Bless us, a curse!

“In vain with lavish kindness the gifts of God are strown;

The heathen in his blindness bows down to wood and stone.”

Reginald Heber, “Missionary Hymn” (1819)

It has long been thought that the path to prosperity in the Third World lay in the development of natural resources. An underdeveloped country would find markets for its mineral wealth or its forests; using the revenue from those sales, it would reinvest to develop a base in secondary industries, to spread literacy, to ensure social and health services, and generally to increase the living standards of its people.

So a conventional development economist would see it; the classical exposition is Harold Innis’s “staples theory,” in which colonial trade in furs or fish with a metropolitan centre creates the conditions for a functioning agrarian economy, followed in turn by a manufacturing economy. Innis was talking about sixteenth-century Canada and English mercantilism, but the principle has found wide acceptance and much more general application.

Even the Marxist economists, battening happily on the idea that Third World poverty was a direct result of exploitation by imperialists, accepted this idea, sometimes even explicitly: for them, the nature of imperialist exploitation of the colony was in its extraction of raw materials to be turned into finished goods back in the developed world, and the loss of those resources kept the Third World poor. Take away the idea that resources equal prosperity, and the whole notion of colonial exploitation collapses.

It may therefore be a bit surprising to see an idea called the “commodities curse” in circulation. Put briefly, it says that underdeveloped countries with larger resource endowments — particularly mineral or hydrocarbon wealth — will find their economic growth stunted and will also be slow to develop as a democracy.

The central argument is that resources in the ground are subject to control — often monopoly control — by the powerful. Where a country has oil fields or mines, the most powerful element will move to take control of them, and will enrich itself at the expense of the people.

It is not hard to see the superficial attractions of the theory. Certainly there are enough examples of near-feudal dictatorships bankrolled by resource wealth, and enough places where warlords fight over diamond mines. But scratch the commodity curse theory, and it’s not that sound underneath.

Political scientist Michael Ross of the University of California at Los Angeles has developed the curse thesis in a report for famine-relief agency Oxfam America. Ross, using the statistical technique of regression analysis on demographic and macroeconomic data, finds that in states where a large fraction of gross domestic product (GDP) comes from mineral or hydrocarbon production, living standards are unusually low, poverty rates are high, and health indicators are poor.

Ross presents his statistical methodology only cryptically, showing numbers without identifying the statistical parameters he has calculated, so it is difficult to tell whether the correlations he finds are real or a statistical artifact. (Neither are there any scatterplots or tables that would provide essential background information in assessing the results.) But assuming the correlations even exist, what do they really say?

Ross uses the United Nations Development Program’s Human Development Index (HDI) as his index of living standards. Others have been skeptical about the usefulness of the HDI (which is calculated from life expectancy, literacy, school enrolment, and gross domestic product per capita) as such a tape measure, arguing that it takes too few factors into account and that it is too arbitrary in the weights it gives to the factors it does use. But even if we accept the HDI as the score, is Ross calling the play-by-play at all accurately?

The study finds a strong negative correlation between a high dependence on mineral production (measured as the percentage of gross domestic product contributed by mineral production) and HDI. It also finds a strong positive correlation between mineral dependence and the fraction of the population that lives in poverty.

In agenda-driven political science, correlation is causation, and Ross devotes much of the rest of his study to teasing explanations out of the data.

To take one example: he finds infant mortality rates correlate with oil- or mineral-dependence. The explanation is that the most oil-dependent states spend a smaller fraction of their GDP on health care. Mineral-dependent states show no such pattern, so Ross shifts to the explanation that they do a bad job of health care, no matter how much they spend.

But who are Ross’s mineral-dependent economies? Botswana, Zambia and Zimbabwe, where severe AIDS/HIV rates affect both life expectancy and infant mortality rates; Sierra Leone, Liberia and Angola, all suffering from hideous social breakdown and civil war; Papua New Guinea, a generation or two removed from the Stone Age. It is at best obstinate and at worst foolish to blame infant mortality in those countries on poorly managed health care.

To take a second example: Ross argues that mineral dependence hinders a country’s ability to diversify its economy. Making a distinction between agriculture and manufacturing on the one hand (“pro-poor” economic activity) and resource extraction on the other, he says attempts to create value-added industry are made difficult by the tariffs industrialized countries place on manufactured goods, refined metals and petrochemical feedstocks.

