Curse or Blessing? Natural Resources and Human Development
The following paper aims to provide a summary and an analysis of the research ”Curse or Blessing? Natural Resources and Human Development” by José Pineda and Francisco Rodríguez. A short introduction – based on the same research paper – leads to an explanation of the different channels through which Human Development can be affected and to the question why natural resources can be seen as a curse as well as a blessing. I would like to classify the examples listed by Pineda and Rodríguez into two categories: I present on the one hand countries that had difficulties with natural resources (curse) and on the other hand examples of successful development through natural resources (blessing). The main part of this paper deals with the empirical study of Pineda and Rodríguez and its results. A conclusion summarises the various mentioned reasons and contains also a personal critical reflexion in light of the capability approach of Amartya Sen.
One might argue that natural resource abundance should lead to positive changes of the development of a country and should result in a higher HDI. In the contrary, various studies aim to show that in spite of the presence of natural resources a region has very low prospects regarding human development. Scrutinizing the ‘old’ HDI-components from 1980 until 2005 and dividing countries into ‘net-exporters’ and ‘net-importers’ of natural resources Pineda and Rodríguez show that “GDP growth has been smaller for net exporter countries, which is at the heart of the natural curse hypothesis.[and that] …, changes in the non-income component of HDI,…, are on average larger for net exporting countries.” (Pineda/Rodriguez, 2010: 2)
They find out that the changes (in the period from 1980 to 2005) for net exporters were higher than for net importers for life expectancy, gross enrolment and literacy, but not for GDP/capita. This would lead us to the argument that human development is affected by various channels, and not by income. (Pineda/Rodriguez, 2010: 2-4)
1.1 Channels that affect Human Development
The following paragraph is based on the literature review of Pineda and Rodríguez (2010: 4-10) and presents a short description of the different ‘channels’ that try to find an answer why natural resources are linked to a negatively impact on human development: Dutch Disease, volatility, trade structure, depletion, rent-seeking and institutional weakness.
- Dutch Disease
A boom in one resource within a country leads to capital moves from outside and in the following to a higher exchange rate. The other sectors of this country might lose competitiveness because of higher prices abroad.
The prices of natural resources depend on various factors, such as the extraction rate or contracts.
- Trade Structure
Another study shows (Lederman and Maloney, 2007) that growth can be affected if exports are not diversified. In other words, a negative impact of natural resources on growth can be assessed when a certain trade structure exists.
After a resource boom a country can suffer from negative growth. This could be averted by investing in foreign assets.
A higher so-called rent-seeking behaviour can be identified when point-source resources exist. This is linked, for example, to inefficient projects and fiscal policies due to lobbying and weak or non-existing institutions.
- Institutional Weakness
Institutions play a crucial role regarding the relationship between natural resources and growth: “…once institutions have been controlled for, oil actually has a beneficially effect on growth.” (Pineda/Rodriguez, 2010: 7) In the contrary, other studies tried to show that natural resources have a negative impact on democracy or that strong growth can exist within countries characterised by a weak institutional setting.
1.2 Difficulties with Natural Resources: The Curse Argument
The following paragraphs – based on Pineda and Rodriguez (2010: 6-14) – introduce different examples of the discussed channels and should provide insight into why natural resources are/were seen as a curse or culprit for a lower development of a region.
Firstly, when states acted as a ‘direct recipient’ of the wealth of natural resources the result was a Dutch disease. In other words, industries other than the developing one were not supported which led to a loss of competitiveness. Examples are Spain (silver and gold rich in the 16th century) and the ‘petro-states’ Nigeria, Algeria, Iran and Venezuela. Especially the ‘Venezuela case’ shows that a deterioration of an economy goes hand in hand with a change in the policy type and could moreover be influenced negatively by investing only in intensive industries (relying on energy).
Secondly, the oil boom in the 1970s led also to Dutch disease effects: characterized by dependence on the oil sector and foreign capital influx. It highlighted in the fall of the prices. As a consequence loans were not able to be paid back.
1.3 Natural Resources as a Blessing
In contrast, various examples exist that argue against the curse theory of natural resources for the development of a region. The following cases – based on Pineda and Rodriguez (2010: 6-14) – show that resource dependence can result in economic prosperity, or to cut a long matter short, successful resource-based growth does exist.
Countries, such as Norway or Chile, founded a fund (Petroleum/ Copper) in order to stabilise their wealth and to protect their economies from negative impacts. Sweden and Finland are also examples for successful development based on natural resources. They are better-off than many other countries (although they had the same wealth as Argentina at the beginning of the 20th century) because they have invested their revenues in education, knowledge clusters and research. Others examples are the US (investments in infrastructure and knowledge), Australia (creation of a knowledge based intensive mineral sector) and Botswana (institutions combined with a diamond mining sector).
By reading this, one might argue that natural resources have only a beneficial effect on the whole state. But Aragon and Rud (2009) showed that also the situation within local communities (they scrutinized the area around a Peruvian gold mine) can be improved by rising income levels and standards of living.
To sum up, it can be said that natural resources could be both, a curse and a blessing. It mostly depends on the policies and on the institutional setting.
2 The study by Pineda and Rodríguez
The following parts (2; 2.1 and 2.2) deal with the empirical study of Pineda and Rodríguez and its results (Pineda/ Rodríguez, 2010: 14-26). Like Lederman and Maloney they see natural resources as
“…assets for developing that necessitate appropriate policies and adequate human and physical capital. …[natural resources can properly be employed by countries in order] to create sustainable economic growth and development through proper export diversification, human and physical capital investment, volatility and real exchange rate control.”
