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The Curse of the Golden Egg
February 28, 2011  |  by Dale Keiger

More than 25 years have elapsed, but Peter M. Lewis vividly remembers an early morning telephone call and subsequent walk through a city market. He was a doctoral candidate at Princeton University in the 1980s when he applied to the U.S. State Department for a summer internship. “In those days they had a good program that would place you in overseas embassies with a small stipend,” he says. “You had no choice as to your placement—if you were accepted, you were just told where you were going. So I got a phone call at 6 in the morning saying, ‘You’ve been accepted and you’re going to Lagos.’” Lewis, now director of African Studies at the Nitze School of Advanced International Studies, had been to Africa before but not to Nigeria. He recalls, “I went for a walk through downtown Lagos. It’s a very dense, very busy city of several million people, and the downtown area has a lot of market activity. I was looking for things to buy, souvenirs, and there were a lot of goods in the market, but it was quickly apparent that very little of it was made in Nigeria. There were textiles and padlocks and mosquito coils and machetes, and they were made in Europe, they were made in China, they were made in India, in the United States and elsewhere, but very little manufactured locally.”

This struck Lewis as odd. Nigeria’s population then probably was approaching 100 million (it’s now estimated at 152 million) and it had considerable oil wealth. Together, those should have been the foundation of a robust economy. But that day in the market, there was little evidence of a Nigerian economy beyond petroleum exports. And there was substantial evidence that despite the money pouring in from its state-owned oil fields, the government could not provide basic public services. “Electricity might be out for a week at a time. Trash was piled two stories high in block-long accumulations. It really looked like things were coming unraveled, which they were—there was a coup shortly after I was there.”

What Lewis encountered on the streets of Lagos was just beginning to be a subject of serious study and debate in the 1980s. Economists had begun to note that a striking number of African countries (and developing nations in other parts of the world) rich in oil, natural gas, diamonds, gold, copper, and other valuable minerals also were plagued by lagging economic development, ineffective and often corrupt governments, widespread poverty, severe economic disparities, and violence, sometimes open warfare. Rich in resources, yet poor by most measures. Consider some numbers. Nigeria has more known oil than all but a dozen of the world’s nations, yet its estimated per capita gross domestic product ranks 183rd in the world; the life expectancy of a Nigerian at birth in 2008 was 48 years, and the country has endured a succession of corrupt and repressive governments, plus ethnic strife and a violent insurgency in its oil-producing region. Angola also has oil beneath its surface, but a per capita GDP ranking of 120 after 27 years of civil war. The Democratic Republic of Congo has abundant oil, copper, and other resources, yet 80 percent of its population lives on the equivalent of 20 cents per day. Meanwhile, look at Japan, South Korea, and Singapore. Meager reserves of the natural resources in demand by a growing world, but per capita GDPs of 39th, 49th, and 7th, respectively (all GDP figures are 2009), strong public sectors, and robust civil societies.

Some economists have called what has befallen so many resource-rich countries the “paradox of plenty.” Others prefer the more vivid and arresting “resource curse,” and that’s the label that has caught on. What Lewis first glimpsed in Nigerian street markets has stayed with him. In 2007, he published the book Growing Apart: Oil, Politics, and Economic Change in Indonesia and Nigeria (University of Michigan Press). He organized an April 2009 SAIS conference on “The Politics of Development and Security in Africa’s Oil States,” and hopes to shepherd into print a collection of the conference papers by the end of this year.

“On the face of it, having abundant natural resources would give you a tremendous advantage in development,” he says. “You’d be able to pay your civil servants, build up your public sector, deliver universal health care and education at some decent level, provide economic opportunities, and invest in infrastructure. That would presumably make you popular so you could win elections, and dampen incentives for conflict. Yet it hasn’t worked out that way.”

The notion of abundant resources as a drawback is not new. Developmental economists love to quote Six Books of the Commonwealth by 16th-century French political philosopher Jean Bodin (for some reason frequently leaving out Bodin’s attribution of the observation to the ancient Roman historian Livy): “Livy remarks that the inhabitants of rich and fertile country are normally mean and cowardly, whereas a barren soil makes men sober of necessity, and in consequence careful, vigilant, and industrious.” Machiavelli, Montesquieu, Adam Smith, and John Stuart Mill also noted that resource wealth seemed to correlate with problems that it should solve. Modern economists took up the question in earnest about the time Lewis was traipsing about Lagos. In 1980, Gobind T. Nankani, former vice president for Africa at the World Bank, found that over a 16-year period the developing world’s leading exporters of minerals had half the per capita GDP growth of a control group of so-called nonmineral states. A similar study four years later by Boston University’s David Wheeler of 30 sub-Saharan countries found much the same. The first heavyweight modern study came in 1997, when Jeffrey D. Sachs and Andrew W. Warner of Harvard applied regression analysis to 19 years of economic data from 97 countries. They controlled for a host of factors that might have influenced growth in those countries, such as trade policy, investment rates, bureaucratic efficiency, and income distribution. What they found was abnormally slow growth rates in countries that had high ratios of natural resource exports to GDP. What’s more, they demonstrated that those same countries had higher rates of civil war. A few years later, economist Michael Ross of UCLA analyzed 16 years of data from 113 countries and found an additional effect: a wealth of petroleum and mineral resources increases the prospect of authoritarian rule. Resource curse, indeed.

