help is another outcome of this wealth grab.

Firms yield to this temptation; as bribing government officials to gain access to resources at lower rates is a better business proposition than to invest and develop an industry.

It is common knowledge that natural resource prices are volatile. Oil or gas prices or for that matter prices of all other commodities like metals, minerals and crops fluctuate according to the state of the global economy.

Gas that a decade back was available at 10 percent of crude oil price, is currently available at 30-40 percent the rate of crude oil. It is extremely difficult to control this volatility.

Lenders provide money to exploit natural resources when times are good, but want their money back when prices plummet. Economic activity dependent on cash flows is thus even more volatile than commodity prices. Most of the gains made in a boom are depleted in the downturn that follows.

Thirdly, natural resources, while a good source of wealth, do not create jobs by themselves if raw resources are exported instead of using them indigenously for value-addition.

Exporting raw copper from Balochistan for instance might bring some money, but an industry based on this natural resource would create a lot of jobs and more money.

Abundant natural wealth often creates rich countries with poor people. Majority of the people in oil rich Latin American and Middle East are poor.

Poverty in resource rich Pakistan is over 40 percent, while resource less Japan is among top global economies. Singapore without natural resources exports 10 times more than Pakistan.

Democratic, consensual and transparent processes are more likely to ensure that the fruits of a country’s wealth are equitably and well spent.

Wealth accumulated from plundering of national resources is parked by the looters in safe havens in the developed countries. Governments in developed countries can help with common-sense reforms.

It is a well-established fact that secret bank accounts not only support terrorism, but also facilitate the corruption that undermines development.

Similarly, transparency would be encouraged if only payments that are fully documented were tax deductible.