NEW discoveries of natural resources in several African countries — including Ghana, Uganda, Tanzania, and Mozambique — raise an important question: Will these windfalls be a blessing that brings prosperity and hope, or a political and economic curse, as has been the case in so many countries?
On average, resource-rich countries have done even more poorly than countries without resources. They have grown more slowly and with greater inequality — just the opposite of what one would expect. After all, taxing natural resources at high rates will not cause them to disappear, which means that countries whose major source of revenue is natural resources can use them to finance education, healthcare, development and redistribution.
A large literature in economics and political science has developed to explain this "resource curse ". Three of the curse’s ingredients are well known: resource-rich countries tend to have strong currencies, which impede other exports; because resource extraction entails little job creation, unemployment rises; and volatile resource prices cause growth to be unstable.
Moreover, resource-rich countries often do not pursue sustainable growth strategies. Political dysfunction worsens the problem.
There are well-known antidotes to each of these problems: a low exchange rate, a stabilisation fund, careful investment of resource revenues, a ban on borrowing, and transparency. But newly enriched countries need to take several more steps to increase the likelihood of a "resource blessing".
First, these countries must do more to ensure that their citizens get the full value of the resources. There is an unavoidable conflict of interest between natural-resource companies and host countries: the former want to minimise what they pay, while the latter need to maximise it. Well-designed, competitive, transparent auctions can generate much more revenue than sweetheart deals. Contracts, too, should be transparent, and should ensure that if prices soar, the windfall gain does not go only to the company.
Unfortunately, many countries have signed bad contracts that give a disproportionate share of the resources’ value to private foreign companies. But there is a simple answer: renegotiate; if that is impossible, impose a windfall-profit tax.
Botswana’s renegotiations laid the foundations of its remarkable growth. It is not only developing countries, such as Bolivia and Venezuela, that renegotiate; Israel and Australia have done so as well.
Equally important, the money gained through natural resources must be used to promote development. Infrastructure has been built with one goal in mind: getting the resources out of the country at as low a price as possible.
Real development requires exploring all possible linkages: training local workers, developing small and medium-sized enterprises to provide inputs for mining operations and oil and gas companies, domestic processing, and integrating the natural resources into the country’s economic structure. Today, these countries may not have a comparative advantage in many of these activities, and some will argue that countries should stick to their strengths.
That is wrong. What matters is dynamic comparative advantage. Forty years ago, South Korea had a comparative advantage in growing rice. Had it stuck to that strength, it would not be the industrial giant it is today.
Companies will tell Ghana, Uganda, Tanzania and Mozambique to act quickly, but there is good reason for them to move more deliberately. The resources will not disappear, and commodity prices have been rising. In the meantime, these countries can put in place the institutions, policies and laws needed to ensure resources benefit all of their citizens.
Resources should be a blessing, not a curse. They can be, but it will not happen on its own. And it will not happen easily.
• Stiglitz, a Nobel laureate in economics, is professor of economics at Columbia University.
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