The Devil's Excrement
The Negative Effect of Natural Resources on Development
The discovery of new non-renewable natural resources, such as oil, natural gas, and minerals, has often been viewed as a sure- fire foundation for national development-those countries lucky enough to strike black gold, or gold itself, see themselves as having taken the first important step on the road to prosperity. Therefore, it is not surprising that many have placed their hopes in resource exploitation as the means for lifting out of poverty a large proportion of the 2.7 billion people (nearly half of the world's population) who live on less than US$2 per day.
Natural resource deposits have undeniably brought prosperity to countries such as Norway and Iceland. Unfortunately, most resource- rich countries do not see economic development follow their natural wealth. Rather, relatively resource-poor regions such as East Asia have grown much faster than countries in Latin America, Africa, and the Middle East that have considerable deposits of oil, natural gas, and minerals. Recent studies show that even after controlling for income and other factors, oil- and mineral-dependent countries generally have higher poverty rates, income inequality, child mortality, and child malnutrition than those that are not dependent on such income sources. These countries, identified by their high ratio of exports of a single commodity to total exports, also spend less on healthcare, have lower enrollment in primary and secondary schools, and have a higher incidence of political corruption. They are more likely to have authoritarian governments, large sovereign debts, high military spending, and civil wars than countries without significant natural resources. Finally, there is a growing consensus among economists that in all but the most transparent and industrialized nations, the discovery of natural resources has tended to have a negative impact on growth. Juan Pablo Perez Alfonso, a founder of the Organization of Petroleum Exporting Countries, summed up these trends when he said, "I call petroleum the devil's excrement. It brings trouble. Look around you. Look at this locura [madness]-waste, corruption, consumption, our public services falling apart. And debt, we shall have debt for years."
However, the achievement of high human development indicators in some countries, such as Norway, has been enabled by services funded in part through natural resource exploitation. Human development is denned by expanded capabilities of individuals to make choices about the life they wish to lead, and indicators of human development include not just gross domestic product (GDP) but also measures such as life expectancy, literacy rates, and political freedom. Access to education, Healthcare, and discursive political processes raises these indicators. Nevertheless, most oiland mineral-dependent countries have, in fact, not fared well by human development indices. As the accompanying figure shows, many of these countries have very low Human Development Index (HDI) rankings. The HDI, developed by the United Nations Development Programme, combines data on per capita income with data on Healthcare and education and is available for 174 countries. Tn a recent study, even after controlling for per capita income, a five-point gain in mineral dependence resulted in a 3.1 -point decrease in the HDI rank.
Abundance in oil and mineral resources is associated, to a substantial degree, with low human development indicators, high income inequality and poverty rates, and depressed rates of economic growth, because the discovery of oil and mineral resources often fuels internal corruption and conflict, encourages unethical corporate behavior, leads to the violation of human rights, and results in environmental degradation. These trends do not mean that oil and mineral wealth necessarily lowers human welfare. The opposite can be true if the following requirements are met: first, those who are affected by resource exploitation must be consulted; second, successful resource exploitation must tangibly benefit citizens; third, a pre-determined set of environmental criteria must be met; fourth, all transactions must be transparent; and fifth, efforts must be made to promote democracy if the previous four criteria are to be consistently achieved. While advances have been made, there remains much room for further progress.
Internal Corruption and Instability
The tendency of oil and mineral resource discovery to fuel internal instability and corruption is what has led some to term these resources as a "curse." This assertion seems justified, as the list of states-both semi-democratic and authoritarian-that have declined substantially after discovering oil or mineral resources is nearly as long as the list of those that are resource rich. Of course, not all countries face decline after this discovery, but the list of those afflicted includes Nigeria, Venezuela, Equatorial Guinea, Gabon, Angola, Algeria, Gongo-Brazzaville, Kazakhstan, Yemen, Saudi Arabia, Liberia, Papua New Guinea, and Sierra Leone. This paradox can be explained in a number of ways.
Opposite:Texaco activity in Ecuador from 1964 to 1992 caused crude oil accumulation like that shown here. Above: Protesters decry the execution of Nigerian environmental and human rights activists who agitated against Royal Dutch/Shell.
One explanation is what economists term "Dutch disease" after a phenomenon observed in the Netherlands following the discovery of natural gas, whereby natural resource discovery leads to deindustrialization and dependency on a single commodity. Some have argued that the trade policies of developed nations contribute to this phenomenon-while unfinished products often have no tariffs, finished products that could be created from mineral resources or oil, namely plastic, often face prohibitively high tariffs. This prevents the creation of local industries that add value to raw materials, which in turn prohibits export diversification and economic growth.
