CHAPTER ONE
The Most Disadvantageous Lottery in the World
Historic Controversies Around Natural Resources and Economic Prosperity
The relationship between natural resource wealth and economic prosperity has confounded economists for centuries. At first glance, the idea that an abundance of resources bestow anything other than benefits on their owners is counterintuitive. Natural resources are an essential factor of production, and their scarcity value might therefore be expected to greatly advantage countries and regions in which they are located. These advantages relate both to international trade and fiscal affairs, notably the revenue-generating capacity of resource-rich states. While the existence of a resource curse has gained increasing support in the postwar period, its counterintuitive nature is reflected by associated terms such as the âparadox of plentyâ (Karl, 1997).
Scholarship around the resource curse has proliferated in recent decades, but this literature is but the latest in a centuries-old debate in economics that dates back at least as far as the very origins of the discipline. The Physiocrats and mercantilists of the eighteenth century agreed on little, but shared a basic understanding of economic prosperity that was rooted in the accumulation of natural wealth. Adam Smith disagreed. In his view, the wealth of a nation derived from productivity-enhancing specialization with cooperation through markets. He argued that an undue obsession with resources and commodity accumulation undermines the development of a âcommercial society,â in which lasting economic prosperity resulted from specialized trade, manufacturing, and the efficient division of labor.
Intellectual traditions do not emerge in a historical vacuum, but are rather embedded in prevailing economic realities. Four major economic epochs signified major shifts in the history of economic thought around resource wealth: the Early Modern Era, the aftermath of the Industrial Revolution, the postwar period in the mid-twentieth century, and the aftermath of the oil shocks in the late 1970s. The latter culminated in the formal articulation of the resource-curse hypothesis. This literature and the vast theoretical and empirical literature that has accompanied its expansion are the focus of this chapter, as they frame and contextualize the central arguments advanced in this book. To underline the deep intellectual origins of the debate, however, we turn first to historical antecedents of the resource curse.
SUCH STRANGE DELUSIONS: HISTORICAL ANTECEDENTS TO THE RESOURCE CURSE
In intellectual traditions that predate the Industrial Revolution, natural wealth was synonymous with agricultural productivity and prowess. Agrarian productivity was regarded as obviously conduciveâand indeed tantamountâto economic and social well-being. The Physiocrats, the first Ă©conomistes, who influenced Adam Smith and the emergence of Enlightenment political economy, most famously regarded agricultural prowess as the cornerstone of economic progress. In most other leading philosophies of the Enlightenment, however, natural wealth assumed a wider meaning beyond agriculture.
Mercantilists and the Enlightenment
The moral philosophers of the Scottish Enlightenment, notably David Hume and Adam Smith, held a more qualified view of natural resources in relation to economic wealth than that of the Physiocrats and the bullionist tradition of mercantilism. Indeed, the Scottish Enlightenment political economistsâ opposition to the bullionist obsession with rare metals as the measure of wealth was a central criticism of that particular strand of mercantilist logic. While acknowledging the motivational power of the quest for silver and gold to the Iberian colonial expansion during the Age of Discovery, and the extent to which the promise of bountiful raw materials underwrote successive European nationsâ expansion into the New World, Smith was deeply critical of the irrationality that accompanied such pursuits.
âThe same passion which has suggested to so many people the absurd idea of the philosopherâs stone, has suggested to others the equally absurd one of immense rich mines of gold and silver,â Smith ([1776] 1981:563) argued. Referring to Sir Walter Raleighâs fixation with the mythical city of El Dorado, Smith argued that so strong was the lure of resource riches, that âeven wise men are not always exempt from such strange delusions.â Smith was equally skeptical about the microeconomics of mining. No enterprise was âmore perfectly ruinous than the search after new silver and gold minesââindeed, for Smith, mining constituted âthe most disadvantageous lottery in the world [in which] the common price of a ticket is the whole fortune of a very rich manâ (Smith [1776] 1981:562).
The most prescient of Smithâs insights on the subject of natural resources, however, pertain to the more general level at which resource wealth creates distractions and incentives that lead economic actors away from more productive endeavors. Smithâs argument in this regard is an early articulation of ârent-seeking,â an argument that has been applied with increasing frequency to the case of resource economies (as discussed in chapter 2). Even when observers understood full well that âthe wealth of a country consists, not in its gold and silver only, but in its lands, houses, and consumable goods of all different kinds,â once confronted with resource abundance, âthe lands, houses, and consumable goods, seem to slip out of their memory; and the strain of their argument frequently supposes that all wealth consists in gold and silver, and that to multiply those metals is the great object of national industry and commerceâ (Smith [1776] 1981:429). Late twentieth-century scholars would observe a similarly slippery grasp of economic beliefs in the face of large resource discoveries.
