Do resource rich economies have better or worse human development outcomes?
Although increasingly challenged, we often hear that being resource rich can adversely affect growth prospects. Here we concentrate instead on a lesser-known aspect: how resource rich economies fare in terms of education, health, income inequality and poverty. The IMF classifies over 50 developing and emerging economies as resource rich. Many are in Africa, where a significant share of the world’s poor lives. With the increasing prices of many internationally traded commodities in the post-COVID recovery, resource revenues could provide a welcome boost to development spending for such governments.
A look at the data suggests that countries with greater income from natural resources do not seem to have a clear relationship with human development outcomes. The scatter plots in the figures 1-3 below show that there is a weak negative correlation for education and health outcomes and no correlation for poverty and inequality measures. The data also show significantly varying experiences among resource rich countries. For example, in Figure 1, Chad and Malaysia have very similar levels of resource rents as a ratio of GDP, but Malaysia’s school enrolment rate is over 70 percent while the corresponding figure for Chad is approximately 20 percent. Likewise, Somalia and Egypt have similar levels of resource abundance, but Egypt’s under-five mortality rate is less than 30 per 1,000 live births, while the corresponding figure for Somalia is about five times bigger (Figure 2). This suggests that countries with similar levels of resource rents can end up with significantly different achievements in terms of poverty, inequality, health, and education. The challenge is to explain why.
Figure 1: Education outcomes and resource rents
Figure 2: Health outcomes and resource rents
Figure 3: Income distribution, poverty, and resource rents
Is there a developmental resource curse?
In a recent WIDER working paper, we take stock of existing research, showing that progress in significant human development outcomes has been heterogeneous. For example, resource abundance may lead to higher and persistent income inequality and poverty. This may happen if property rights over natural resources grant significant rents to influential minorities. The possibility of Dutch Disease and the inherent volatility in the price of natural resource commodities are other mechanisms through which distributive impacts can materialise. But none automatically implies greater inequality or poverty. Much depends on the policy responses and quality of institutions. Similarly, the effect of natural resources on health and education may be ambiguous. A thriving natural resources sector could contribute to increase the income of the poor and provide governments with additional revenues that can finance health and education expenditure. However, it could also have adverse effects on education (via labour market participation, as a growing natural resources sector may absorb a greater share of the working population in low-skilled employment) and health outcomes (via pollution). This also suggests that the presence of a natural resource sector per se does not necessarily translate into worse development outcomes. Hence, it is not a ‘curse’.
Why do some countries do well while others do not?
What, then, can explain why some countries perform well and others do not when it comes to development outcomes? The debate on the ‘resource curse’ has emphasised that institutions matter when it comes to explaining why some resource rich countries grow less than others. In the case of human development outcomes a lot depends on what types of state institutions countries have. Countries with effective states are more likely to reap greater benefits from resource revenues, because the public sector is often the key actor when it comes to providing health and education services or tackling poverty.
But resource windfalls may increase inefficient spending on patronage. If, under certain conditions, political leaders in resource-rich countries divert a large proportion of revenues derived from resource extraction to patronage, there will be less public resources available for spending on education and health or on social transfers that can contribute to poverty and inequality reduction. But under what conditions are patronage and inefficient use of public resources more likely to occur in resource-abundant countries? An important set of factors in determining state effectiveness are constraints on the executive – political institutions that place effective constraints on a ruler can play a major role in the emergence and development of effective state institutions.
One mechanism concerns the presence of independent institutional actors within the national government that can control and limit the use of state resources, so as to demand greater accountability with respect to budgetary planning and implementation. For example, in parliamentary systems, an effective parliament can institutionally oversee and audit the state budget. This implies that the executive may be more likely to promote an effective and independent civil service and so maintain or innovate fiscal infrastructure and the state’s ability to raise revenues and deliver effective public financial management.
Another mechanism is related to the possibility that chief executives who are subject to formal limitations to their power may be more likely to follow the rule of law, so that an independent judicial system may be more effective against any breach of tax laws or abuse in revenue spending.
What are the implications?
This also has policy implications. When developing a natural resources sector, governments should be mindful of two things: how “strong” their states are and what kind of political institutions they have. Using natural resources for human development can be difficult in economies where states do not have well developed capabilities. Mechanisms ensuring that executives are held accountable can guarantee that resource revenues are more likely to be spent on education and health, as well as effective anti-poverty programmes.
The effects of the current crisis on SDGs progress in resource-rich economies may be significant and long lasting. Now is the time to build political support within countries and commitment to using income from natural resources for development should a post-COVID spike in international commodity prices occur.
The views expressed in this piece are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors.