1. Is there really a Resource Curse
Is there really a Resource Curse? Implications for Governance and Production Jonathan Di John
Resource Curse: Natural resource abundance leads to:
poor economic performance/growth collapses
high levels of corruption/poor governance
greater political violence.
Contrary to earlier arguments that mineral abundance can help overcome traditional resource gaps (savings, fiscal and foreign exchange constraints). Innis (1966) ‘staple thesis’
Resource Curse theory applied to all natural-resource abundant economies, not just in Sub-Saharan Africa

2. Variants of the Resource Curse Argument:
Dutch Disease: natural resource booms render manufacturing and agricultural sectors uncompetitive
The economic concept of Dutch Disease refers to the potential negative effects natural resource windfalls and accompanying appreciations of exchange rates can have for the rest of the economy. One of the potential dangers of oil booms, for example, is that exchange rate appreciation renders the non-oil-tradable sectors such as manufacturing sector less competitive and thus can generate de-industrialisation.
The core argument of the second variant, which has been called “political Dutch Disease”, is that rentier state leaders, by relying on ‘unearned” income (in the form of mineral rents and/or aid), do not develop a set of reciprocal obligations with citizens via the nexus of domestic taxation. As a result, mineral rents (particularly oil and gas) can, in lower-income countries, coincide with weak or illegitimate state institutions which may trigger conflict.
‘Unearned’ income through mineral resource rents can allow elites to purchase security through corrupt patron-client networks, rather than with the establishment of a ‘social contract’ based on the exchange of public goods financed through domestic taxation. Such arrangements, according to this model, can reduce a regime’s legitimacy and relative military, administrative, political and economic power, which, in turn, can render the regime vulnerable to rebellion (Reno, 2002; Le Billon, 2003). Laitin and Fearon (2003), drawing on rentier state theorists (e.g. Chaudhry, 1989; Karl, 1997), posit that oil dependent poor countries are more prone to conflict than non-oil economies because ‘oil producers tend to have weaker state apparatuses that one would expect given their level of income because rulers have less need for socially intrusive and elaborate bureaucratic system to raise revenues- a political Dutch Disease’ (p. 81).
According to rentier state theorists, the reliance on unearned income can have several negative effects on a regime’s legitimacy and capacity to combat or prevent rebellion. The first outcome of increased unearned income is a growing independence of states from citizens. This increased autonomy of states from citizens can increase the ability of state leaders to act in predatory ways, or at the very least reduces the need for state leaders to develop long-run political bargains with interest groups. This, in turn, makes taxation and revenues more unpredictable, which may increase arbitrary confiscation when volatile mineral rents suddenly collapse. The second retarding effect on state capacity of unearned income is the decline in bureaucratic capacity. With little bureaucratic presence in tax collection and limited information about what goes on at the grassroots level, states may be vulnerable to organized predators including guerrillas and private armies. A third argument of rentier state theorists is that mismanagement of resource wealth can create grievances that, when combined with a history of ethnically-based secessionist tendencies, can increase the likelihood of organised armed rebellion (Malone and Nitzschke, 2005: 5). The plausibility of these arguments depends on the extent to which oil wealth necessarily generates the aforementioned problems.

3. Variants of the Resource Curse Argument:
Rentier State and theory of rent-seeking: the economic effects
oil abundance, especially when controlled by the state, is assumed to generate extraordinarily large degrees of rent-seeking and corruption
increases in rent-seeking and corruption will generate lower growth
Corrupt transactions—the need to keep bribes secret reduces the security of property rights, which lowers investment in long-gestating projects
. The main idea behind the behind the theory of rent-seeking is to identify the costs of state interventions, particularly the costs of creating monopoly and the targeting of subsidies. The mainstream theories of rent-seeking maintain that whenever public agents have monopoly power and discretion over the distribution of valuable rights, incentives for corruption increase. This, in turn, leads to a waste of resources in attempts to influence public authorities.
the basic policy advice deriving from rent-seeking theory is that the elimination of all state-created rents will eliminate wasteful, that is, unproductive rent-seeking activities. This policy advice is meant to support the case for economic liberalization (including trade liberalization, privatization and financial deregulation). Economic liberalization, by reducing state-created rents and curbing centralized state discretionary authority over rent allocation is argued to reduce the level of rent-seeking and corruption, which, in turn, will increase investment and growth levels.