(Pineda/ Rodríguez, 2010: 11)
2.1 Empirical Method
Pineda and Rodríguez try to analyse the impact of natural resources on the one hand on GDP (per capita) growth and on the other hand on human development taking data (of HDI components) from 1970 to 2005 into consideration. At first, they define the indicator of resource abundance by the net exports of natural resources per worker. With a linear regression – the ordinary least square (OLS) method – the question if natural resources have a positive influence on the human development index – and its components – should be answered. In order to address the question if human development is influenced differently in Latin America Pineda and Rodríguez take also ‘a set of regional dummies interactions’ into consideration. In the regression the changes of the components of the HDI are the dependent variable while natural resource abundance is the so-called key variable.
The results of the (OLS) regression method show that natural resources have a positive effect on human development for net resource exporting and net resource importing countries as well. What concerns the HDI components the researchers found out that natural resource abundance influences literacy positively and significantly while the components gross enrolment and life expectancy do not always have positive and statistically significant specifications.
“Regarding the income HDI component, GDP per capita growth shows that natural resource abundance could be a blessing for growth. …For both the HDI and GDP, …, [the] resource abundance is more important for exporters than for importers.“ (Pineda/Rodriguez, 2010: 18)
The researchers have also measured the interaction in Latin America but the results show that the effect of natural resources on human development in this region is significantly smaller than in the rest of the world.
To sum up, Pineda and Rodríguez find strong evidence that the effect of natural resource abundance on literacy and life-expectancy is positive, even stronger than for GDP growth.
3 Conclusion and Critical Reflexion
The paper of Pineda and Rodríguez shows clearly that a curse of natural resources on HDI components does not exist due to positive effects of natural resource abundance on human development. The researchers give an excellent literature review and show examples that led to the development of “the curse and the blessing view” of natural resource abundance. But Pineda and Rodríguez only scrutinize the ‘old’ HDI-components (until 2010) in order to evaluate if the presence of natural resources in a country should be seen as curse or blessing for the (human) development. They do not see or consider human development (as a whole) more than HDI components and therefore a better title for their paper would be ‘natural resource and the HDI’.
In other words, with regard to the critics on the calculation of the HDI until 2010 (as an arithmetic mean) their work cannot be criticised because they scrutinised the single HDI-components. Furthermore they do not even justify why they have chosen the HDI and its components for measuring human development. It’s a pity that they do not give any explanation why Latin America has different results than the rest of the world.
Although it is obvious that the capability approach is tightly linked to institutional questions (or economics), to environmental questions and to the ecological pillar of sustainability, Sen does not say much about environment or natural resources – linked to human development – in his book ‘Development as Freedom’.
But his view: “For efficient provision of public goods, not only do we have to consider the possibility of state action and social provisioning, we also have to examine the part that can be played by the development of social values and of a sense of responsibility that may reduce the need for forceful state action.” (Sen, 1999: 269) and “The need to go beyond market rules …, in the context of environmental protection.” (Sen, 1999: 269) is not only linked to the theory of collective action (Sandler 1992) but can also be connected to Elinor Ostrom’s approach of how to “governing” common-pool-resources in a sustainable and efficient way (Ostrom/Gardner/Walker, 1994 and Ostrom, 1999). Furthermore Ostrom lists different intermediary institutions that constitute local arenas of participation and interaction, maybe examples – for Sen’s approach – of the process and the aim of development. In other words, I would say that natural resources as well their management through (local) institutional settings play a decisive role within development and should therefore be taken into consideration to a greater extent in the Human Development approach and should also be considered in studies in a broader view (instead of reducing resources to exports and imports).
It is a matter of fact that the exploitation of natural resources and their export result in an increase of the GDP. Even if the revenues are used for education and healthcare it is hard to tell if there are less or more capabilities than before. To sum up, the difficulty is in registering and assessing all different effects and impacts on the environment and on the single agents.
In my opinion an interesting new approach would be to take the Environmentally Adjusted Domestic Product (EADP) and to derive a (environmentally adjusted) GNI in order to estimate the HDI. Were this possible, the (green) GDP or the GNI would be smaller when a country’s welfare is based on exploitation of natural resources (Indonesia). Hence on the one hand a decrease in capabilities could be better illustrated in the HDI and on the other hand the sustainability-issue could be introduced.
Beside this, also others scientific strategies are highly debatable: Other scientists would prefer cost-benefit-analyses (imperfect: because non-monetary assets that are not be able to be reproduced cannot be valued) for a certain region, or would define a list of basic capabilities (Martha Nussbaum).
[Remark: These controversial approaches arise because a so-called ‘silver bullet’ (Jeffrey Sachs), a precise criterion of development or a list of well-defined elements does not exist.]
From my point of view Pineda and Rodríguez have failed to analyse the relationship between natural resources and human development because on the one hand they have only scrutinised the impact on the HDI and its components (but human development is more: for instance its about people and their relationship to commodities) and on the other hand their focus on natural resources – regarding that they are more for people than net-imports or exports – is too narrow. In other words, they only look at natural resources and HDI components, but what would be central in human development are functionings.
To conclude, I would say that the question if natural resources (abundance) are a curse or a blessing is still highly debateable and even more when analysing functionings of a certain person.
Ostrom, Elinor (1990), Governing the Commons. The Evolution of Institutions for Collective Action, Cambridge u.a.: Cambridge University Press
Ostrom, Elinor/Gardner, Roy/Walker, James (1994), Rules, Games and Common-Pool Resources, Ann Arbor: University of Michigan Press
Pineda, J., and Rodriguez, F. (2010). Curse or Blessing? Natural Resources and Human Development UNDP Human Development Research Paper No. 04.
Sandler, Todd (1992), Collective Action. Theory and applications., Ann Arbor, Univ. of Michigan Press
Sen, Amartya (1999), Development as Freedom, Oxford University Press