"RESOURCE CURSE" AND HOW TO AVOID IT

Author(s): Paul J. Stevens

Source: The Journal of Energy and Development, Vol. 31, No. 1 (Autumn, 2005), pp. 1-20
Published by: International Research Center for Energy and Economic Development (ICEED)
Stable URL: https://www.jstor.org/stable/24812676
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 "RESOURCE CURSE" AND HOW TO AVOID IT

Paul J. Stevens*

Introduction

Since the 1950s,

resources there
would be has beenin concern
disadvantaged thateconomic
the drive for economies dominated
progress. This by natural
became known as "resource curse."1
In the 1950s and 1960s, the transmission mechanisms were explained by de
teriorating terms of trade between the "center" and "periphery" plus perceptions
of limited economic linkages from primary product exports. In the 1970s, it was
driven by the impact of the oil shocks. In the 1980s, the phenomenon of "Dutch
disease" attracted attention. Finally, in the 1990s, it was the impact of oil, gas, and
mineral projects on government behavior that dominated the discussion.
The common thread was that natural resources should generate revenues to
translate into growth and development by providing capital and foreign exchange to
overcome key barriers to growth. However, the reality appeared to be the reverse.
Countries with abundant natural resources seemed to perform less well than their

*Paul J. Stevens, an economist and specialist on the Middle East, was educated at Cambridge
University and the School of Oriental and African Studies and has taught at the American Univer
sity of Beirut and the University of Surrey (United Kingdom). In 1993, he joined the University of
Dundee (Scotland), its Center for Energy, Petroleum and Mineral Law and Policy, where he holds
the BP Professorship of Petroleum Policy. The author spent several years as an oil consultant and
continues to consult for companies and government. Professor Stevens has published extensively on
energy economics, the international petroleum industry, economic development issues, and the political
economy of the Gulf. His articles have appeared in The Energy Journal, Energy Policy, International
Energy Analysis, The Journal of Energy and Development, Middle East Economic Survey, Middle
East Insight, and Middle East Journal, among others. He has contributed to or authored Strategic
Position in the Oil Industry (I. B. Tauris for the Emirates Center for Strategic Studies and Research,
1998), Boundaries and Energy: Problems and Prospects (Kluwer Law International, 1998), and En
ergy Economics (2 volumes) in the series The International Library of Critical Writings in Economics
(Edward Elgar, 2000).

The Journal of Energy and Development, Vol. 31, No. 1

Copyright © 2006 by the International Research Center for Energy and Economic Development
(ICEED). All rights reserved.
1

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2 THE JOURNAL OF ENERGY AND DEVELOPMENT

more poorly endowed neighbors. More recently, "resource curse" has

and has attracted a much wider audience than before. The World Bank
forced by non-governmental organizations (NGOs) to consider its role
ects through "the extractive industry review." The more responsible p
mineral corporations have begun to consider their impact on the natio
because of worries over corporate reputation. Financial investors in
are concerned that negative effects could threaten the economics of t
Finally, a number of countries are about to receive large amounts of r
such projects, and there is much debate over how these revenues migh
a positive rather than a negative force.
However, in the literature there are references to nations that alleg
a "curse" and instead received a "blessing."2 For example, M. Ross sta
are exceptions: some states with large extractive industries—like Bots
and Malaysia—have overcome many of the obstacles ... and implemen
pro-poor strategies."3 There are similar references elsewhere to "suc
Botswana,4 Chile,5 Indonesia,6 Malaysia,7 and Norway.8 Other claime
stories include Australia, Canada, and the United States.
This paper examines these resource-rich countries, designated a
suspects." The following section identifies the relevant criteria to de
"curse" or a "blessing." The third portion determines empirically wh
usual suspects" avoided a "curse." The subsequent section presents fou
case studies—Botswana, Chile, Indonesia, and Malaysia—seeking to ex
they did and why. The fifth portion tries to draw policy lessons of value f
facing an influx of revenues from oil, gas, and mineral projects of wh
long list ranging from Angola to the Caspian states, Iraq, and Russia.

The Criteria to Establish the Impact of Oil, Gas, and Mineral Project

Two criteria are considered: what happens to the rest of the traded e
to living standards as the project develops.9
Much of the literature uses per-capita gross domestic product (GDP) t
performance.10 However, a more relevant variable is non-oil-, gas-,
traded GDP since this eventually must sustain the economy. This fits
of "Dutch disease" when it is the non-resource-traded sector that suffe
"traded-economy criterion" is real per-capita growth of agriculture, ma
and services."
There is, of course, no objective basis for what constitutes a good or a b
mance in terms of this criterion. However, to provide a benchmark, t
also are used for geographic regions and income cohorts as defined b
Bank. This gives some idea as to a good or bad performance relative to
"peers."

