Over the past decade, we have learned an enormous amount about the resource curse. Ten years ago, few people had even heard of the term. Others were sceptical that the discovery of large amounts of oil, gas or minerals could bring about less economic growth than originally expected.
There were also sceptics about whether resource reliance could worsen the quality of governance.
Today, there are few sceptics left. We now know that countries often do suffer from resource curse problems, sometimes massively so.
Looking for solutions to the resource curse
In recent years, a large number of intelligent and committed people have put a great deal of effort into seeking practical solutions. And solutions are really needed: the list of poor countries likely to become mineral and energy exporters is expanding steadily.
But we cannot stop countries using the resource they have. Once found, oil, gas, coal, copper or other minerals will inevitably be extracted and exported. How can we shield countries like Ghana, Mongolia, Mozambique and Uganda from the worst effects of the resource curse?
Who should control public revenues from resources?
The fundamental question is: Who will control the enormous amounts of money that can be earned from exploiting energy and mineral deposits? Countries have chosen to hand control to one of three bodies:
Candidate 1: Central government
Almost inevitably, central governments get their hands on most of the money. And governments are, arguably, best placed to use it for transformative developmental investments.
Most of the policy thinking has focused on how to make resource revenues more transparent: including the volumes, sources and uses of the money, and how to reduce the scope for ruling elites to go on spending binges, steal the money, or use it to keep themselves in power and in clover.
There is a range of good policy ideas, including institutional arrangements like the Extractive Industries Transparency Initiative, regulation in rich countries that obliges energy and mineral companies to be transparent about their payments to governments if they want to be listed on prime sharemarkets like New York (e.g. the Dodd-Frank Act passed by the U.S. Congress in 2011).
Investing some of the money in various kinds of long term funds is also a good solution. However no poor country has been spectacularly successful so far. – Poor countries tended to have poor quality governance institutions even before they became resource wealthy. It is however early days. Progress will be gradual and patchy.
Candidate 2: Sub-national government
But should only central governments control resource revenues? Why not provincial, regional or local governments too? In some countries, especially those that have experienced strong local opposition to new oil or mining projects, sub-national governments have a right to a portion of revenues.
This seems like a good idea. But it can also backfire.
In 2004, Peru introduced a radical policy to transfer mining revenues to local governments. When world prices for silver, zinc, copper and tin soared, some Peruvian municipalities became very wealthy. Through careful empirical and statistical research, Javier Arellano-Yanguas showed that this new wealth brought few lasting material benefits and actually generated new political conflicts. (See J. Arellano-Yanguas, 'Aggravating the Resource Curse: Decentralisation, Mining and Conflict in Peru', Journal of Development Studies, 47(4), 2011)
Again, the core problem is that too much money is concentrated in too few hands. Spreading the money more widely can lessen the resource curse. Sub-national governments should have rights to share in resource wealth, but careful thought is needed on how best to implement sharing.
Candidate 3: Individual citizens and households
The most radical proposal is that resource profits should be redistributed as an entitlement to individual citizens or households. The American state of Alaska has long been practicing this idea on a limited scale. Iran recently introduced something similar, albeit without any clear entitlement.
Redistribution is a serious idea that has a future. But how much future, and where? Researchers with the Center for Global Development (CGD) have been promoting redistribution and exploring ways to implement it.
The CGD group’s research shows that one of the obstacles to redistribution is becoming less fundamental: the difficulties of proving personal identity and thus citizenship and entitlement. Taking advantage of new information technologies, some poor countries are quickly establishing comprehensive national identity systems.
Yet the CGD group underplay a potential problem: Unique individual identity numbers will give the recipients de facto citizenship and strong claims to local residence. In those parts of the poor world where large populations have been displaced by conflict or drought, or have migrated for work, the perception that ‘outsiders’ might suddenly win citizenship and a share in new oil or mineral wealth could stimulate serious conflict or even ‘ethnic cleansing’.
Concerns about identity are not a reason to abandon the idea, but a lot of thought, care, and experimentation is needed about the implications of these policies.
Who should control resource revenues? They should be split between the candidates
Each of the three main candidates for ownership of public resource revenues has potential, and each has problems. Any two of them combined are likely to be more effective than one alone.
Splitting revenues between the candidates will spread the money more widely, and also let us compare the performance of the different channels. This option allows us to shift some money from one channel to another, providing incentives for each ‘owner’ to show that that they are using the money well. By the same logic, we are likely to get better results if we use of all three channels simultaneously rather than two.
In the next few years, we can expect a lot of progress in finding solutions to the resource curse. Progress will be faster if we build institutional pluralism and competition into our experimental designs.