The Resource Curse in Africa

The imagination agony in AfricaChapter 1 macrocosmThe pick plague is the surmise that countries with an abundance of earthy alternatives, much(prenominal) as embrocate and minerals, achieve less(prenominal) frugal harvest-tide than countries that ar non endowed with rude(a) imagerys. There ar authors that argue this invest (Auty 1990, Gelb 1988, Sachs and Warner 1995, 1997, 1999) and in that location atomic round 18 those that conceive the vision verbalize is less to do with preferences and more than than to do with semipolitical management (Brunschweiler 2008a, 2008b, Ross 1999, 2001).This possibility appears to be contrary to the fast instinct felt by numerous that natural imagingfulnesss every last(predicate)ow for receipt an opportunity for countries to acquire by using change magnitude taxations associated with a unc all overing of alternatives or an incr heartsease in instauration prices of much(prenominal)(prenominal) imagina tionfulnesss.The first department of this typography discusses a few of the most important mechanisms in which the imaginativeness curse tidy sum manifest itself. These argon through institutions, corruption, conflict, Dutch distemper and human capital of the United States. The second portion studies the aspect of Botswana by providing an understanding of Botswanas scotch and development path I impart investigate how Botswana avoided rough of the traps preference abundant countries usu entirelyy fall into and how Botswana managed diamond dig in range to benefit the coun afflict. I will alike per configuration a teeny-weeny comparison among Botswana and Sierra Le angiotensin-converting enzyme to highlight the distinguishable channels in which resource abundance can affect economies.In my final chapter I will analyse whether Botswana has been successful in fully escaping the resource curse symptoms by discussing any problems the diamond mining may realize subject .This paper, whilst small, highlights the sizeableness of investigating phenomena such as the resource curse. Many countries digest locomote into poverty since the emergence of citeable resources in their economies, yet Botswana has managed to avoid such problems. It is important to analyse how Botswana did this, so that lesson may be learned and used to help former(a) countries avoid such problems in the future.The Resource Curse Literature Re fitExplanation of resource curseThere be compositors cases of resource poor countries outperforming resource easy countries throughout history. In late(a) convictions the Asian Tigers flip achieved fast industrialisation and sparing harvest-home in spite of having few natural resources, where as diamond rich countries such as Sierra Le angiotensin-converting enzyme still re chief(prenominal) low on world frugal and social indicators ( founding Bank Development Indicators 2009). But do natural resources always engage to poor f rugal development? Or be thither other variables in the context of which the natural resources be l aid that determine economic development?There has been much discussion on the resource curse topic. Prominent among them atomic number 18 studies by Sachs and Warner (1995, 1997, 1999). Although in the evidence to the paper Sachs et al admit their findings are farthermost from definitive the full general findings are that there is evidence for a prohibit relation between natural resource intensity and subsequent harvest-home (Sachs and Warner 1995p27). They analysed data from 95 developing countries by looking at annual growth tramp between 1970-1990 and resource based exports in 1970. Sachs and Warner secernateified high abundance of natural resources as exports of agriculture, mineral and fuel as a role of GDP. From this simple abbreviation they discovered the existence of the so-called resource curse and they wherefore tested the theory by promiseling a round of oth er variables that could explain the relationship between resources and sulky economic growth.The future(a) discussion will provide a summary of the key mechanisms identify in the literature.CritiqueHowever it is important to n maven that not all academics support the literature on the existence of the resource curse, Brunnschweiler (2008a) is the most prominent. The main critiques of work by Sachs and Warner are the variables used to measure resource wealthiness. Brunschweiler for showcase believes per capita mineral wealth is more appropriate. The question is overly raised as to whether Sachs and Warner were right to include agriculture in their regressions. Although agriculture is indeed a primary natural harvest-tide, as it is the out sum up of utilising the resource of land, it can be said that agriculture takes a diverse path in the sparing than minerals or fuel. It may be better to classify agriculture one at a time when considering the resource curse, especially in the context of the third world where many economies are agricultural based. Further in this paper I will analyse whether agricultural resources cause the alike make on the parsimony as mineral resources.Arguments against the Resource CurseBig clitoris theoryWhilst there is no denial that the resource curse has effected countries resembling Venezuela, Nigeria and the Congo (Wenar 2008) there incur been cases such as Botswana and Norway that accept presumptuousness strength to the argue