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Escaping the Resource Curse

Escaping the Resource Curse

Foreword by George Soros
Copyright Date: 2007
Pages: 432
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  • Book Info
    Escaping the Resource Curse
    Book Description:

    The wealth derived from natural resources can have a tremendous impact on the economics and politics of producing countries. In the last quarter century, we have seen the surprising and sobering consequences of this wealth, producing what is now known as the "resource curse." Countries with large endowments of natural resources, such as oil and gas, often do worse than their poorer neighbors. Their resource wealth frequently leads to lower growth rates, greater volatility, more corruption, and, in extreme cases, devastating civil wars.

    In this volume, leading economists, lawyers, and political scientists address the fundamental channels generated by this wealth and examine the major decisions a country must make when faced with an abundance of a natural resource. They identify such problems as asymmetric bargaining power, limited access to information, the failure to engage in long-term planning, weak institutional structures, and missing mechanisms of accountability. They also provide a series of solutions, including recommendations for contracting with oil companies and allocating revenue; guidelines for negotiators; models for optimal auctions; and strategies to strengthen state-society linkages and public accountability.

    The contributors show that solutions to the resource curse do exist; yet, institutional innovations are necessary to align the incentives of key domestic and international actors, and this requires fundamental political changes and much greater levels of transparency than currently exist. It is becoming increasingly clear that past policies have not provided the benefits they promised. Escaping the Resource Curse lays out a path for radically improving the management of the world's natural resources.

    eISBN: 978-0-231-51210-7
    Subjects: Business, Political Science, Economics, Environmental Science

Table of Contents

  1. Front Matter
    (pp. i-viii)
  2. Table of Contents
    (pp. ix-x)
    (pp. xi-xvi)
    George Soros

    “Resource curse” is the term used to describe the failure of resource-rich countries to benefit from their natural wealth. Perversely, many countries rich in natural resources are poorer and more miserable than countries that are less well endowed. This is clearly visible in Africa. The Congo, Angola, and Sudan have been torn by civil strife, and Nigeria suffers from endemic corruption, while resource-poor countries such as Burkina Faso and Ghana are equally poor but more peaceful and democratic.

    Lifting the resource curse could change the fate of the countries concerned and make a significant contribution to achieving the United Nations’...

    (pp. xvii-xx)
    Macartan Humphreys, Jeffrey D. Sachs and Joseph E. Stiglitz
  5. CHAPTER 1 Introduction: What Is the Problem with Natural Resource Wealth?
    (pp. 1-20)
    Macartan Humphreys, Jeffrey D. Sachs and Joseph E. Stiglitz

    There is a curious phenomenon that social scientists call the “resource curse” (Auty 1993). Countries with large endowments of natural resources, such as oil and gas, often perform worse in terms of economic development and good governance than do countries with fewer resources. Paradoxically, despite the prospects of wealth and opportunity that accompany the discovery and extraction of oil and other natural resources, such endowments all too often impede rather than further balanced and sustainable development.

    On the one hand, the lack of natural resources has not proven to be a fatal barrier to economic success. The star performers of...


    • CHAPTER 2 What Is the Role of the State?
      (pp. 23-52)
      Joseph E. Stiglitz

      In the first chapter of this volume, we identified one of the central problems underpinning the resource curse: Too often countries do not get the full value of their resources. Consider a government genuinely interested in using its good luck of an abundant resource endowment for the benefit of its people. But first it must somehow extract the resources from below the ground and sell them. To do that, it will have to rely on public employees and/or private contractors. It can hire the private contractors to undertake specific tasks, or it can sell them the natural resource in return...

    • CHAPTER 3 How to Evaluate the Fiscal Terms of Oil Contracts
      (pp. 53-88)
      David Johnston

      Oil is the world’s number one strategic commodity. It is vitally important to developed and developing nations that rely on imported oil and gas, as well as to exporting nations, many of them among the poorest countries in the world—the Middle East aside. For countries with petroleum resources, the contribution from the petroleum sector to the nation’s budget is often dramatically greater than the contribution to the country’s gross national product (GNP). For example, if the petroleum sector were to represent 10 percent of GNP it would likely represent from 30 to 40 percent of the nation’s budget. Not...

    • CHAPTER 4 How to Negotiate an Oil Agreement
      (pp. 89-113)
      Jenik Radon

      The mere mention of a natural resource discovery, especially of oil and increasingly of gas, ignites personal and national dreams of riches and hopes of prosperous times, fueled more than ever by recent dramatic increases in oil prices. Bolivia, Kazakhstan, Mexico, and other developing nations view their natural resources as an asset not belonging to any private party. Irrespective of who may own the surface land and rights, the nation owns the assets, and this position is often enshrined in a state’s most fundamental law, its constitution (see also chapter 7). The “emerging” players, such as Mauritania, Equatorial Guinea, and...

    • CHAPTER 5 How Best to Auction Oil Rights
      (pp. 114-152)
      Peter Cramton

      There are many ways for states to assign oil rights. Rights are sometimes assigned via informal processes, such as first-come-first-serve, or other processes, such as “beauty contests,” in which companies submit exploration and development plans. In this chapter, however, I examine the design of auctions for oil rights, focusing especially on issues faced in developing countries. For the purposes of this chapter, I assume that revenue maximization is the overriding objective. While certainly there can be other objectives, such as the timing of the revenues and country employment and investment (see chapter 3), in what follows, I assume that revenue...