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 AVOIDING THE RESOURCE CURSE 3

The second criterion concerning standards of living is more difficult to measure.

Obviously, poverty levels and their reduction are key but data are generally of poor
quality. Instead, proxy measures are used—components of the "physical quality of
life index"—infant mortality, life expectancy, and literacy. The Human Development
Index (HDI) from the United Nations Development Program (UNDP) also is used.
An obvious problem is the evaluation of the data on a time-series versus a cross
section basis. How can improvements or deteriorations over time be measured? A
reduction in infant mortality indicates improvement, but if one country's rate fell
from, say, 94 to 52 per thousand over time, is this a better performance than one
which falls from 10 to 6 per thousand? To solve this problem, the paper adopts a
"benchmarking" approach. For each indicator, a simple log equation is estimated
for all countries with per-capita GDP as the independent variable. The equations
are presented in the Appendix. It is then possible to estimate, given a nation's per
capita GDP, what the indicator should be. Comparing this with the actual number
indicates the country's performance. It also is possible to compare performance
by using the HDI at a point in time compared to geographic regions and income
cohorts as benchmarks.

Application of the Criteria to Establish the Impact of Oil, Gas, and Mineral
Projects

The first stage is to identify those countries at risk. Taking the period 1965-1995
at five-year intervals, countries have been picked whose export revenues from fuels
or minerals exceeded 30 percent of merchandise exports in any period. The 55
countries are listed in table 1. The choice of 30 percent is entirely arbitrary.12 At
20 percent there are 66 countries.
Table 2 illustrates the results for non-resource per-capita GDP from 1980 to 2000
for 30 target countries. The lack of target nations simply indicates a lack of relevant
data for the period. The results show the "usual suspects" performed far better than
other target countries and performed well in relation to regional and income bench
marks. For example, Botswana outperformed the Asian "tigers." Chile performed
better that the Latin American region and the upper middle-income countries.
Tables 3,4, and 5 show results for the poverty indicators. For infant mortality, 12
of 51 countries did better than expected; for life expectancy it was 22 of 49 and for
literacy only 7 of 39 did better than expected. The infant mortality results give sup
port to the hypothesis that the "usual suspects" performed better while the majority
of the resource-rich countries did poorly. The only glaring exception is Botswana,
with a poor performance that can be explained largely by HIV-/aids-related prob
lems. Life expectancy results are not convincing either way. The literacy results
suggest very poor performances by most countries. Only Chile among "the usual
suspects" performed better than expected.

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4 THE JOURNAL OF ENERGY AND DEVELOPMENT

Table 1
COUNTRIES/TERRITORIES WHERE OIL, GAS, OR MINERAL EXPORTS EXCEED
30 PERCENT OF MERCHANDISE EXPORTS FOR ANY PERIOD, 1965-1995

Algeria Indonesia Panama

Angola Iran Papua New Guinea

Australia Iraq Peru
Bahrain Jordan Qatar
Bolivia Kiribati Saudi Arabia
Botswana Kuwait Senegal
Brunei Lao (People's Democratic Seychelles
Cameroon Republic of) Sierra Leone
Canada Liberia Suriname
Chile Libya Syria
Colombia Malaysia Togo
Congo (Democratic Republic of) Mauritania Trinidad and Tobago
Congo (Republic of) Mexico Tunisia
Cyprus Morocco United Arab Emirates
Ecuador New Caledonia Venezuela
Egypt Niger Virgin Islands
Gabon Nigeria Yemen
Greenland Norway Zambia
Guyana Oman

Source: The World Bank, World Development Indicators 2002 (Washington, D.C.: World Bank,
2003).

The HDI position in table 6 buttresses the view that "the usual suspects" per
formed well. Norway, Australia, and Canada have done better than the rest of the
Organization for Economic Cooperation and Development (OECD). Chile, Malay
sia, Indonesia, and Botswana outperformed their comparators except for Indonesia
vis-à-vis East Asia-Pacific.
Thus we conclude that the "resource curse" is not an automatic inevitable condi
tion. In some cases, resource projects had a positive impact.

The Case Studies

There is a vast literature on the causes of "resource curse,"13 but how countries
avoided the "curse" has received little attention. The following four case studies of
the "usual suspects" attempt to discern policies that avoided a "curse" and why such
policies were implemented. They are not intended to be comprehensive histories of
each country but rather an attempt to draw out the main actions and motivations.