4. Variants of the resource curse argument
Rentier State and theory of rent-seeking: effects on political stability
1) ‘honey pot’, or rent-seeking argument, which suggests that oil abundant less developed countries generate valuable rents and that the existence of these rents tends to generate violent forms of rent-seeking that take the form of ‘greed-based’ insurgencies.
2) rentier state argument: oil states are more likely to have weak state structures because they have less need to create strong bureaucracies to raise revenue. Weak state structures, in turn, can make the state more vulnerable to insurgency.
The core argument of the second variant, which has been called “political Dutch Disease”, is that rentier state leaders, by relying on ‘unearned” income (in the form of mineral rents and/or aid), do not develop a set of reciprocal obligations with citizens via the nexus of domestic taxation.[As a result, mineral rents (particularly oil and gas) can, in lower-income countries, coincide with weak or illegitimate state institutions which may trigger conflict.
Unearned’ income through mineral resource rents can allow elites to purchase security through corrupt patron-client networks, rather than with the establishment of a ‘social contract’ based on the exchange of public goods financed through domestic taxation. Such arrangements, according to this model, can reduce a regime’s legitimacy and relative military, administrative, political and economic power, which, in turn, can render the regime vulnerable to rebellion (Reno, 2002; Le Billon, 2003). Laitin and Fearon (2003), drawing on rentier state theorists (e.g. Chaudhry, 1989; Karl, 1997), posit that oil dependent poor countries are more prone to conflict than non-oil economies because ‘oil producers tend to have weaker state apparatuses that one would expect given their level of income because rulers have less need for socially intrusive and elaborate bureaucratic system to raise revenues- a political Dutch Disease’ (p. 81).

5. The Resource Curse and Political Violence
rentier state model: mineral abundance generates: a) low levels of government legitimacy, b) slow economic growth; c) higher levels of political violence. Why?
A) a growing independence of states from citizens due to high levels of unearned income (from mineral rents) and low levels of domestic taxation.
B) a potentially retarding effect on state capacity of unearned income is the decline in bureaucratic capacity..
C) mismanagement of resource wealth can create grievances that, when combined with a history of ethnically-based secessionist tendencies, can increase the likelihood of organised armed rebellion.
The plausibility of these arguments depends on the extent to which oil wealth necessarily generates the aforementioned problems.
The logic as to why oil economies are subject to greater political violence worthy of particular attention since the onset of such violence is the greatest expression of an illegitimate government.
the reliance on unearned income can have several negative effects on a regime’s legitimacy and capacity to combat or prevent rebellion.
This increased autonomy of states from citizens can increase the ability of state leaders to act in predatory ways, or at the very least reduces the need for state leaders to develop long-run political bargains with interest groups. This, in turn, makes taxation and revenues more unpredictable, which may increase arbitrary confiscation when volatile mineral rents suddenly collapse.
B) With little bureaucratic presence in tax collection and limited information about what goes on at the grassroots level, states may be vulnerable to organized predators including guerrillas and private armies.
Supporters of the rentier state model suggest that reducing a state’s ‘unearned income’ from mineral rents will enhance the prospects of peace. Policy recommendations include advocating greater transparency in the payments multinationals in extractive industries make to host governments in poor countries (Gary and Karl, 2003; Center for Global Development, 2004: 56-7); or avoiding extractive industries altogether and concentrating efforts in order to diversify mineral-dominant economies towards agriculture and manufacturing (Ross, 2001b).