big push theory. In the big push role model, developing economies are stuck in a trap. In order to develop their economies they compulsion to industrialize so they are able to create wealth of their witness. However there are super fixed costs associated with industrialization that developing economies cannot afford. Thus, the name big push comes from the idea that developing economies film a giant blastoff of capital in order to develop. This shot of capital can be used to invest in eco nomic infrastructure and will allow a more rapid gathering of human capital which further allows social and economic development. (Murphy, Shleifer and Vishny 1989, Birdsall et al 2000)Ironically, this injection of capital could arise from large resource revenues, which suggests that the resource curse may be avoided if the capital is handled in a amentiferous manner, for ensample a gigantic-term and sustainable plan.An important point made by perambulator and Jourdan (2003) is that as access to resources and minerals is becoming easier due to decreased transportation costs, countries are able to sustain industry without having a large natural resource base. This is could mean that countries who are not resource abundant skill be better off, as they envision less adverse side-effects that I will discuss in this paper than resource rich economies.Dutch complaintThe first effect, cited by Sachs (1995) and many others (Norberg 1993, Gelb 1988) is the Dutch Disease. Although it is oft linked to the baring of a natural resource, Dutch unhealthiness can occur when there is any positive income shock. For example a significant rise in primary product world prices can create sudden increased revenues for primary product exporters. The earliest Dutch Disease model I can trace was first created by Corden (1984) and the model has been constantly remodelled and analysed by other academics since.There are twain strands of the Dutch disease model, the resource movement effect and the currency appreciation effect.Currency Appreciation doDutch disease is often known as de-industrialisation because as one sector of the prudence booms, (in the case of this paper we are talking well-nigh the tradable natural resource sector) other tradable sectors of the economy become less matched. This is because a sudden increase in exportation of a natural resource of any kind can cause currency appreciation (Dutch disease). Whilst this is nice for the country as it makes impo rts cheaper, it makes all the exports from the country (apart from the natural resource) less competitive in the world market as it costs other countries more gold to from that particular country. The same path is also true for investment in this sector. This is why the manufacturing sector of resource abundant countries often shrinks.Resource Movement EffectThe resource movement effect is the relocation of drudgery factors away from the manufacturing sectors towards to booming (natural resource) sector. Davis and Tilton (2005238) believe the Dutch disease actually allows a country to benefit from its new found mineral wealth by encouraging resources to flow from other sectors of the economy to the booming sector However, this resource movement is also a cause of the shrinking of the manufacturing sector famous above.An important point argued in Sachs and Warner (1997) is that the shoplifting of a manufacturing sector itself is not a problem. The problem arises when the shrinkag e causes slow economic growth, such a case may occur when an economy becomes more dependent on their natural resources. The advisability of this is not good (Jefferis 1998) as the economy becomes more undefended to world price changes in the natural resource. In turn, these often quicksilver(a) price changes make it hard for administrations to make mid or long term economic plans and policies. This is often said to be what happened in the oil rich mall East in the 1970s (Auty 1990) political relations were over approving most the earning forefinger of their resources and then the oil prices fell dramatically.However the shrinkage of the manufacturing sector can have a negative impact on the economy because productivity grows faster in the manufacturing sector than in the resource sector (REF) and a decline in this sector means the economy is losing out on this productivity. A similar wrinkle is made by Gylfason (2001) about learning-by-doing and technological advances. The shrinking of a tradable manufacturing sector also creates farm out losses usually this could be compensated for as the primary product resource sector expands. But most minerals and oil sectors are capital intensive and not roil intensive (Sarraf 2001), so they are not able to absorb the unemployment.InstitutionsAnother strand of the resource curse theory is the analysis of the relationship between resource abundance and institutions. Defining institutions is a difficult job as it can involve many varied aspects of a countries history, culture and governance. The main reason why institution analysis is vital to discovering the relationship between resource abundance and economic growth is that institutions affect policy structure and policy structure sets the arena in which an economy and resources are managed.ColonisationFirstly, the history of a nation can go a long way to explaining the current mail a nation faces today. Acemoglu