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 AVOIDING THE RESOURCE CURSE 5

Table 2
NON-RESOURCE PER-CAPITA GROSS DOMESTIC PRODUCT GROWTH BY REGION,
INCOME GROUP, AND SELECTED COUNTRIES, 1980-2000
(in percent)

Region
Region // Income
IncomeGroup
Group/ / Region / Income Group /
Country Country

East Asia & Pacific 212 Latin America & Caribbean 14

Botswana 139 Colombia 12
Malaysia 127 Senegal 5
Indonesia 119 Peru 3
Chile 99 Cameroon 0
South Asia 91 Jordan -5
Egypt 90 Gabon -6
Suriname 72 Venezuela -8
Tunisia 65 Zambia -8
Trinidad and Tobago 60 Sub-Saharan Africa -9
Iran 46 Ecuador -11
Lower middle income 45 Papua New Guinea -17
Seychelles 42 Algeria -17
Low income 39 Togo -23
Upper middle income 37 Nigeria -24
Morocco 23 Niger -31
Mexico 22 Congo (Republic of) -52
Panama 20 Sierra Leone -55

Norway 15

Source: World Bank, World Develop

2003).

Botswana: At the time of independence in 1966, Botswana was extremely

poor.14 However, as the diamond revenues began to grow, national development
plans "were adhered to and instilled fiscal discipline."15 And while much was spent
on social services, there were relatively few "prestige" projects.
The development strategy was to develop the physical and social infrastructure.
Both the finance and development functions were housed in the same ministry.
The currency was then closely linked to the South African rand; thus, as the rand
depreciated during apartheid, the Botswana pula followed. Although during 1981
1989 the nominal pula-rand exchange rate appreciated by 24 percent, differences
in inflation meant depreciation in the real exchange rate.16 In 1972, a Revenue
Stabilization Fund and Public Debt Service Fund was created to smooth revenue
impacts, a process helped by the nature of the agreement with De Beers.17 Also
in 1972 an incomes policy was introduced specifically intended to prevent mining

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6 THE JOURNAL OF ENERGY AND DEVELOPMENT

Table 3
INFANT MORTALITY BY REGION, INCOME GROUP,
AND SELECTED COUNTRIES, 1995"

Region
Region/ Income
/ Income
Group
Group
/ / Region / Income Group /
Country Country

Suriname 0.25 Low income -0.11

Chile 0.17 Guyana -0.11
Malaysia 0.16 Senegal -0.13
Congo (Democratic Rep.). 0.13 Oman -0.14
Norway 0.11 Antigua and Barbuda -0.14
Australia 0.09 Kuwait -0.14

Canada 0.07 Seychelles -0.14

Trinidad and Tobago 0.06 Egypt. -0.16
Cyprus 0.05 Lao (P.D.R.) -0.19
Syria 0.04 Cameroon -0.19
Jordan 0.02 Mauritania -0.20
Nigeria 0.01 United Arab Emirates -0.20
Lower middle income 0.01 Mexico -0.20
East Asia/Pacific 0.00 Morocco -0.20
High income -0.02 Bolivia -0.21
Yemen (Republic of) -0.02 Saudi Arabia -0.21
Togo -0.03 Zambia -0.22
Colombia -0.03 Peru -0.24
Panama -0.03 Sub-Saharan Africa -0.24

Ecuador -0.05 Papua New Guinea -0.25

Tunisia -0.06 L. America/Caribbean -0.25
Iran -0.07 Sierra Leone -0.26
Venezuela -0.07 Middle East/North Africa -0.26

South Asia -0.07 Upper middle income -0.27

Bahrain -0.07 Angola -0.32
Indonesia -0.08 Congo (Republic of). -0.35
Algeria -0.08 Botswana -0.45
Brunei -0.09 Gabon -0.73
Kiribati -0.10
New Caledonia -0.10
Niger -0.11

aWhat is measured is the difference between the estima

variable.
iable.
Sourc
Source: World Bank, World Development Indicators
2003).

wages from increasing general wages. This was driven by concerns over inflation
and aimed at preventing excessive income disparities. Throughout the period, there
was "growing concern with respect to poverty and inequality in the distribution of

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 AVOIDING THE RESOURCE CURSE 7

Table 4
LIFE EXPECTANCY BY REGION, INCOME GROUP,
AND SELECTED COUNTRIES, 1995s

Region
Region / Income
/ Income
Group
Group
/ / Region / Income Group /
Country Country

Suriname
Suriname 0.08
0.08 L.America/Caribbean
L. America/Caribbean 0.01
0.01
Lower
Lower middle
middle
income income 0.05 Oman
0.05 Oman 0.00
0.00
East
EastAsia/Pacific
Asia/Pacific 0.05
0.05
Bolivia
Bolivia 0.00
0.00
Jordan
Jordan 0.05
Yemen 0.05
Yemen (Republic
(Republic of)
of) 0.00
Syria
Syria 0.04 0.04 Canada
Canada 0.00 0.00
Algeria 0.04
Algeria 0.04 Upper
Uppermiddle
middle income
income 0.00
0.00
South
South Asia 0.04Seychelles
Asia 0.04 Seychelles -0.01 -0.01
Panama
Panama 0.04
0.04 Saudi
Saudi Arabia
Arabia -0.01
-0.01
IranIran 0.040.04Australia
Australia -0.01
-0.01
Tunisia
Tunisia 0.040.04
Kuwait
Kuwait -0.01
-0.01
Guyana
Guyana 0.030.03 Bahrain
Bahrain -0.01 -0.01
Chile
Chile 0.03
0.03 Congo
Congo
(Democratic
(DemocraticRep.
Rep. of)
of) -0.02
-0.02
Ecuador
Ecuador 0.03 Brunei
0.03 Brunei -0.02
-0.02