By the age of the industrial revolutions in Britain, Western Europe, and the United States, the concept of natural wealth shifted toward the direct uses of commodities, such as timber, coal, steel, cotton, copper, and rubber, in industrial processes. Both contemporary observers and subsequent scholarship has identified access to proximate natural resources as an unambiguous boon, and possibility a prerequisite, for economic development and industrialization in that era. The relative ease with which Western European nations accessed supplies of coal, steel, timber, and peat from domestic deposits, as well as peripheral geographies, such as the Baltics and their colonies, has been advanced by some scholars as aâand sometimes theâcritical factor in determining why the Industrial Revolution occurred there rather than in other comparatively advanced societies of the period (for a recent articulation of this view, see Pomeranz, 2000; however, the argument dates back to Jevons, 1865).1
Escaping Backwardness: Natural Resources in Postwar Development Economics
The increase in the global trade in commodities in the late nineteenth century reduced the relevance of the geographic proximity to resources that prevailed during the Industrial Revolution. In the United States, trade in agricultural goods and industrial metals increasingly migrated toward formal exchanges, such as the Chicago Board of Trade and the New York Mercantile Exchange, to facilitate more efficient price discovery, risk management (including through the trading of commodity futures and options), and information sharing. Gradually, this mode of trade and market exchange became the norm across agricultural and nonagricultural commodities. On the demand side, rapid economic growth and global trade supported the expansion of commodities trading and production. The inter- and postwar periods of the twentieth century heralded significant growth in the demand for and trade in natural resources, driven by energy- and resource-intensive growth patterns, the rise in automobile usage, and postwar reconstruction efforts. Persistent breakthroughs in transportation (notably, the use of âsuper tankers,â capable of transporting more than three million barrels of oil) and physical and financial infrastructure further promoted international commodities trading, as well as the globalization of supply and demand dynamics for most natural resources (World Trade Organization, 2010).
Of particular importance to the evolution of the literature on resources and economic development is the emergence during this period of a large number of developing countries as global suppliers of primary products and traded commodities. Consequently, natural resources featured prominently in the grand theories of economic development that emerged after World War II. The emergent field of âdevelopment economicsâ viewed the rapid modernization of poor countries as a distinct challenge and intellectual project, providing a fertile breeding ground for scholarship on the role of natural resources in the economic development of comparatively poor countries.
All the important contributors of this periodâWalt Rostow, Albert Hirschman, Hans Singer, Raul Prebisch, Paul Rosenstein-Rodan, Ragnar Nurkse, and Arthur Lewisâaddressed the role of the natural resource sector in relation to broader economic development and modernization. While offering contrasting visions of the means and pace through which modernization could be achieved, these theories had in common the belief that the key to economic development lay in moving away from the âbackwardâ economic undertaking of extracting primary goods toward modern industry, characterized by higher skills, productivity, and real wages. Most of these modern development theoriesâstill under the impression of the role of coal, steel, and other industrial resources in the industrialization of Europe and, subsequently, the United Statesâregarded abundant resources as a catalyst for economic development. Although resource wealth was not viewed as the key to economic prosperity, it was widely regarded as an advantageous starting point.
Rostowâs influential stages-of-growth theory (1960), with its focus on investment and capital accumulation, viewed the extraction of primary goods as the most basicâor, to use his famous term, âbackwardââmodes of economic production. That said, resource abundance was regarded as critical to mobilizing the requisite savings, investment, and capital formation to advance through predetermined stages of economic development. Indeed, the often large rents and windfalls generated by resource wealth opened up the seductive possibility of âleapfroggingâ certain stages of development in Rostowâs view. Arthur Lewisâs similarly influential two-sector model of economic development was built on the assumption that economic development required the release of surplus labor from the primary modes of production and its reallocation toward an urban, capitalist one (Lewis, 1954, 1955). In Lewisâs view, this process would only be accelerated by an abundance of natural resourcesâindeed, he attempted to show how poor countries could still industrialize even when they were relatively resource poor. Following Rostow, Lewis believed an abundance of natural resources to be a means through which to accelerate an economic transition to modern, industrial capitalism.
A more dirigiste view of how natural resources should advance the goal of rapid economic development and modernization was contained in Rosenstein-Rodanâs (1943) earlier âbig pushâ model, and further expanded on by Nurkse (1961). To achieve âbalanced growth,â the big push involved state-directed investments funded by resource windfalls into other sectors of the economy that remained underdeveloped. Rosenstein-Rodan and Nurske argued that in the absence of massive, state-led investment, developing countries would get stuck in a low-equilibrium trap based on specialization in resource production. As with Rostow and Lewis, models in the big push tradition did not regard an abundance of resources as in any way detrimental to the process of modernization, for it merely strengthened the means to achieve balanced growth and modernization, and potentially sped up this process.
Albert Hirschmanâs (1958) emphasis on the âforward and backward linkagesâ between economic activities contained a more qualified view of the role of the resources sector in economic development. In his view, certain primary subsectors, such as agriculture, had relatively few linkages and were therefore not conducive to sustained development, whereas others, such as steel, were characterized by a myriad of such linkages, which could help spur development and growth. It is important to note that Hirschman, who cautioned against heavy-handed state planning and generally favored gradual economic reform and change, opposed Rosenstein-Rodan and Nurskeâs âbig pushâ approach. Hirschman was more comfortable with what he reg...