et al (2001) notes the importance of colonisa tion is the determination of institutions. In his view there are two types of colonisation. There is settlement colonisation whereby the colonisers mental pictureated to settle in the region, perhaps due to a low relative incidence of deadly infectious diseases, as occurred by the British in northernmost the States. The settlement colonies are mostly made up of the new world, such as North America and Australasia.The second type of colony are extractive colonies, whereby the colonisers extracted resources that they found valuable, be it peck as slaves or minerals. Naturally, these two different paths have caused quite different outcomes in institutions. Intuitive thinking would lead us to believe that traits of a colonisers such as property rights and rules of truth would be embedded in there colonies. Indeed, Murshed (2001) and Acemoglu et al (2001) publish paper on the same lines. This theory leads to the thinking that colonies with exploitative colonisers tended to not p rogress to foreign good institutions to the same strength as settled areas. It could be argued, as by Murshed, that patterns of exploitative behaviour with regard to resources were learned and inescapably repeated by colonies. On the other hand, settled colonies tended to retain institutions of virtue and property rights that European colonisers may have brought over.Acemoglu has raised the point that different colonising nations have left very different institutions john. For example, he argues that the British colonies transmitted better institutions with regard to respect for the rule of law and democracy (Acemoglu et al 2001p12). In either case it is evident that institutions brought in from Europe have remained in some form. However, we must(prenominal) not forget that the colonies of Africa, Asia and Latin America existed long originally they were discovered by the Europeans. Prior to colonisation these countries had their own functioning political and social institution s and it could be that European invaders solitary(prenominal) capable these institutions to fit their needs and left many existing ways intact.A small precisely important point to note is that colonisation could also have had an impact on the ethno linguistic and ethno fractionalisation of a country because mushy country borders were placed upon areas of land with no regards to considering the existing, and it could be argued natural, borders. These artificial borders were emplaced for the ease of the colonisers and very be littlerd consideration was given to existing social borders, for example between tribes or geographical boundaries. This enforced ethno fractionalisation can be the cause of conflict indoors a country, even if natural resources are not in the equation, a prime example of this is in Rwanda.Leite and Weidmann (2002) are of the opinion that resource wealth does not directly affect economic growth, exactly that it resources affect the likelihood of corruption, which therefore influences economic growth. Bulte, Damania and Deacon (2005) further this argument by pointing out it may not be the existence of institutions that way out just the quality. In Bulte et al (2005) analysis they differentiate between two types of resources. Point resources which are geographically based and therefore an abundance of these resources are typically associated with inequality in terms of power and the division of the surplus, and often are accompanied by vertical relationships between agents (shareholders, managers, labourers). (Bulte et al 2005p1031). Whereas transmit resources, such as agricultural land, are more geographically fete and are therefore more equally distributed and less able to be protected by an elite. It is the belief of Bulte et al (p1034) that point resources attract worse quality institutions than diffuse resources with regard to corruption and government performance.CorruptionAn abundance of natural resources provides substantia l revenue for an economy but unfortunately in many developing countries where there are weakly infrastructures and poor people, the enticement of this revenue can cause corruption especially in the political sphere. When a government experiences large flows of finance, especially if these flows are relatively sudden, for example a discovery of minerals or oil, or new technology that helps extract resources, it can be hard for a government to manage such flows (Dietz 2005). They may not have had experience in dealing with large sums of money. These sudden windfalls increase the opportunity for corruption as it is hard to grasp track of the money and therefore it is easier and to steal and waste.Corruption also comes in the form of laziness. The political elite may chose to ensure they remain in power by buying political favour using the resource revenues. This undermines democracy, but as politicians are able to obtain large sums of money from resources it is easier to buy politic al favour than to develop good policies and there is little incentive to build infrastructure in other areas of the economy, as resources are the main source of income.One would assume that if areas of the economy were to start flunk or not being highly-developed and declareed to a adequate standard of the citizens then the citizens would implore action from the government. However, in