6. Theoretical and Empirical Problems
Leaders are implicitly assumed to “own” the natural resources, that is, they are assigned the ‘property rights’ over resources.
How rulers appropriate and maintain power is not adequately analysed.
By assigning “rights” to leaders (whether in the state or civil society), the whole problematic of how “common pool resources” are managed is neglected, when the real problem of common pool resources is, in fact, analysing the processes through which rights are assigned, enforced, maintained and changed (Olson, 1965; Libecap, 1989; Ostrom, 1990). In other words, it is assumed that there are no collective actors within the society that can impose some domestic conditionality on how those who occupy the state exercise their power.

7. Theoretical and Empirical Problems
Rent distribution through patronage is common to all economies at lower levels of development.
North et al (2009) on ‘limited access orders’:
The principal solution through history to the classic Hobbesian problem of endemic violence is the creation of what Nortth et al (2007) call limited access orders (as opposed to the much rarer, open access orders, which characterizes advanced market economies).
The limited access order creates limits on the access to valuable political and economic functions as a way to generate rents.
When powerful individuals and groups become privileged insiders and thus possess rents relative to those individuals and groups excluded (and since violence threatens or reduces those rents), the existence of rents makes it in the interest of the ‘privileged insiders’ to cooperate with the coalition in power rather than to fight.
By assigning “rights” to leaders (whether in the state or civil society), the whole problematic of how “common pool resources” are managed is neglected, when the real problem of common pool resources is, in fact, analysing the processes through which rights are assigned, enforced, maintained and changed (Olson, 1965; Libecap, 1989; Ostrom, 1990). In other words, it is assumed that there are no collective actors within the society that can impose some domestic conditionality on how those who occupy the state exercise their power.

8. Theoretical and Empirical Problems
Leaders are assumed to have predatory as opposed to developmental aims.
Implicitly assumed that leaders in petro-states are revenue-satisficers and not revenue-maximizers.
Not having developmental aims does not necessarily imply predation.
The neglect of the political processes through which a leader appropriates power limits our understanding of the motivations of state leaders. The state is not a thing, such as ‘a predator’, but a set of social relations. The existence of oil abundance does not preclude the possibility that state leaders share income from resource rents with groups that comprise their political support base. Even if it is assumed that the leader has absolute power and is thus the ‘owner’ or ‘residual claimant’ in an economy, it does not necessarily follow that leaders will act in predatory ways. Following Olson (1993), a leader that has a long time horizon, what he calls a ‘stationary bandit’, has the incentive to maximise the rate of economic growth as this will maximize the resources accruing to the state in the long-run. In the neoclassical theory of the firm, the residual claimant refers to the firm owner (Alchain and Demsetz, 1972). The firm owner in this theory is assigned the right to appropriate the residual, that is, profits, of the firm’s team production. According to this theory, private ownership of firms provides the incentives for owners to monitor team production efficiently.
Supply (stationary bandit) and demand (growth-enhancing interest groups) factors not explained. rentier state model does not adequately address the dynamics of rights appropriation, rent-seeking and the dynamics of power struggles. The neglect of dynamics is certainly inappropriate for assessing the growth prospects associated with institutional formations.

9. Theoretical and Empirical Problems
Selection Bias
Is resource abundance the result of failed policies?
By definition, most countries that do not have a diversified agricultural and manufacturing base are natural resource dependent.
Abundance versus dependence
. In historical terms, almost all countries began as mineral-dominant economies. For instance, the US, Canada, Norway, Sweden, the Netherlands, Australia, and Malaysia were, in earlier stages of development, more mineral-dominant, less diversified economies. Not only that, Findlay and Lundhal (1999) have demonstrated the generally growth-enhancing role natural resources played in stimulating capital accumulation and growth throughout the now advanced countries in the period

