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Too Much of a Good Thing

The Curse of Natural Resources

By Jens Glüsing, Alexander Jung, Uwe Klussmann and Thilo Thielke

Many countries with enormous reserves of oil, gas or precious metals, are plagued with disproportionate poverty, corruption and mismanagement. Would the people in Nigeria, Congo or Russia be better off without their natural gifts?

A thick sludge laps against the coconut palms, black and foul-smelling. The banana plants are blackened with oil as well; they point leaflessly at the sky as if a fire had raged here. Located about two hours southeast of Nigeria's oil capital, Port Harcourt, the town of Kpor looks like a battlefield.

Farmers used to plant corn, kasava or yams here. But ever since drillhole 18 at the nearby Bomu oil field started leaking, the mangrove swamps in this Ogoni territory have been flooded with oil for entire kilometers. "We kept calling the government, but no one came," complains Lekagah N. Lekagah, the village elder. Now nothing will grow here again. The land is dead -- and yet it remains extraordinarily valuable and continues to be fiercely contested.

Nigeria is one of the global oil business's greatest hopes. Oil fields as large as the ones being found here are to be discovered in few other places in the world, and corporations want to double oil extraction here within the next 10 years. Nature has blessed this country and it could be extremely wealthy. Instead, it's being ruined.

In Nigeria today, more than 130 armed militias fight for influence. The country is divided, and its people are worn out by ongoing conflict. The situation here is so chaotic that Nigeria, which is the world's sixth-largest oil exporter, has to import fuel. The country doesn't have enough functioning refineries to process oil for its own people.

But there is method to these paradoxes, and it can often be observed in those areas where oil and natural gas, metals such as gold, silver and copper, and precious stones such as diamonds, rubies and saphires are extracted. It is precisely in the countries that dispose of the largest resources that poverty and misery reign as war and violence run rampant. The economies of these countries have missed the chance to participate in the information society.

Years ago, American economists Jeffrey Sachs and Andrew Warner closely examined this state of affairs and discovered a significant fact: States rich in resources usually have considerably lower economic growth than states where natural resources play a less important role.

Nigeria is a striking example. Twenty five years ago, when the country was still an important exporter of agricultural products, annual per capita income was $913. Now the 135 million people of Nigeria earn only $645 on average. They often live without electricity, without running water, without a developed road system -- even though revenues from oil have doubled during the same time period.

Venezuela is another example. The country used to be an internationally respected Latin American democracy -- at least until the oil boom began in the 1970s. The minister responsible at the time, Juan Pablo Pérez Alfonso, was sensitive to the dangers ahead -- he called oil the "excrement of the devil." And he turned out to be correct: In Venezuela, per capita income is barely higher today than it was 25 years ago.

Or take Russia. The oil and natural gas boom of recent years has allowed a small group of oligarchs close to the state to become miraculously wealthy. But the vast majority of citizens has not profited. Almost 70 percent of Russians earn less than €200 a month ($255); 27 percent don't even take home €100 ($127) at the end of the month. Russia is consistently developing into the "Nigeria of natural gas," says Yuri Solosobov of the Moscow Institute for National Strategy.

Rich lands with poor people -- this phenomenon is not limited to those countries where fossil fuels are extracted; it can also be observed where metals or minerals are mined. In nations like the Congo, Suriname or Sierra Leone, which are dependent on the mining industry, per capita income declined by almost 11 percent in the 1990s, according to World Bank figures. Globally, per capita income increased by 17 percent during the same period.

Economists speak about the "paradox of abundance" when they describe such contradictions. Or they speak somewhat more mysteriously about the "resource curse." It's not just the economy that's cursed, but the entire state -- and the general population suffers most.

Authoritarian regimes are often in power in countries that depend on natural resources -- regimes that don't respect human rights and oppress minorities. Infant mortality is especially high in such countries -- in eastern Congo, the rate is 41 percent -- and life expectancy is especially low. Corruption runs rampant. Hardly a cent is invested where it is most needed -- in streets, schools and hospitals. Instead it is spent on weapons.

In the OPEC states, military expenses claim almost one-fifth of national budgets. The members of the oil cartel spend only half the global average on school children and students.

Oxford professor and World Bank economist Paul Collier has calculated the probability of civil war in such countries. His conclusion is that in a country that doesn't dispose of substantial natural resources, the risk is only as high as a half-percent. In countries that depend mainly on natural resources, on the other hand, the probability rises to 23 percent. Raw materials are "the most significant risk factor" for a community, according to Collier -- more important than historical, geographic or ethnic factors.

It's a fatal mechanism: Raw materials are precious; therefore they're fought over. But the struggle for them can only continue because it is financed from the revenue the raw materials yield. And since this source of cash is virtually limitless, the conflict continues for years and even decades. The Unita rebels financed their protracted war in Angola mainly by selling precious stones that go by the fitting name of "blood diamonds."

The resource curse -- it sounds almost as if the grim pattern of development were inevitable. But is it the inevitable fate of countries rich in natural resources to always fare worse than other states? Would the people in Nigeria or Angola be better off if there were no natural resources in those countries? Or does their situation -- the fact that these states don't prosper -- have more to do with the legacy of colonialism?