circumstances where an abundance of resources are in the country, the government often tries to buy favour from the people by not taxing the citizens, instead they use the resource revenues to provide basic infrastructure, such circumstances could be classed as the rentier effect cited by Mehlum (2006) and Brunschweiler (2008a).On the other hand, the government could decide to use the resource revenues to aid them in an effort to block the formation of social groups. The government might try to do this because they fear groups independent of the government may demand more from a government that is unwilling to give more. As Ross (2001 p335) argues Scholars examining the cases of Algeria, Libya, Tunisia, and Iran have all observed oil-rich states blocking the formation of independent social groups all argue that the state is thereby blocking a necessary effrontery of democracy. This is one of the many ways resources appear to affect politics.Whilst the basics are still provided and the people have more money in their hands, the situation can cause problems as the government is not longer held responsible as it is not using the peoples money. indeed the relationship between government and citizens breaks down. This leads to a less democratic clubhouse and one that Karl (1997) believes would be one more vulnerable to civil war.ConflictAs preliminaryly discussed weak institutions and corruption can both lead to conditions that breed conflict as they diminish the governments ability to function properly. Although a give out of studies are unable(p) to show a strong link be tween resource declivity and civil conflict (Ross 2004), in recent history there have been many examples of the internal conflict within countries that are abundant in diamonds, such examples are Sierra Leone and Angola. Collier and Hoeffler (2001) cite that war emerges as either a product of grievance or greed. In the case of natural resources it appears that greed is most likely due to the enormity of the revenues compared to other forms of government revenue.The conflict often takes the form of civil war within a country as fractions of hunting lodge jockey for engage over the resource wealth (although the conflict can also take the form of hidden conflict within governments). Collier (2004) suggests that high social and economic inequality, overleap of political rights and religious or heathen divisions in high society cause civil wars. The presence of natural resources can act as a accelerator pedal by highlighting these faults and at the same time creating a financial i ncentive for war. If conflict does occur then (Brunschweiler 2008b) believes it could be the case the conflict makes countries dependent on resource stemma which is the omission response when other economic sectors are not performing well. This indicates that one time a country enters into conflict due to resources, they may have entered a vicious cycle that will be hard to stop.Fractionalisation within resource abundance societies has been greatly studied (Easterly and Levine 1997, Brunschweiler and Erwin 2009) as it is believed that societies that are fractioned by class struggles, ethnicity or religion have weaker institutions (Hoedler 2006). In turn weaker institutions lead to a diminished ability of the government to control situations and therefore fighting is more likely to erupt (Arezki et al 2007). Whilst the fragmentation in society is the tail for the fighting, the presence of resources can be seen as the trigger or catalyst for conflict. Fighting is bad for economic growth as it decreases productive activities, which lowers productions and lowers incomes (Hoedler 2006). Therefore in general the consensus is that the more homogeneous the society, the less likely the jeopardize of conflict.Having high revenues from resources can also lead to rentier state symptoms as discussed previously. In this case it may be that those in control of resource revenues are constantly on the lookout for opposing groups trying wrest control from them. Unfortunately as they are the ones controlling the revenues, they have money to master citizens by not only repressing social groups but by employing armed conflict if they require. This is why (Brunschweiler 2008b) believes that as governments are able to bloodline themselves they are more likely to be authoritarian. Although Rosss (2001) paper primarily discusses the Middle Eastern oil states, he admits that his findings can relate to other mineral economies outside the Middle East. This repression can also dist ort the economy by squashing entrepreneurial talent (Alayli 2005)However there are some scholars who believe that resource abundance can actually help avoid conflict, for example, Brunnschweiler and Bulte (2008b) translate resource wealth raises income, and higher incomes, in turn, reduce the risk of conflict. However, they admit it is a small reduction in risk and it could be that the large prize (resource revenue) that people are able to fight over is a stronger incentive than higher incomes.The link between ethnic fragmentation and the resource curse has been investigated in a paper by Roland Hodler (2006). The aim of his paper is to explain why resources can be a blessing for some countries and a curse for other. For him, there are two effects of natural resources. Firstly, income of a country