10. Theoretical and Empirical Problems
Resource curse theorists do not examine the possibility that mineral abundance can be central to the development of manufacturing industry in particular
(Wright and Czelusta (2007); Lederman and Maloney (2007).
. .For instance (Wright and Czelusta (2007); Lederman and Maloney (2007).
examine how and why technological development and collective learning positively affected the development of natural resources in the U.S. economy. They demonstrate how large-scale investments in exploration, transportation, geological knowledge, and the technologies of mineral extraction, refining, and utilization in natural resources contributed to long-run economic growth and industrialization of the United States. Blomström and Kokko (2007) explore how the development of natural resources led to increasingly high-tech industrial production in Sweden and Finland during the 19th and 20th centuries. The key policy question to ask is why natural resource revenues are used in ways that sustain economic growth and diversification in some countries and not in others (Chenery 1979). Lack of economic diversification and poor economic growth are why economies are mineral dependent. If that is the case, then it makes sense to ask why political conflicts prevented growth in some mineral dependent economies and not in others.

11. Is there empirical evidence to support the resource curse?
Variation and Change in growth of mineral abundant economies not well explained (e.g Botswana, Malyasia, Venezuela, Nigeria)
Economic growth in non-mineral rich economies not well explained (e.g. India, China, Tanzania, Malawi)
Recent growth accelerations in aid dependent economies not well explained (e.g. Mozambique, Uganda, Tanzania, Ghana). The fact that aid dependent economies may be pursuing more liberal economic policies demonstrates that policy matters more than levels of rents in the economy
Corruption rates/governance indicators indeterminate with respect to long-run growth
Mineral abundance economies do not appear to be more corrupt than non- mineral abundant economies
. The fact that aid dependent economies may be pursuing more liberal economic policies demonstrates that policy matters more than levels of rents in the economy

12. Is there convincing evidence in support of the rentier state model?
Table 1
. Growth and Corruption in Mineral -
Abundant and Non
Mineral Abundant
Developing Countries, 1965
2000
1965
1990
1. Mineral
Abundant
2. Non
Mineral
Developing Countries (2)
(13 observations)
(19 observations)
Median GDP
Growth
4.3
5.6
Rate 1965 90
(2.5
12.4)
(1.5
9.5)
(Range)
Median Corruption
3.9
3.6
Index 1980
85 (1)
(0.2
6.5)
(0.7
8.8)
Developing Countries
4.0
3.7
Rate 1990
(1.6
7.0) (
0.6
10.3 )
3.3
3.2
Index 1996
6.8)
(1.0
5.0)
Note: (1) A corruption index of 10 indicates minimum corruption, an index of 0 indicates maximum corruption;
(2) Mine
ral
Abundant is defined as those economies where mineral/fuel exports in total exports in 1980 is equal
or greater to 35 percent; non
mineral abundant is defined as those economies where mineral/fuel exports in total
exports is less than 35 percent in 1980 .
Sources: World Bank,
World Development Indicators
; Subjective Corruption indices from Transparency
International
In sum, two important mechanisms where the resource curse hypothesis may explain increased conflict, namely low growth and high corruption, are not supported by the evidence.
The fact that subjective corruption rates are similar in mineral-resource abundant and mineral-scarce economies suggests that the existence of mineral rents does not necessarily generate higher forms of illegal rent-seeking in the former type of economy. This has two implications. First, mineral-resource states do not generate greater legitimacy problems because of corruption. Second, corruption, a generally non-violent form of influencing, is not systematically less prevalent in mineral-resource abundant economies. If this were the case, it could be argued that the absence of non-violent, illegal forms of rent-seeking were suppressed, then violent forms of rent-seeking such as rebellion were more likely. This is not the case.