However, economic decline can also be ascribed to the irresponsible and corrupt state practices that often occur after natural resource discovery, not just to Dutch disease and the trade policy of developed nations. For example, resource discovery tends to upset budgets by creating the perception that the state is richer than it really is. Oil discovery led to the extravagant construction of Nigeria's artificial capital city and to the maintenance of more than 20,000 expensive Saudi princes. Such practices are not sustainable during cyclical slumps, yet prove difficult to cut back for political reasons. Thus, they lead ultimately to substantial external debt.
Moreover, oil or mineral resource discovery generally increases incentives for state corruption. Since the death of Nigerian President Sani Abacha in 1998, authorities have seized more than US$2 billion wrongfully gained dollars from the Abacha family, along with 34 mansions and $4 luxury cars. Meanwhile, Nigeria remains among the poorest countries in the world. Corrupt rulers, including those in semi-democratic states, may also use resource moneys to placate the army and bribe opposition, as has been the practice of Venezuelan President Hugo Chvez.
Most tragically, exploitation of non-renewable natural resources can fuel wars by making control of the state something lucrative enough to fight for, as has happened in the Sudan and elsewhere. According to "Greed and Grievance in Civil War," a 2000 World Bank study by Paul Collier and Anke Hoeffler, countries highly dependent on the export of oil or minerals face a 23 percent risk of civil war over a five-year period, as compared to a 0.$ percent incidence in an identical country without natural resources. Furthermore, a 2001 Oxfam America report finds that oil can worsen poverty by incentivizing conflict and other negative behaviors, thereby stunting democratic development. Taken together, these trends severely jeopardize the growth of both the economies and human capabilities in the states that they affect.
Unethical Corporate Behavior
While high-profile non-renewable resource companies have recently made increasing efforts to implement ethical business practices, many such companies nonetheless perpetuate bribery, environmental abuse, violation of human rights, and an overall lack of transparency.
Oil and mineral companies are currently not required by law to reveal how much they award for extraction rights, making it extremely easy for politicians to embezzle natural resource monies. Despite the US Foreign Corrupt Practices Act of 1977, which outlaws bribery, there have also been a series of high-profile bribeiy scandals, including those relating to oil exploitation in Kazakhstan.
Furthermore, resource exploitation has led to human rights abuses around the world. The oil company Occidental stands accused of providing lethal aid to Columbian armed forces in order to defeat guerilla groups who were threatening pipeline construction. Industry peer ExxonMobil may have been complicit in the abuses committed by the Indonesian military, while Unocal likely benefited from forced labor deployed by the military government in Myanmar. Two case\s relating to Myanmar that are currently in US courts will be a test of the Alien Tort Claims Act (ATCA), which allows aliens to sue in US courts for cases involving gross human rights abuses. In 2002, the administration of US President George W. Bush took the unusual step of intervening in a lawsuit against ExxonMobil, arguing that applying the ATCA might hinder US attempts to fight terrorism.
FOOL'S GOLD
Violation of the Rights of Indigenous Peoples
While the exploitation of oil and mineral resources can threaten the human rights of a diverse group of people, the human rights of indigenous peoples have been particularly vulnerable. One of the best-documented threats to indigenous peoples is the construction of access roads to remote drilling sites. Once constructed, roads serve as open arteries for settlers who may engage in subsequently ecologically and economically unsustainable activities, such as overgrazing, on lands previously claimed or used by indigenous peoples. Furthermore, governments have used manipulative tactics to gain access to natural resources, by demanding monetary taxes from subsistence groups that do not use currency and then subsequently evicting groups from traditionally occupied lands.
Oil and natural gas companies are more sensitive than they were in the past to the threats that access roads pose, and they have begun to utilize offshore technology. In addition, governments expropriate indigenous land less than they did during previous decades. Many have gone so far as to incorporate into their constitutions portions of International Labor Organization Convention 169, an international document discussing indigenous rights, which requires that indigenous peoples be consulted about resource exploitation decisions that affect them. However, meaningful consultation often remains sorely lacking.
Environmental Degradation
Non-renewable resource exploitation can lead both directly and indirectly to environmental degradation. Drilling, pipeline construction, and waste removal can directly promote the destruction of rare species, while resource exploitation can indirectly lead to environmental destruction through opening arteries to settlers, as discussed above.