rises if the country chooses to use the resource for its own industrial benefit or exports them to other countries this is a direct positive effect. Secondly, an indirect negative effect is natural resource wealth increases conflict, but only (according to Hodler) if there are multiple groups opposing each other. Hodler focuses on rivalling ethnic groups, but other groups that could affect the equilibrium are class groups and political groups. In Hodlers model the resource abundance is a blessing to a country if the direct positive effect is greater than the indirect negative effect, but a curse if the negative outweighs the positive and thus a relatively homogenous society is less likely to experience a resource curse as there are less opposing groups challenging the equilibrium.Linked with this argument is that of Bannon and Collier (20033) that ethnic dominance on board resource richness breeds conflict. Ethnic dominance especially in government or institutions has an important advantage because that race then have the power in moderating and equalising ethnic relations, or neglecting and perhaps exacerbating them (Good 2005p31)The magnitude of the negative effe ct in Hodlers paper is determined by the number of opposing groups. The higher the number of groups the weaker property rights. I take my interpretation of property rights from Acemoglu et al (2001) whereby people have secure property rights (rights against expropriation and that those with productive opportunities expect to receive returns on their investment and that a broad cross section of society have the opportunity to invest. Furthermore Acemoglu et al (2001) make the point that relative political stability is needed in order to maintain these property rights.Human CapitalAs we can see that the resource curse is interlinked with many aspects of economics. It is also linked with human capital rearing and health. Education is important in economic development as it raises labour efficiency, provides a more participative society and a better quality of sustenance (Barro 1997), but is teachingal development being affected by the resource curse? Evidence by Gylfason (et al 20 01 p850) shows that school enrolment at all levels tends to be inversely related to natural resource abundance, as measured by the share of the labour force engaged in primary production, across countries. Questions could be raised about the validity behind using such measures and whether other measures are more appropriate but there is plenty of evidence from other authors such as (Birdsall et al 1997) which come to the same conclusion.There are two prominent arguments about the effect the resource curse has on education and vice versa. Firstly, the enormous revenues created by an abundant resource can be used by forrad thinking governments to fund education (Sachs and Warner 1997). On the other hand, it has been argued by Gylfason that some resource dependent economies choose not to invest in education infrastructure as they see little immediate need for it because high skill labour and high quality capital are less common in primary production then elsewhere (Gylfason 2001 p10) . However focusing on resources (and neglecting education) hinders the learning-by-doing process. This process is more likely to develop, along with gains in technological advances, in the manufacturing sector (Sachs and Warner 1995). Thereby depending on resources and neglecting education can slow economic growth as a undivided as there is no incentive to increase the earning power (both at individual and national level) that can be achieved through education. It is also worthwhile to note that education is strongly linked with a higher valuate of absorbing new technologies from other countries (Birdsall 1997).The Case of BotswanaAlthough in the previous section I discussed ways in which an abundance of natural resources could lead to slow economic growth, there have been countries that are resource rich and have had good economic development for example Norway and Botswana. Norway became one of the top grading countries on both economic and social indicators in the world (Lars on 2003) since the extraction of oil in the early 1970s.Graphs showing growth of Botswana compared to other African nations hereIn this section I aim to discuss the experience of Botswana through the same key mechanisms I used in the previous chapter. These mechanisms are Dutch disease, institutions, conflict and human capital. By using the same key mechanisms I hope to show how Botswana has avoided the problems that cause the resource curse.Botswana has developed relatively rapidly considering that Botswana was the third poorest country in the world before independence (Beaulier 2003p233) As Acemoglu et al (2001) points out there were only 22 graduate Batswana, who studied outside the country and only 12km of paved road. It seems that Botswana was in the same position as the majority of Sub-Saharan Africa. But since the bonny growth in Africa has been negative since 1965 (Acemoglu et al 2001) how has Botswana managed to achieve the highest rate of per capita growth of any country in the world in the last 35 years (Acemoglu et al 2001)? Especially considering that as a resource rich country it could be expected that Botswana would have slower growth than those without resources.Dutch DiseaseThere are contradicting