Thursday, April 07, 2022

The Oil Curse

  The “resource curse” phrase was first coined by Prof Richard Auty in 1994, the term refers to the inability of nations to use their windfall wealth to improve their population’s lot and bolster their economies. The rich natural resources bring corruption and poverty to a nation, rather than positive economic development and, counterintuitively, these countries end up with lower growth and development than those without natural resources.

The subject of extensive research, the resource curse, or “paradox of plenty”, points to an inverse relationship where wealth brings a detrimental impact. Nigeria – the largest oil producer in Africa, the sixth-largest global exporter, holds the tenth-largest proven oil reserve in the world – is arguably such a “cursed” nation. Dependent on their natural resource exports, these countries have on average, lower growth rates, lower levels of human development, and more inequality and poverty. They also have been found to have worse institutions and more conflict than resource-poor economies. It arises predominantly due to poor political governance and weak institutions, coming from the distinct phenomena around oil exploitation rather than possession – and is shaped by the multinationals, national and foreign governments, the foreign financiers and investors, alongside the structures of states and private actors in oil exporting countries.

Studies have shown that following an oil boom, an imbalance results as the non-oil sectors are left underdeveloped. As demand rises for capital and labour, the booming oil sector draws away those same factors from essential but less-lucrative sectors, such as agriculture, leaving them enfeebled. The windfall, having created a concomitant abundance and ensuing vast revenues, higher wages, and better returns on investments, leads to administrations finding themselves in new territory. Incompetence and inexperience in managing state finances creates higher incentives to attract corruption.

The state earns most or all its total revenue from the rents paid by foreign individuals, companies or governments. This leads to non-oil sectors shrinking, inflation spiralling, imports increasing in quantity and costs, more expenditure on political vanity projects, subsidies and welfare programmes to counter increased cost of living and the depletion of foreign exchange.

A wealth of sorrow: why Nigeria’s abundant oil reserves are really a curse | Global development | The Guardian

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