The Resource Curse: Pitfalls and Reforms

by raw05 | Nov 21, 2022 | Visualization

What is the Resource Curse?

While one might expect to see better development outcomes after countries discover natural resources, resource-rich countries tend to have higher rates of conflict and authoritarianism, and lower rates of economic stability and economic growth, compared to their non-resource-rich neighbors. This is what has become known as the Resource Curse. Countries like Venezuela in Latin America, Angola in Africa, and Saudi Arabia and the United Arab Emirates in the Middle East have all exhibited varying degrees of this problem. Countries suffering from the resource curse also have significantly higher rates of pollution, and those with higher GDP per capita rely less on renewable energy sources. Because those countries are also mostly authoritarian, taxes are not collected from the people and government expenditures are not monitored.

In Lebanon, the prospect of commercial gas fields has excited the people and has led the government to sign contractual agreements with drilling companies to start exploring and producing commercial gas. Many believe that this project would enrich and stabilize Lebanon, but the history of resource-rich countries predicts otherwise.

Problem Evidence

Economic Instability (related to SDG 8, 8.2): Below, we can see each country’s oil rents share of GDP, that is, the share of resource sales and exports out of total GDP. We can clearly observe that Gulf Countries and some resource-rich African countries like Libya, Angola, Democratic Republic of Congo and others, have oil rents account for 25 to 45% of their GDP on average for the past 30 years.

We can also see how Oil Rents move exactly in tandem with GDP Growth for Saudi Arabia and the UAE, which means that their economic growth is highly dependent on oil prices and sales volume, rendering it non-sustainable.

As for economic instability, severe inflationary periods have been recorded for these countries with the Gulf’s Oil Crisis in the 1970s through 1980s and the 1990 Oil Shock which impacted the Arab World greatly, and then Venezuela’s insane inflation rate which since 2016 has increased to 53,798,500%. These trends can be observed below for Saudi Arabia, the UAE, Iraq and Venezuela. The inflation rate is more volatile in these countries and the consumer price indices are in a steep upward trend.

Conflict and Government Expenditures: We can see in the representation below how countries which were perceived to be most reliant on Oil Rents are also more likely to have a higher share of their GDP be dedicated to Military Expenditure (SDG 16, 16.4). This indicates they are more prone to conflict, wars and social instability. Also, the lack of monitoring for governmental expenditures means that important sectors can be de-prioritized. For example, the research and development expenditures’ share of GDP is much lower in Arab countries than in Europe (SDG 9, 9.5, 16, 16.6).

The number of journal articles produced by each area of the world clearly shows the Middle East and Africa’s lower priority for innovation and scientific or scholarly research. High technology exports also have a low share of GDP in comparison with European, North American and East Asian countries.

Pollution and Environmental Impact (related to SDGs 3, 7, 7.2, 8, 8.4): The mapchart below clearly shows the high exposure to PM2.5 molecules in resource-rich countries. Despite having lower population rates and less condensed cities, the Gulf Countries are amongst the most air polluted countries. Saudi Arabia uses only oil as an energy source and has a renewable energy sources rate close to 0% (out of total consumption). The UAE also uses only natural gas to power the country and no renewable energy sources.

Solutions and Reforms: Example of Saudi Arabia

Eventually, Saudi Arabia  took serious steps to diversify its economy and to become less reliant on its natural resources. It took counsel with the IMF during the early 2010s and then announced its Vision 2030 which aims for sustainable development and diversification of the economy. The data shows improvements on many levels. First of all, we can see that the GDP’s composition is shifting from being purely reliant on Oil Rents to including more activities done in the Transportation and Tourism (SDG 8, 8.9) sectors. We can also see that more Foreign Direct Investments are being made.The Military expenditures’ share of GDP is also regressing over time.

The number of journal articles published is also increasing rapidly with more and more Saudi Arabians focusing on scientific research and on new technologies (SDG 9, 9.5).

Recommendations for Lebanon

It is important to be aware of the consequences that a resource rich country may face by relying on its resource. Lebanon already has weak governance and is prone to economic instability and conflict, this is why it is especially important to learn about the reosurce curse and to keep encouraging the Lebanese people to be productive and to ensure that the governmental institutions are diversifying the economy, maintaining price stability, and producing energy from renewable resources even with natural gas being available as a resource; these concepts are especially relevant to the UN’s sustainable development goals which call for sustainable economic development, good governance, and environmental health. The data shows that proper public policy and budget controls can truly be impactful.