Egypt. 0.03
Egypt. 0.03 United
UnitedArab
Arab Emirates
Emirates -0.02
-0.02
Venezuela
Venezuela 0.03
0.03 High
High income
income -0.02
-0.02
Colombia
Colombia 0.03
0.03Norway
Norway -0.03
-0.03
Mexico
Mexico 0.030.03 Lao
Lao (P.D.R.)
(P.D.R.) -0.03
-0.03
Morocco 0.03
Morocco 0.03 Papua
Papua New
New Guinea
Guinea -0.03
Indonesia
Indonesia 0.02
0.02Mauritania
Mauritania -0.03
-0.03
Trinidad
Trinidad and and Tobago 0.02
Tobago Nigeria
0.02 Nigeria -0.03
-0.03
Low
Lowincome income 0.02
0.02Cameroon
Cameroon -0.04
-0.04
Peru
Peru 0.02
0.02 New
New Caledonia
Caledonia -0.04

Malaysia
Malaysia 0.02 Senegal
0.02 Senegal -0.05
-0.05
Middle
Middle East/North
East/North
Africa
Africa 0.01
0.01
Niger
Niger -0.06
-0.06
Kiribati
Kiribati 0.01 Sub-Saharan
0.01 Sub-Saharan Africa
Africa -0.07
-0.07
Antigua
Antigua andand Barbuda 0.01
Barbuda 0.01
Angola
Angola -0.09
-0.09
Cyprus
Cyprus 0.010.01Zambia
Zambia -0.09 -0.09
Congo (Republic of) -0.10
Gabon -0.12
Botswana -0.13
Sierra Leone -0.16

"What is measured is the difference bet

variable.

Source: World Bank, World Developm

2003).

income and wealth between urban and rural areas."18 Some 55 percent of households
in rural areas were in poverty compared to 30 percent in urban areas.19

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8 THE JOURNAL OF ENERGY AND DEVELOPMENT

Table 5
LITERACY BY REGION, INCOME GROUP,
AND SELECTED COUNTRIES, 1995a

Region
Region/ /Income
Income
Group
Group
/ / Region / Income Group /
Country Country

Guyana
Guyana 0.96
0.96 South
South Asia -0.26
Asia -0.26
Chile
Chile 0.16 Sub-Saharan
0.16 Sub-Saharan
Africa
Africa
-0.30
-0.30
Ecuador
Ecuador 0.09
0.09 Syria
Syria -0.30
-0.30
Cyprus
Cyprus 0.03 Malaysia
0.03 Malaysia -0.31
-0.31
Colombia
Colombia 0.03
0.03
Lao
Lao(P.D.R.)
(P.D.R.) -0.33
-0.33
Congo,
Congo, Dem. Rep. Dem.0.03 Iran
Rep. 0.03 -0.34
Iran -0.34
Trinidad
Trinidad 0.02 Niger
and Tobago and Tobago -0.36
0.02 Niger -0.36
Zambia
Zambia 0.00 Papua
0.00 Papua
New New
Guinea
Guinea-0.39
-0.39
Indonesia
Indonesia -0.01
-0.01Mauritania
Mauritania -0.39
-0.39
Panama
Panama -0.01
-0.01Algeria
Algeria -0.46
-0.46
Bolivia
Bolivia -0.01 Bahrain
-0.01 Bahrain -0.47
-0.47
Venezuela
Venezuela -0.03
-0.03 Senegal
Senegal -0.47
Jordan
Jordan -0.03
-0.03Brunei
Brunei -0.48
-0.48
East
EastAsia/Pacific
Asia/Pacific
-0.03-0.03
Egypt
Egypt
-0.48
-0.48
Mexico
Mexico -0.06
-0.06 Tunisia -0.50
Tunisia -0.50
Peru
Peru -0.06
-0.06
Botswana
Botswana-0.50
-0.50
Lower
Lower middle
middle
income income-0.06
-0.06 Middle
Middle East/North
East/North Africa
Africa -0.54
Nigeria
Nigeria -0.11
-0.11 Morocco -0.59
Morocco -0.59
Cameroon
Cameroon -0.15
-0.15
Saudi
SaudiArabia
Arabia -0.68
-0.68

Congo
Congo (Republic of) -0.19
(Republic Kuwait
of) -0.19 -0.74
Kuwait -0.74
Upper
Upper middle
middle income income
-0.20 -0.20
Oman Oman -0.74
-0.74
L.
L.America/Caribbean
America/Caribbean-0.20
-0.20
United
United
Arab
ArabEmirates
Emirates -0.89
-0.89
Togo
Togo -0.21
-0.21
Low
Lowincomeincome -0.22
-0.22

Yemen
Yemen (Republic
(Republic -0.26
of) of) -0.26

"What is measured is the difference between the estimated and the actual log of the depend
variable.