Many corporations have recently started to engage in environmentally sound practices due to pressure from advocacy groups, resulting in a marked improvement over practices in the 1970s. However, environmentally threatening behavior remains common. For example, pipeline routes have not been closed off in the Camisea Basin in Peru, allowing an influx of settlers. In addition, steep pipeline grates that fail to meet international standards have led to massive landslides, and the construction of an oil refinery within a marine buffer zone threatens endangered species in the region. In nearby La Oroya, Peru, a Doe Run copper mine directly behind the town emits 17 times as much sulfur as the entire copper industry in the United States and 17 times the amount of lead of a similar Doe Run operation in Missouri. Such high rates of emission drastically affect the health of local populations.
Natural Resource Policy and Human Development
These extensive shortcomings hardly mean that a country should entirely shut its doors to resource exploitation, as Bolivia did in October 2003 after attempts to export natural gas by now-ousted President Goni Sanchez de Lozada. Mineral and oil resources have the potential to play a key role in lifting some of the poorest regions of the world out of poverty. However, tor natural resource exploitation to lead to human development instead of just the enrichment of certain populations, a government must adhere to five basic measures. First, it must consult those affected by the resource exploitation. Second, it must ensure that resource exploitation benefit the people, not just the elites. Third, it must meet a predefined set of environmental criteria. Fourth, it must make the entire process as transparent as possible. Finally, it must make every effort to promote democracy.
Meaningful consultation with those affected by resource exploitation is central, because it confers people with a voice about extractive processes that have the potential to profoundly affect their lives, their health, and the environment in which they live. The belief that resource exploitation represents a conflict between economic growth (if resources are exploited) and culture (of previously untouched groups, now endangered) is a fallacy. Those making this argument view culture as a static entity, a fossil rather than a continuously evolving web of social perceptions and interactions. Economic development can be consistent with cultural integrity, it those affected are properly consulted and have a chance to knowledgably participate in decisions about resource exploitation that affect them. These decisions, if made discursively, confer those affected with the agency to protect their cultural structures and to benefit from resource exploitation, in the form of government investments in education and health.
Allowing citizens to benefit from resource exploitation and giving them a voice in how to distribute benefits is also critical. There are two different models for distributing natural resources monies to citizens. In Alaska, the state-run Alaska Permanent Fund disburses roughly $8,000 each year to every family for discretionary use. In Norway, oil revenues are used to provide social services. The Norway model is perhaps more open to corruption, given that government officials must manage the natural resource monies. Nevertheless, it may be more appropriate for the developing world because it is more likely to result in essential investments in Healthcare, education, and infrastructure necessary for human and economic development.
Resource exploitation must also meet certain predetermined environmental standards. Fortunately, environmentally friendly technology is available and increasingly employed. For example, companies are using "offshore" technology to drill in the Peruvian jungle, with drilling sites being operated as if they were islands: workers and supplies are flown in by helicopter to avoid access roads. Nevertheless, companies often fail to utilize such technology. The best strategy for enforcing environmental standards would thus involve a combination of surveillance on the part of civil society, an agreement within the Organization for Economic Cooperation and Development (OECD) that would require companies that operate in OECD countries to adhere to pre-determined standards, and rigorous environmental prerequisites for development loans. Transparency is also essential. Recently, ten investment funds managing more than US$600 billion of assets declared support for transparency, arguing that a lack of transparency is a business risk because it makes companies vulnerable to accusations of complicity in unethical practices.
Finally, it is crucial to remember that Norway and Iceland, which have successfully used natural resources to usher in human development, are among the world's most transparent democracies. Studies show that some of the key ailments of oil- and resource- dependent states, such as low life expectancy, high child mortality, poverty, inequality, and corruption, are substantially diminished when a country is at least partially democratic. 'Ib a significant extent, successful resource exploitation in terms of human development depends on creating successful democracies, so that citizens have the opportunities to demand transparency, adherence to environmental standards, and benefits from oil and mineral revenues. The effectiveness of citizens, governments, and civil society in promoting democracies that are transparent and give citizens a say in how revenues are spent is the most critical test to successful resource exploitation that the developing world faces today.
"TO A SIGNIFICANT SUCCESSFUL RESOURCE EXPLOITATION INTERMS OF HUMAN DEVELOPMENT DEPENDS ON CREATING SUCCESSFUL DEMOCRACIES..."
staff writer
MELISSA DELL
Copyright Harvard International Relations Council Fall 2004
Source: Harvard International Review
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