Number cruncher

Some countries are blessed with lots of oil, copper, diamonds and so on. Surely these countries should fare better than those which are not so lucky? In fact, the reverse is true. There appears to be a “resource curse” where resource-rich countries grow more slowly than resource-poor equivalents. So what is going on here?

Countries that enjoy large revenues from their natural resources must invest these in physical and human capital which will improve productivity in the general economy. If they spend the revenues on imported consumer goods or large “vanity” projects, there will be few long-term benefits.



The key factor here is the quality of basic institutions. Badly defined property rights, lack of transparency and weak legal institutions are fatal. A dramatic example is Nigeria. From 1965 to 2000, oil revenues per capita rose from US $33 to US $325. Yet income per capita hardly changed and the number of people surviving on less than US $1 per day rose from 26 per cent to almost 70 per cent of the population.

The post-colonial experience of Botswana is a stark contrast. While 40 per cent of GDP stems from diamonds, good institutions and policies, including high expenditures on education, have generated excellent growth. GDP per capita is now ten times that of Nigeria.

Of course, the very existence of huge profits from resource exports may help undermine institutions. Individuals devote their energies to grabbing their share rather than engaging in more productive activities. This very process tends to undermine the rule of law. The resource profits also allow politicians to bribe voters, offering well-paid but unproductive jobs, tax handouts and the like. Furthermore, institutions may be destroyed as different groups fight over resource profits, with the profits then being used to fund the fighting.

What is required is to improve the legal systems and the quality of institutions, with a related insistence on accountability and transparency in the use of resource revenues. The beneficiaries from resource profits will oppose this, so unless inside or outside pressure can make them change their ways, the prospects tend to be bleak.