Source: World Bank, World Development Indicators 2002 (Washington, D.C.: World B
2003).

It was almost as though the government was deliberately constraining freedom

of action to limit temptation. Linkage to the rand sacrificed monetary policy inde
pendence. Mineral revenues as a percentage of revenues and grants rose steadily
from 25 percent in fiscal 1982/1983 to a peak of 59 percent in fiscal 1988/1989,
thereafter averaging around 49 percent with a range of 40 to 58 percent. It has been
argued that stability of the rent stream was an important explanation of success.20
Also helping was the fact that expenditure was constrained because of capacity
constraints in the domestic economy. However, at the same time, an economic
environment was created that was "conducive to private investment and promotes
market-orientated sustainable development."21

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 AVOIDING THE RESOURCE CURSE 9

Table 6
HUMAN DEVELOPMENT INDEX RANKING, 1999

Norway 0.939
0.939
Australia 0.936
0.936
Canada 0.936
0.936

High income (OECD)"

(OECD)a 0.926
0.926
Chile 0.825
0.825

Malaysia 0.774
Venezuela 0.765
Latin America and Caribbean 0.76

Upper middle income 0.74

East Asia and Pacific 0.719
Indonesia 0.677

High income (oil exporters) 0.648

Botswana 0.577
Low income 0.549
Sub-Saharan Africa 0.467

Nigeria 0.455

aOECD = members of the Organization for Economic Cooperation and Development.

Source: United Nations Development Program, Human Development Report 2001 (New York and
Oxford: Oxford University Press, 2001).

To be sure, there was a contraction in agriculture—the main non-mineral trad

able sector—from 37 percent of non-mining GDP in 1972 to 5.9 percent in 1996.22
This reflected Botswana's "meager"23 agricultural resources plus severe drought
conditions in 1982-1983 and 1987-1988, which rather "confused" "Dutch disease"
effects.24

Thus, Botswana appeared to pursue the right macroeconomic policy to avoid

economic overheating and exchange-rate appreciation, although it may be too early
to argue total success. Mineral rents leveled in the 1990s and attempts to increase
public-sector jobs began to look unsustainable as urban unemployment, always a
problem, began to rise.25 Also HIV and aids present serious challenges in terms of
poverty and well-being.
The interesting question is why Botswana behaved in the way it did? There
were a number of initial advantages. The population was "small and largely ho
mogeneous and cohesive."26 The country also was used to drought and therefore
saw prudence in saving for the proverbial "dry day" as a natural state. Both the
political and bureaucratic elites acquired a "development orientation"27 exhibiting
a classic characteristic of a "developmental state."28 At the same time, Botswana's
consensual democracy showed a high level of transparency in public revenue ac
quisition and disposal, and corruption remained well below levels common in many

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10 THE JOURNAL OF ENERGY AND DEVELOPMENT

other developing countries.29 Throughout the period, there were serious at

manage corruption, in 1994 a Directorate of Corruption and Economi
created to good effect.30
Another important element was expertise among senior bureau
contained a number of expatriates, including a strong element of very
South Africans denied alternative outlets at home by apartheid. In the
of independence, most educated people worked as civil servants and th
crats worked in close coordination with political leaders."31 This burea
"fairly small and efficient" and was allowed "a large degree of auton
leadership had "the trust and unquestioning support of the people.. .."3
there was a strong civil society.34 Botswana became a de facto one party st
ballot box.35 Ruling political elites were strongly involved in livestock
which helped mute the urban bias common in many other developing c
reduced poverty as resources moved to rural areas.36
J. Cobbe (citing A. I. Samatar) argues that the key to success was the
the class structure and the way the emerging dominant group used power
state capacity and the economy but, at the same time, allowed the "tech
insulated professional civil service" to get on with the economic policy
this could be argued to be a case of "luck and the presence of the rig
ties in the right places at the right times."38 Another source argues t
doubly blessed.39 It maintained its "hegemonic continuity" during the
independence and then received large revenues that created discretion t
direction and scope of economic change without serious opposition.40
theories of market efficiency were adopted as the main ideology and i
national interest with their own. In short, Botswana was a classic exa
"developmental state."