13. Is there empirical evidence to support the resource curse?
comparative work on oil states, Smith (2004) has found that, in the period , oil wealth is robustly associated with increased regime stability, even when controlling for repression, and with a lower likelihood of civil war.
As Smith notes:
“Durable regimes in oil rich states are not the outliers that both rentier state and resource curse theorists have assumed them to be. Regimes such as Suharto’s in Indonesia, which lasted 32 years, Saddam Hussein’s Ba’athist regime in Iraq, which lasted 35 years (and was only ousted by a full-scale U.S.-British invasion in March, 2003), and long-lived monarchs of the Persian Gulf appear to be more representative of regime durability than do the favourite cases of Iran, Nigeria, Algeria, and Venezuela –the “big four.” Moreover, the durability effect has been independent of the consistent access to rents with which regimes can buy legitimacy, since the busts created no trend toward regime crisis or instability in exporting states.” (p.242)

14. Policy Considerations
Taxation of mineral rents inadequate in sub-Saharan Africa (e.g. Zambia, DRC).
Need for governments to develop productive strategies that exchange mineral rights for local content conditions, whereby foreign investors are obligated to use domestic suppliers on an increasingly greater scale. Local content management has been one of the main ways in which FDI can be utilised for the benefit of national productive capacity.
Capacity-building in the geological survey capacity in sub-Saharan Africa needs to be developed in order to improve the bargaining power of states vis-à-vis multinationals. This is an area where the international financial institutions can play a leading role.
Dual Track strategy of growth (e.g. Mauritius, Malaysia) promising for promoting growth and political stability. Requires strong national political parties (e.g. China, Malaysia, Indonesia).
role of China and India may increase bargaining power

15. Taxing Resource Abundance Effectively
Threshold effects: which factors enhance the development prospects of mineral and fuel abundant less developed economies?
Taxing Resource Abundance Effectively
The Ownership Structure of Exporting Industries
Implementing Dual-Track Growth Strategies
role of China and India may increase bargaining power

16. Political Stability: elite bargains and political parties
The degree of centralised rule and patronage matters for political stability
A cursory examination of relatively peaceful polities (Tanzania, Zambia. Malawi, South Africa, Botswana) and those where the state survived even during civil war (Mozambique) suggests that:
The construction of political organisations, particularly political parties, has been central to providing the institutional mechanisms of distributing patronage to regional elites and to important political constituencies in ways that either prevent challenges to authority and/or maintain cohesion of the ruling coalition
Unravelling of elite bargains in Zimbabwe has led to instability and violence.

17. Business Climate: Infrastructure, taxation, and regional trade pacts
Johannesburg –Maputo Corridor presents promising opportunities for FDI
Landlocked countries—Zambia, Malawi have high transport costs
Corporate Taxation on FDI, especially mining projects is not generally burdensome. Most countries use taxation to promote FDI.
Large Taxpayer Offices make tax payments relatively simple.
SADC has the most promise among African regional trade pacts (mostly due to the diversification of production and development level of South Africa, the dominant partner in the region).
Largest 16 companies in Mozambique pay no income tax.

18. Many large mining deals are off-budget and contracts remain secret.
Politics of Business
Many big projects involve personal deals with political party elites. Property rights are selectively protected.
Many large mining deals are off-budget and contracts remain secret.
Joe Hanlon on Mozambique—need local partner to acquire land ; Zambian mining

19. Vulnerabilities for Growth, Investment and Stability
Exports and tax base overly reliant on prices of natural resources.
Apart from South Africa, the infrastructure gap is large (i.e. road, ports, and electricity, irrigation). Landlocked countries worst affected.
Likely revision of tax regimes to increase mining tax royalties.
Skilled labour in short supply in most countries as a result of de-industrialisation, especially in Zambia, Mozambique, less so in South Africa.
Political party fragmentation a threat to stability (e.g. Zambia, South Africa, especially Zimbabwe).
History of large-scale capital flight, emigration of skilled workers.
Joe Hanlon on Mozambique; Zambia
Regional infrastructure a problem
Wrt point 3), factors driving increases in mining tax regimes: 1) IMF pressure, 2) China and India competing with Western MNCs, 3) CSR and EITI initiatives, 4) domestic pressures of small and medium businesses not wanting to bear the whole burden of corporate tax, 5) Governments desire to reduce aid dependency