But this is not a problem inherent in resource extraction: this is a barrier industrialized countries have put up to protect domestic manufacturing. Economic structure snobbery — rife in most advanced economies — is the villain, not resource extraction.

Ross, having found a correlation between income inequality (measured as the fraction of income that flows to the poorest 20% of the population) and mineral dependence. But here he suggests no mechanism at all. Perhaps we can help: mineral projects tend to be capital-intensive and to provide opportunities for relatively skilled people. In underdeveloped economies, the bottom 20% has little chance to share in the jobs a mineral project generates. But they would have little chance to share in any relatively modern industrial enterprise anyway: and if Ross has some time on his hands, comparing inequality levels in agrarian societies might just show the same result.

But opportunities for skilled workers in underdeveloped economies are an unalloyed blessing, raising educational standards and creating a new class that has been raised out of subsistence agriculture.

He is on more secure ground in noting that mineral and hydrocarbon producers are vulnerable to price shocks. That is true, but it is no less true of other commodity production. The problem is over-dependence on a single economic sector, not over-dependence on the minerals sector specifically.

Ross also suggests that agricultural development offers a better development option to poor countries. The experience of most poor countries with cash crops (whence comes the term “banana republic”) would suggest otherwise. Central American countries depended on cash crops for a century; income inequality there was legendary. And, as we note above, commodity price shocks can happen as easily in the coffee, cocoa, or palm oil markets as they can in the metal or crude oil markets.

Which brings us to an overarching principle that is hard to ignore: backward economies have little to offer the world but resources and cash crops. (They can become labour exporters, but only at the cost of stunting economic progress at home.)

Sectoral dependence, whether it is on cash crops or on mineral or hydrocarbon resources, is, in the end, a lack of economic diversity. And countries raise themselves out of dependence by making money on what they have, and using that capital to diversify.

To examine the curse theory further, let us now consider the relative performance of rich countries with abundant natu
ral resources. Have they found them a curse?

Norway, Australia, Canada and Sweden — all of them often paraded as having “commodity” economies — inconveniently occupy the first four spots in the UN’s HDI tables. The United States, which is often forgotten to be a major commodity producer itself, is sixth. Iceland and Finland, two more “commodity economies,” are seventh and tenth. None of these countries is “resource-dependent” to the extent that many Third World countries are; but their dominant place among the most successful societies, using Ross’s own measure, is a gaping hole in the “curse” thesis.

Or take the flip side, the supposed blessing that accrues to countries with fewer resources. In Renaissance Europe, two such nations were Holland and Portugal; both became seafaring nations and both developed an overseas empire. On the “commodity curse” theory, they both should have prospered in much the same way. They did not.

If Oxfam wants to be taken seriously by knowledgeable people, it has done it the wrong way. Even the photographs that illustrate Ross’s report (supplied in some cases by anti-mining pressure groups) come with the kind of tendentious captions that suggest the study was not meant to be evenhanded in the first place. This is reinforced by the report’s foreword, in which Oxfam America policy advisor Keith Slack retails how the organization “sees local communities struggling to defend their rights against encroachment by large-scale resource extraction,” and calls for a “rethinking [of] the role of minerals extraction as a tool for poverty reduction.”

The curse thesis is a handy myth for the anti-mining agenda. But far more plausible is the thesis that an impoverished economy is one in which there exists no incentive to improve one’s lot and no security for property. The argument made in its favour is that — at the most basic microeconomic level, that of the family breadwinner — nobody will make an extra effort, or an extra investment, unless he can be sure to get the benefit. Wealth held in common will be squandered, while that held as property will be husbanded.

Certainly this is as good an explanation for why colonialism left so many backward economies behind. In those places where profits were reserved to European traders or settlers, standards of living tend to be low. On the other hand, where an indigenous commercial class developed to take advantage of the chance to get wealthy (think Singapore or Hong Kong) economies are today indistinguishable from those of the old industrialized world.

It also explains, though not without some exceptions, the relative standing of many countries with comparable resource endowments. In the end, the most reliable rule is that people will create wealth when they are given the best possible chance to do it. That means secure property rights and the enjoyment of income, resources or no resources.