Chile: In 1973, the Chilean economy was highly distorted after a lon
state intervention.41 Prior to 1975, "Dutch disease" consequences wer
by protectionism, which was unsustainable. In addition, a sharp incr
wages in the early 1970s introduced further distortions and fueled seri
Yet from 1986 to 1999, Chile enjoyed the longest, strongest, and most
of growth in its history, finally conquering the high levels of inflatio
driven by growth in the export sector after the late 1970s. Exports in
10 percent of GDP to 35 percent.42 Yet this was when policies were "u
inconsistent over time"43 and often were far from the neo-liberal econ
associated with the "Washington consensus." After relatively success
measures between 1973 and 1978, including public spending reduction
reform, arguably the "big bang" reform program of 1978-1982 proved
allowed exchange-rate appreciation to break the stubbornly high leve
tion. This led to a capital inflow that triggered a balance-of-payments
threatened the domestic financial system.

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 AVOIDING THE RESOURCE CURSE 11

Several factors explain eventual success. A key contributor was the exchange
rate policy after the 1981-1982 crisis. Between 1982 and 1988, the real exchange
rate depreciated by 80 percent, which goes a long way to explain export strength.
Although "Dutch disease" effects contracted traditional agriculture, new high-value
agricultural exports spearheaded a more general export revival. After 1982, capi
tal market opening was linked to trade liberalization plus a stabilization policy to
defeat inflation.44 A Mineral Revenue Stabilization Fund was created to insulate
the economy from fluctuating mineral revenues driven by price volatility. In addi
tion, after 1985 strict controls over short-term capital movements were introduced
to manage "hot money." Much of the growth also was dependent on indigenous
rather than foreign capital, driven post-1975 by the increasing availability of do
mestic credit. Furthermore, domestic entrepreneurship flourished under Pinochet
because the state got the economic environment "right." The government "behaved
like a developmental state ... it was state policy as well as ideology that gave rise
to a new generation of entrepreneurs."45 In the past, Chile's industrial bourgeoisie
were not noted for dynamism but rather for short termism and tendencies to lavish
consumption, yet it was this group that drove the "miracle."46 Furthermore, "a cer
tain amount of 'state developmentalism' was indeed part of the explanation for the
growth of entrepreneurship...."47 This "midwifery role" by the state was reinforced
by ideological practices from an autonomous bureaucracy well versed in the ideol
ogy of the "Washington consensus"—the so-called "Chicago boys."48 Finally, from
1973 the military government was "uniquely independent of either working groups
or industrial interests, so that it came to function as a developmental state."49 This
independence is crucially important to stop a "developmental state" from drifting
into a "predatory state."50
Chilean society was characterized by an in-built frugality going back to the
Basque immigrants of the 18th century.51 However, in more recent times inflation
tended to mitigate against conventional savings; hence, there was a tendency for
families to invest in education. Once the economy began to grow, the process was
reinforced by access to good quality labor.

Indonesia: During 1950-1965, the economy failed because it was incapable of

funding public expenditure growth without incurring an inflationary penalty.52 In
1965, a coup brought Suharto to power, triggering a long period of "developmental
authoritarianism."53 The new regime was "able to insulate themselves from pressures
from powerful vested interests and pursue policies which have given top priority to
the achievement of rapid rates of economic growth."54 Following the first oil shock
of 1973-1974, the government spent money domestically, thus aggravating inflation
and seriously damaging Indonesia's competitiveness.55 This "Dutch disease" was
managed in the wrong way by protecting domestic non-oil-traded goods, a solution
common to other oil-exporting countries. Although 1978 saw devaluation, inflation
prevented it from impacting the real exchange rate. In addition, "the oil boom years

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12 THE JOURNAL OF ENERGY AND DEVELOPMENT

saw a marked retreat from the liberal economic policies of the early
Period."56 The result was growing domination by the public sector. Ho
ing the 1970s, Suharto directed considerable emphasis to agriculture,
rise to strong growth in the 1970s and significant reduction in poverty lev
rural areas received resources."
Realizing the failure of these policies, during 1982-1986, a new set
emerged that aimed at microeconomic reform. A strict policy was p
on expenditure readjustment and exchange-rate realignment. The cons
agement of depreciation plus insulating the economy from oil revenu
surpluses was a major contribution to avoiding "Dutch disease."58 In ad
1985 policy expanded non-oil exports, helped in 1986 by a large deva
Despite these attempted micro-reforms, the public sector remained a k
the economy in the late 1980s accounting for 30 percent of GDP and
of nonagricultural GDP.60 In general, while Indonesia's macroeconom
were successful, its attempts at micro-reforms were less so. J. Temp
Indonesia's positive experience was influenced by luck.61 The oil boom
coincided with the green revolution promoting agricultural growth. T
the national oil company, Pertamina, in 1975 ruled out wasting revenu
sector. Finally, Indonesia's location among the booming Asian "tigers
ready-made export market.
As with the other case studies, the key question was why policies we
Suharto appointed a group of five economic advisors—the so-calle
mafia"—which was extremely influential in directing policy. The orie
toward market-based solutions. Thus, "the more technocratic ministri
view the role of the state as that of facilitator of market led economic dev
By 1990, a large constituency in favor of market liberalization had d
donesia had all the characteristics of a "developmental state." It was au
but promoted development as its source of legitimacy while suppress
opposition. Although nominally democratic, Suharto effectively
power. Always lurking was the potential to turn to a predatory state
of powerful vested interests who wish to use the powerful state to bui
empire."63 A key constraint was the role of the army, vehemently anti-co
therefore natural supporters for market-led policies. It also tended to
active in domestic politics.64 However, corruption remained rife in th
the government veered between development and prédation.