    • CHAPTER 6 Are Oil Producers Rich?
      (pp. 155-172)
      Geoffrey Heal

      There is a popular image of an oil-producing country, a real stereotype: It is of a very rich land where no one needs to work and everything is provided by the state. True, some other aspects of the image are typically less attractive, but the essential popular image relates to extreme abundance. Yet, in sharp contrast to this we find a vast and growing literature on the “resource curse” that documents how and why an abundance of natural resources, in fact, leads to social and economic problems. How can we reconcile these conflicting images? How can we reconcile the seemingly...

    • CHAPTER 7 How to Handle the Macroeconomics of Oil Wealth
      (pp. 173-193)
      Jeffrey D. Sachs

      The idea that oil is a “curse” is only partly true. Oil is, of course, an enormously valuable resource that can bring economic benefits to an economy. Oil-rich states have often outperformed their neighbors that lack oil, as illustrated in table 7.1, showing regional comparisons using the most recent available data. Generally, oil-rich countries, region by region, tend to have higher per capita income levels (in purchasing power terms). This often corresponds to higher levels of private consumption as well. In many other categories of well-being—life expectancies, child mortality rates, electricity use per capita, paved roads—oil producers are...

    • CHAPTER 8 The Political Economy of Natural Resource Funds
      (pp. 194-234)
      Macartan Humphreys and Martin E. Sandbu

      Despite popular belief in their utility, research on natural resource funds does not find evidence that funds lead to better management of natural resources (Davis et al. 2003; Fasano 2000). Natural Resource Funds (NRFs) are employed in countries that use revenues well, but they are also employed in countries that use them badly. While they may restrain government overexpenditure in some cases, in other cases, fund rules are changed or the NRFs themselves are raided when governments wish to increase expenditure. In cases where there appears to be a positive relationship between the presence of NRFs and expenditure smoothing, it...


    • CHAPTER 9 How Mineral-Rich States Can Reduce Inequality
      (pp. 237-255)
      Michael L. Ross

      If we use a broad measure of development progress—changes in child mortality rates between 1970 and 2000—we find enormous variation in the performance of oil- and gas-exporting states (figure 9.1). Indeed, oil and gas exporters tend to have more varied outcomes than non-exporters: as the dependence of countries on oil, gas, and other mineral exports rises, so does the variation among states in development outcomes. Oil and gas revenues seem to magnify the ability of governments to do both good and bad things for their citizens.

      One key to success is managing the impact that mineral rents have...

    • CHAPTER 10 Ensuring Fairness: The Case for a Transparent Fiscal Social Contract
      (pp. 256-285)
      Terry Lynn Karl

      The “resource curse” in oil-exporting countries, a catchall phrase capturing the perverse development outcomes linked to natural resource wealth,¹ is primarily a political/institutional and not an economic phenomenon—a fact that most policy makers have been slow (or perhaps unwilling) to grasp.² For oil exporters, the resource curse cannot be attributed to oil itself, which is merely a black viscous material, but rather to the types of arrangements that have developed around its exploitation. Nor can it be attributed to the mere possession of petroleum; for the full panoply of resource curse consequences to appear, petroleum must be sold in...

    • CHAPTER 11 Critical Issues for a Revenue Management Law
      (pp. 286-321)
      Joseph C. Bell and Teresa Maurea Faria

      In this chapter, we set out a number of elements that need to be addressed in any oil or mineral revenue management law, analyze the key issues, and provide some alternative solutions. Since a number of the policy questions are addressed elsewhere in this book, the focus here is on legal and institutional issues. We discuss various national laws but make particular reference to the recently enacted oil revenue management law of Sao Tome and Principe, as set out in abridged form in Appendix 1. This law was drafted by a special oil commission made up of representatives of various...

    • CHAPTER 12 Future Directions for the Management of Natural Resources
      (pp. 322-336)
      Macartan Humphreys, Jeffrey D. Sachs and Joseph E. Stiglitz

      The chapters in this volume identify steps that governments of resource-rich countries can take to increase the benefits that their countries derive from their holdings of oil, gas, and other resources. The focus on governments is natural: these actions will work only if governments lead the way. We believe these reforms should attract the support of their populations. Moreover, in some cases, these reforms will be brought about only with concerted pressure from civil society.

      But the “resource curse” afflicts not just host country governments and their populations; it also affects the operations of major international corporations, their home governments,...


    • APPENDIX 1 Abridged Sao Tome and Principe Oil Law NATIONAL ASSEMBLY Law No. 8/2004 Oil Revenue Law
      (pp. 339-366)
    • APPENDIX 2 Abridged Timor-Leste Oil Law
      (pp. 367-374)
    • APPENDIX 3 Glossary of Oil Terms
      (pp. 375-388)
    • APPENDIX 4 Web Site References
      (pp. 389-390)
    (pp. 391-396)
  11. INDEX
    (pp. 397-412)