views as to whether Botswana experienced Dutch disease and whether this was due to the presence of diamonds. Mogotsi (2002129) thinks that a mild Dutch disease occurred in Botswana as there was no large pre-existing manufacturing sector, so when mining occurred, the expert labour from the small manufacturing sector moved to mining. Less skilled agricultural workers filled the place of the old manufacturing workers. As they are less skilled there is some loss of productivity and efficiency in the manufacturing sector.However Pegg (2009p2) believes that there is little evidence that agriculture or manufacturing in Botswana has suffered from Dutch disease effects like the Dutch Disease model predicts when there is a large tradable mining sector. This is because there is very little resource movement as the diamond industry in Botswana as diamond mining is capital intensive and site specific (Jefferis 1998). This lack of movement means that few positive externalities are present in Botswanas mining industry. This is evident in the employment rates. Whilst Botswana has many good economic and social indicators, unfortunately a high unemployment rate is not one of them. While mining production contributed 40% to GDP, it absorbed only 4% total employment (Iimi 2006ap7). This has large implications for income distribution and inequality in Botswana. As wages are higher in the diamond industry (REF) it distorts wealth in the economy.It has been said that only around half of the population have benefitted from the increased revenues, outside of gains in education, healthcare and infrastructure. This is reflected in around 50% of the population still living below the poverty line despite GDP per capita being around $1000 as there is a sm all workforce for diamonds and a high unemployment rate in general. (http//www.thuto.org/ubh/bw/bhp5.htm)However, in the resource curse theorem if Dutch disease were to occur then imports would be cheaper. As Botswana is 80% Kalahari Desert (Beaulier 2003) agriculture is not a major industry and as such Botswana imports most of its needs. 75% of imports come from neighbouring southwestward Africa (Iimi 2006bp18) there are very little visible effects of the negative sides of Dutch disease.Currency appreciation is the most obvious side-effect of resource related Dutch disease. But large diamond revenues have not caused Botswanas currency, the Pula, to be consistently overvalued. (Pegg 2009p4) Although Botswana faces a difficult situation with regards to mass meeting rates. Botswana must managed the exchange rates carefully as it imports 75% of its goods from South Africa (REF) but Botswanas exports are valued in US vaulting horses. Therefore Botswana must try to keep the Pula stabl e against both the South African rand and US dollar at the same time to avoid increased prices of food or decreased earnings due to falling dollar prices. So far Botswana has managed this well.Botswana has also been forward thinking by accumulating large foreign exchange reserves (Jefferis 1998) which are important and useful to have because it gives them the ability to insure exchange rates to aid the domestic currency should it need it.The government also created the Public Debt Service Fund (PDSF) in 1972. It recognises that the diamond revenues may be beyond the governments absorptive capacity and so the PDSF allows the government to bring through money rather than overheat the economy by spending it. (Pegg 2009p3).The tax income Stabilization Fund (RSF) is especially useful in times of economic downturn like the current financial crisis, as they government are able to finance normal spending by using the savings rather than borrowing.Of course, although good governance has c aused what is seen to be a success with regards to revenue management (Samatar 1999 Leith 2005), it has also been said (Pegg 2009p2) that stability of rent streams also helped Botswana control the massive flows and not fall into resource related Dutch disease. This has also led Botswana to move upper middle income status in the World Bank classification. This is impressive as before independence Botswana was classified as a low income country. (World Bank Income Classification).InstitutionsSeveral authors have put forward the argument that inclusive pre-colonial institutions are responsible for Botswanas economic development as institutions are a reason why food policies are elect and also enable good policy choices to stick. Beaulier 2003)Before colonisation it seems that Botswana society was generally inclusive. An important institution of traditional Botswana society is the role of kgotlas which are an assembly of adult males in which issues of public interest were discussed (Ace moglu et al 2001) Botswana society allowed open dissent of the King and chiefs in kgotlas which provided a fair and responsible society.A further point argued by Acemoglu et al (2001) and also by Englebert (2000) and Iimi (2006a) is that the relatively unintrusive nature of British colonialism left a lot of traditional and functional institutions intact. During the scramble for Africa in the 1800s Britain agreed to granted Botswana protectorate status requested by Batswana chiefs in 1885 (Beaulier 2003). The chiefs wanted protection from the South African Boers who were moving towards Botswana. However, Britain apart from protecting fr