Lecture 3.2

The Resource Curse

Emmanuel Teitelbaum

Overview

Central Questions

  • What is the resource curse?
    • “Dutch Disease”
    • “Four S’s”
  • Policy solutions
  • Breaking down the resource curse
    • Democracy, accountability, gender, conflict
  • Much of the discussion will focus on oil
    • But many of the arguments also apply to other resources

The “Resource Curse”

What is The Resource Curse?

  • The combined political and economic effects of natural resource wealth
    • Low growth, particularly in industry
    • Low accountability and high corruption
    • Volatility in government revenues
    • Entrenched patriarchy
    • Political instability and conflict (civil wars)
    • Adverse implications for democracy and democratic transitions (our main focus)

Oil and Electoral Democracy


Ross Discussion


  • What is a “fiscal theory of democracy” and what does it have to do with the oil curse?
  • Explore the Democracy Around the World App
  • Which country cases support Ross’s theory?
  • Which countries are exceptions?

Oil and the “Four S’s”

  • Source (rentier effect)
    • Non-tax revenues
    • Lack of accountability
  • Scale
    • Spending
    • Repression
  • Secrecy (corruption)
  • Stability (revenue)

Dutch Disease

  • Decline of export sectors when a natural resource is discovered
  • Deindustrialization
    • Poor allocation of resources (investment)
    • Government crowds out private sector
  • Higher exchange rates
    • Hurt competitiveness of industrial sector
    • May lead to protectionist policies

Resource Geography

Where are the Resoruces?

Who Makes Energy?

Who Has the Oil?



Follow the links to the U.S. Energy Information Agency website above. For the first link, play the ranking animation. For the second, select heat map and play the map animation. Discuss with a neighbor. Any surprises?

Resource Production as % of GDP


Policy Alternatives

Policy Discussion

  • Leaving oil in ground
  • Barter contracts (oil for public goods)
  • Distribute more oil revenues to citizens
  • Transfer more money to regional or local governments
  • Privatize (and tax) oil sector
  • Stabilization funds
  • Borrowing counter-cyclically
  • Enhancing transparency

Heterogeneous Effects

Oil and Democracy by Region


Heterogeneous Effects


  • Oil may have destabilizing effect in some regions but not others
  • Theories

    • Degree of resource dependence

    • Levels of inequality (Dunning)

    • Experience with democracy (Ross)

    • Industrial policy (Brooks and Kurtz)

Latin American “Exceptionalism”

  • Oil wealth and democracy are both endogenous to industrialization

    • Oil exploration requires investments in human capital

    • These investments are made as part of ISI policies (e.g. Brazil)

      • ISI = Import Substitution Industrialization

    • Industrialization, in turn, leads to democracy

  • Extension of modernization theory
  • What about Venezuela?

Extensions

Oil and Patriarchy (Theory)


Source: Ross, The Oil Curse, Chapter 4

Oil and Patriarchy (Evidence)


Source: Ross, The Oil Curse, Chapter 4

Oil and Conflict (Theory)


  • Costs vs. benefits of rebellion
    • Costs: repression; opportunity costs
    • Benefits: winning power; patronage from new leaders (if you win)
  • Expected benefits > costs in oil-producing regions
    • Incentives frequently lead to separatist wars
    • Spoils of war greater for aspiring leaders

Oil and Conflict (Evidence)


Source: Ross, The Oil Curse, Chapter 5

Where Does Oil Cause Conflict?


Source: Bell and Wolford 2015

Mediating Effects of Poverty


Source: Ross, The Oil Curse, Chapter 5

Conclusion

PSC 2339 Website