Malaysia: Economic success here was the result of the "new econom
(NEP) that operated during 1970-1990. This was an eclectic mix of "int
policies as well as market coordination," moving away from import su
Key was the relatively high savings rate. The naturally frugal nature o
was encouraged by compulsory saving schemes for employees that pro
investment, supplemented by capital inflows from abroad. Much went

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 AVOIDING THE RESOURCE CURSE 13

investment on social overhead capital.66 This mixture of intervention and markets

made "export orientated industrialization a success."67 In particular, subsidy ele
ments in infrastructure and tax advantages were key ingredients to attract foreign
investment that formed the backbone of the industrialization drive. The share of
manufacturing in GDP rose from 3 percent in 1970 to 33 percent in 1995 while
manufacturing exports rose from 11.9 percent of merchandise exports in 1970 to
80 percent over the same period.68
A key advantage was the fact that the country's primary exports were highly
diversified, including tin and rubber but also oil and gas. Indeed, a central pillar of
policy was to promote diversification.69 This insulated the economy from individual
commodity price shocks.70 However, it was not all plain sailing. The push for trade
liberalization in the 1970s was successful. The "big push" into heavy and chemical
industries in the first half of the 1980s, driven largely by public-sector companies
under protectionist measures, was not a success. By the mid-1980s, the policy
moved back to greater openness. The emphasis was again placed on development
of the private sector, underpinned by a privatization program.71 The source of the
NEP was the so-called "backroom boys" comprised of a mixture of "bureaucrats,
academics and technocrats."72
Malaysia was characterized as a strong state able to control opposition to poli
cies while ensuring "political stability and collaboration in solving theft and other
problems."73 As with Indonesia, the potential for prédation remained a constant
threat, and there was "the growth of unproductive cronyism."74 However, the ruling
elites accepted the "plural society model" as the basis for the state. The constitution
was seen as a "social contract" between different groups.75 In addition, the deliber
ate policy of improving the position of the indigenous Bumiputera contributed to
reduced poverty and improved welfare since this group dominated in the rural areas
and constituted 55 percent of the population.76 As with Botswana and Indonesia,
significant resources found their way into rural areas.

The Policy Lessons

Two questions are central. What was done in terms of policy and, more impor
tantly, why was any particular policy followed? A key point is that none of the
"usual suspects" got it all right, all of the time. There were frequent policy direction
failures; for example, the heavy industry drive in Malaysia in the early 1980s, the
over-expansion of public employment in Botswana, the protectionist response in
Indonesia in the 1970s, and the "big bang" reform program of 1978-1982 in Chile.
However, there was a willingness to learn from mistakes and adopt policies to rec
tify errors. Additionally, the countries did not simply adopt conventional solutions
associated with the "Washington consensus." Their responses were more complex.
Government intervened extensively; revenues were spent.

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14 THE JOURNAL OF ENERGY AND DEVELOPMENT

Finally, while there were commonalities, there also were individu

There was no "one-policy-fits-all" solution. However, certain common
identified. In all cases, fiscal prudence tended to dominate. The rest of
was insulated to a degree from the inflow of revenues. This was ofte
economies were sufficiently diversified to overcome revenue volatilit
because of policy, often involving stabilization funds and/or linking
flows into the overall budget strategy to provide some degree of neu
some cases, the nature of the agreements determining government re
When money was spent, it went to productive activities. Conspicuous
and what would be called gigantic-mania were constrained if not enti
Much of the revenue trickled down to the private sector, boosting
investment. Should revenue trickle-down come from rent seeking or
if invested domestically it will do much for economic growth even if
for the distribution of income. It is when rent and the fruits of corr
to politicians and bureaucrats that the problems begin because these r
dissipated in consumption or overseas bank accounts. In all cases, ex
policies (most of the time) avoided exchange appreciation, and there w
depreciation as a result of deliberate policy despite the fact that depre
to be unpopular because of rising import prices.
Moreover, there were commonalities with respect to development s
all cases, governments intervened but with clear intentions. The inte
geared toward developing market mechanisms with a bias to an expo
tion. It was directed at the promotion and encouragement of the pr
which resulted in strong levels of private investment. The policy w
trade openness, which encouraged competition in domestic activities.
(and again, not all of the time), the policy avoided import-substitutio
as the basis for industrialization. Finally, in many cases, the strategy
orientation to promote rural sectors. Much of the resources from th
mineral exports found their way into rural pockets. Apart from any othe
this helped address poverty as, in most cases, the majority of the pop
in rural areas.77
The issue of why certain policies were adopted is more complex to
The case studies cover different countries. Population differs: Indon
had 178 million compared to Botswana's 1.3 million. Indonesia's a
million square kilometers compares to Malaysia's 0.33 million square
Botswana and Chile had homogeneous populations while Indonesia an
had a great multiplicity of ethnic groupings. Nor is there commonality of
government accountability, or transparency.
However, as with the policies pursued, there are commonalities to ex
taken. Arguably, all four had elements of frugality in the national ps
long-lived governments that, for the most part, were extremely strong e
voting support or military control. They also had highly competent burea

