There is a flip-side to the geographical case presented above. Some countries in inhospitable landscapes find that geography makes the struggle to acquire natural resources and energy supplies more difficult. Others in similar circumstances have been endowed with an abundance of energy resources within their borders. Many of the most forbidding parts of the world from a geographic point of view are also some of the most resource rich: the deserts of Saudi Arabia, the mountainous jungles of South America, the snowfields of Russian Siberia, to name just a few that are known for producing oil.
While possession of such vast deposits of resources virtually guarantees a certain level of prosperity, many of the countries in which these deposits are found are relatively underdeveloped politically and economically. What happens when a country that is poor in terms of income levels and governance receives a sudden influx of energy wealth after the discovery of oil or other valuable energy resources? As it turns out, even in the best of cases, such wealth can be a curse as much as a blessing. This is known as the resource curse.
Too often, when a country strikes it rich as an energy supplier, the collective attention of both the government and the civil society can become devoted solely to maximizing profits from the energy industry. This single-minded focus comes at the expense of other economic and development priorities, and can begin to dominate a country’s political and social life. In the formulation of Thomas Friedman, a columnist for the New York Times, the resource curse is,
The way a dependence on natural resources always skews a country’s politics and investment and educational priorities, so that everything revolves around who controls the oil tap and who gets how much from it—not how to compete, innovate, and produce real products for real markets.1
The Case of Saudi Arabia
Most countries that become major energy suppliers, especially when oil is involved, have nationalized their energy production industries (see “Oil Supply II: Producers”). Thus, proceeds from these industries go directly into government treasuries. In some cases, dominant political interests keep most of this wealth for themselves.
Saudi Arabia is a good example of this: its large royal family has reaped enormous gains from oil sales in the thirty years since it seized control of the national oil company AramcoThe joint venture established by several U.S. oil companies and the government of Saudi Arabia to develop Saudi Arabia’s oil reserves. Over time, the Saudi government purchased shares of Aramco until it achieved full ownership in the 1970s, renaming the company Saudi Aramco., now called Saudi AramcoThe joint venture established by several U.S. oil companies and the government of Saudi Arabia to develop Saudi Arabia’s oil reserves. Over time, the Saudi government purchased shares of Aramco until it achieved full ownership in the 1970s, renaming the company Saudi Aramco. (see “Oil Supply II: Producers”). To be sure, oil revenues are distributed to Saudi Arabia’s citizens through an array of generous social programs. But the creation of a complex welfare state with direct payments from the government to the people has stunted the country’s broader economic development. According to Central Intelligence Agencies estimates, “[Saudi Arabia’s] petroleum sector accounts for roughly 80% of budget revenues, 45% of GDP, and 90% of export earnings,”2 and 90% of export earnings.” Those are certainly not the characteristics of a healthy, balanced economy.
The Biggest Losers are Ordinary Citizens
Saudi Arabia’s lopsided economic profile is only one manifestation of the resource curse, however, and probably not the most troubling one. Other countries, such as Venezuela and Nigeria, two of the world’s leading oil producers, have slipped even deeper into poverty as a result of increased revenues from oil sales. This leads some to believe:
The biggest losers from the rise in oil nationalism may be the citizens of countries blessed with hydrocarbons…Ordinary Venezuelans, for example, are poorer than they were 30 years ago, despite hundreds of billions of dollars their country has earned from oil; and Nigeria is famous for its oil-fired corruption.3
These countries, located in less developed parts of the world, do not have the experience and institutions necessary to handle the exploding revenue streams that frequently accompany discoveries of natural resources. The temptation to seize a part of this wealth for personal gain can lead to corruption and even worse governance.
To read more about how Russia has safeguarded its energy profits, see Appendix K, “The Russian Stabilization Fund.”
To read more about the civil unrest that misspent oil revenues can trigger, see Appendix L, “The Nigerian Backlash.”
For many, the most distressing aspect of the resource curse is its tendency to undermine and erode the basic social contract between a people and its government. Once faith in government has been lost, it can be difficult or impossible to regain, “Not only do all politics [come to] revolve around who controls the oil tap, but the public develops a distorted notion of what development is all about…because someone is getting the oil money and they are not” (see also “The Wave of Renationalization” box in the section on “Oil Suppliers II: Producers.”)4
The so-called “Dutch Disease” is a particular form of the resource curse that emerged during the Netherlands’ experience with a large oil discovery in the 1960s. When a rich country is faced with an influx of wealth from oil or any other natural resource, the value of its currency rises. This can have a negative impact on its balance of tradeThe balance of trade is the difference between a country’s total imports and exports. When exports exceed imports, there is a trade surplus; the converse yields a trade deficit. as goods imported from other countries become cheaper and the prices of its own manufactured exports become more expensive for foreign consumers.The resulting changes to the domestic economy can be disastrous, as certain industries suddenly become uncompetitive internationally. The overall economy can deindustrialized, thus further intensifying the dependence of oil. In the words of Thomas Friedman, “The citizens, flush with cash, start importing like crazy, the domestic industrial sector gets wiped out and, presto, you have deindustrialization.”5 Most developed countries are capable of adjusting to these changes over time, but the short term costs of adjustment can be painful.