There are economists who argue that the curse is an illusion, but if you believe, as Lewis does, that it is genuine, the next question is, What goes wrong? Why aren’t oil-rich Nigeria, Angola, Ghana, and Equatorial Guinea thriving democracies with burgeoning economies?

Those questions still await definitive answers, but Lewis offers a few potential explanations. The first is often called “the Dutch disease”—a label applied by The Economist to describe what happened to Dutch manufacturing and exports in the 1960s after Holland discovered natural gas deposits in the North Sea—and mostly has to do with inflated currency. Say that a nation discovers a huge new oil field and begins exporting crude to petroleum importers like the United States and Japan. That sudden export boom creates a surge in demand for the nation’s currency on foreign exchanges as customers buy, say, Nigerian naira to pay for Nigerian oil. Increased demand creates higher prices, inflating the currency’s value. That in turn depresses other economic sectors, such as manufacturing and agriculture—remember Lewis’ inability to find Nigerian-made goods in the Lagos markets?—because widgets or walnuts now cost more in the inflated currency and importers of those goods shop elsewhere to buy them more cheaply. Plus the booming oil export business draws labor and investment away from the depressed sectors. So now the widget makers and walnut growers not only have trouble selling their goods abroad, they have to pay more for workers and capital, further inhibiting growth. As if that isn’t enough trouble, governments become imprudent or careless in their economic planning. Says Lewis, “When you get this sudden flood of revenues, they’re hard to monitor and an inducement to fiscal myopia. It’s like winning the lottery. People get a windfall and think the windfall is going to be permanent and they won’t have to worry about budgeting anymore.”

But oil or mineral revenue is revenue all the same. Why does it matter if the income is generated by petroleum or copper instead of cocoa, printed cloth, computer circuit boards, or cars? Why have so many resource countries been plagued by governments inept at best, corrupt and authoritarian at worst? Lewis’ answer is that if much of a country’s wealth (in Nigeria’s case, virtually all) comes from exporting natural resources, it becomes what’s known as a rentier state—dependent on income derived from rents, which is what economists call “income derived from the gift of nature.” Because the money that sustains a rentier state is external, the government doesn’t have the same stake in building other parts of the economy and widening prosperity because it doesn’t have to generate tax revenue. Nor does it have to respond to a constituency of taxpayers. As New York Times international affairs analyst Thomas Friedman wrote in Foreign Policy in 2006, “Oil-backed regimes that do not have to tax their people in order to survive, because they can simply drill an oil well, also do not have to listen to their people or represent their wishes.” Politicians or generals, whoever is in charge, can buy off potential opposition through patronage funded by resource rents, and they can afford repressive security measures for those who won’t be bought. Says Lewis, “You get no accountability, a high level of inefficiency, and no investment in roads, electricity, schools, hospitals, effective regulatory institutions, or a legal system.”

Studies have also found a correlation between resource wealth and armed conflict. A number of African states—Democratic Republic of Congo, Liberia, Sierra Leone, Nigeria—have endured civil wars and insurgencies engendered in part by economic inequality and disenfranchisement. The same oil fields, diamond mines, and mineral deposits that sustain a regime also can sustain insurgencies that seize control of them. Factions in the Congolese civil war, which has killed an estimated 5 million people since 1996, have battled for control of mines that produce cassiterite, wolframite, and coltan, which you may have never heard of but are essential for manufacture of computers and other technology. Lewis cites the situation in Nigeria’s Niger Delta. That’s where the oil is, but the people of the delta have derived little benefit from the oil wells they can see and smell. “They know that the wealth is coming from beneath their soil, but they’re not seeing any benefits. Their soil and water are degraded, they don’t get schools or electricity, they don’t even get jobs. There are 30,000 jobs in the oil industry, in a country of 150 million.” The result has been armed violence as insurgents have disrupted oil production.

Though the situation in much of Africa can seem dismal, several countries have made progress, Lewis says. In 2007, Nigeria signed on to the Extractive Industries Transparency Initiative (EITI), which requires it to make public all payments to the state and state revenues accruing from oil, gas, and mining. The goal of EITI is to strengthen accountability and good governance in resource states through transparency, create more stable investment climates, and help prevent conflict. Other African countries that have joined the initiative include Sierra Leone, Zambia, Democratic Republic of Congo, Ivory Coast, and Niger. Lewis notes that Angola has ended its civil war and begun managing its oil revenues better. His colleague, Bo Kong, director of SAIS’ Global Energy and Environment Initiative and a professorial lecturer in African Studies, cites Botswana, which has substantial deposits of diamonds, and South Africa, which produces a lot of metals including gold, for their stability and better use of revenues from natural resources.

For 11 years now, Nigeria has conducted democratic elections that have had serious flaws but, nevertheless, have resulted in the first civilian-to-civilian transfers of power in the nation’s history. “I am an optimist in Nigeria,” Lewis says. “They’re not where they need to be and not even close to where they want to be. Yet there’s both a new generation of emerging elites and a very substantial cohort of businesspeople, public officials, some politicians, commentators, analysts, and so forth who understand the sources of their problems over the last 40 years, and who have a clear vision for where the country could go. These people are trying to get a handhold in the policy domain, and I think they will.”

Dale Keiger is associate editor of Johns Hopkins Magazine.

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