In the previous post we reviewed the Conflict Trap, the first of four poverty traps presented in Paul Collier’s The Bottom Billion. Now we turn to the second trap: the Natural Resource Trap.
It is common for folks to assume that the way out of poverty for a poor nation is to discover natural resources that are in demand in the global economy and export them. Ironically, a national economy dominated by the production and sale of such resources is usually detrimental to widespread economic growth. Why?
Imagine a nation that neither has valuable natural resources for export nor receives aid. If people are going to significantly improve their lot, then they must improve their domestic economy and engage in trade with other nations. Trade means they must be able to produce something worth trading with other nations. That means efforts toward an improving labor force, an investment in technology, and a stable governmental environment that is conducive to the evolution of an array of industries.
Now imagine this same nation when vast oil deposits are discovered. Oil exports quickly become 20% of the economy. Our hypothetical nation’s currency rises relative to other currencies making exports more difficult (i.e., exported goods become more expensive relative to the alternatives.) Resources that might have been invested to improve a range of skills and technology are diverted to the skills and technology to service one industry. Domestic industry becomes severely hampered and imports become far more attractive because they are now relatively cheaper to domestic goods. Government begins to largely ignore all other domestic industry. But this is not all.
Most impoverished nations have very weak governance, if not outright corruption. An elite minority frequently has the ability to control the production and export of the valued resource. They are able to pocket most of the economic bonanza for themselves. Some authoritarian powers widely distribute enough of their resources to minimize discontent among the masses. Others do not and simply use coercive force to keep control of the resources.
Some countries will nationalize the resource industry, attempting to achieve a just distribution of resources to the rest of society through democratic means. This inevitably sets up tremendous power struggles between political factions who want to preside over a very wealthy and powerful government. Politicians compete through evermore expansive handouts to the populous. The absence of taxation as the means to raise government funds leads to less scrutiny by the citizenry. Unlike an autocratic state where at least long-term consideration is being given to proper investment in the resource industry, democratic government officials look no further ahead then the next election, often making irresponsible investments in useless projects and under investing in legitimate ones.
Collier emphasizes the importance of having not only democracy but government restraints provided by checks and balances of power in society and government. He is particularly keen in freedom of the press. He writes:
Wealthier nations are not immune to some of these same dynamics. Those with longer histories of restrained governments are more resistant to these difficulties. However, when wealthier economies stagnate, they usually do so with people at a higher economic level. Therefore, while the Natural Resource Trap is not entirely unique to poor nations it is significantly more devastating.