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 AVOIDING THE RESOURCE CURSE 15

versed in the requirements of economic policy, although this begs the question of
why these technocrats were allowed to get on with their jobs and pursue what were
often unpopular policies.
The answer to the last question lies in the fact that all four were "developmental
states," and it is this element that provides a key part of the explanation.78 A "devel
opmental state" has two components: ideological and structural. The ideological
component is when the ruling elite adopts "developmentalism" as the prime objective
and legitimacy is derived from the ability to deliver development, implying growth
and poverty reduction. The elite then establishes an ideological hegemony—via
the ballot box or less desirable means—over society. The structural component
involves the capacity to implement policies "sagaciously and effectively" to deliver
development.79 Apart from technical capabilities, this also requires a strong state to
resist pressure from powerful, short-sighted private interests and/or a "social anchor"
to restrain temptation to use its autonomy in a predatory manner. The difference
between "developmental" and "predatory" is often very thin, as Indonesia clearly
shows.

Key to the analysis is the realization that "developmental states" can still fail.80
While the "right" ideology and limits to prédation might be in place, the capacity
of the state to implement effective policies might not be enough to manage certain
problems. Such problems may be driven by exogenous shocks, mistakes, or just
good old-fashioned bad luck. The last point is especially important when it is
remembered that much of the literature on the four cases studies does suggest that
the countries were "lucky."

Conclusions

If a state is "developmental," the previous analysis argues a "curse" can be

avoided. Companies implementing the project, together with international financial
institutions, can develop the technical capacity to implement policies to promote
development. It is possible as well that the development of the project can be slowed
to allow time to develop capacity to manage challenges.81
However, if the state is "predatory," developing the project almost certainly will
promote "resource curse," raising the question of whether investment should take
place. One option is not to invest. The weakness with that is simply that some
one else will. Thus, if responsible companies withdraw from certain countries,
irresponsible firms will be more than willing to fill the gap. Furthermore, they
will worsen the consequent "curse," if only because such companies are likely to
aggravate problems of corruption. Another option is to persuade the ruling elite
into the "right" ideology, but this smacks of interference in a nation's sovereignty
and begs a key question as to what is the "right" ideology. Another solution is to
try and strengthen civil society in the country in an effort to constrain attempts at

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16 THE JOURNAL OF ENERGY AND DEVELOPMENT

prédation by the ruling elite. Of course, this assumes that the ruling
tolerate such a civil society. It also, again, smacks of unacceptable inte
begs the question of what "strengthening civil society" actually means
other than simply throwing more money at NGOs.82
These are not simple and straightforward issues. They are complex
and highly contentious, but the fact remains they are issues that must
somehow by all those involved.

NOTES

'P. J. Stevens, "Resource Impact: Curse or Blessing? A Literature Survey," Journal of Energy
Literature, June 2003.
2Ibid.

3M. Ross, "Extractive Sectors and the Poor," Oxfam America, 2001, available at http://www.
oxfamamerica.org/eirexport/index.html, p. 16.
4J. Cobbe, Review of A. I. Samatar, An African Miracle: State and Class Leadership and Colonial
Legacy in Botswana Development (Portsmouth, New Hampshire: Heinemann, 1998), in International
Journal of African Historical Studies, vol. 32, no. 1 (1999); K. R. Hope, "Development Policy and
Economic Performance in Botswana: Lessons for the Transition Economies in sub-Saharan Africa,"
Journal of International Development, June 1998; R. Love, "Drought, Dutch Disease and Controlled
Transition in Botswana Agriculture," Journal of Southern African Studies, March 1994; M. Sarraf and
M. Jiwanji, "Beating the Resource Curse: The Case of Botswana," Environmental Economics Series,
paper no. 83 (2001); "The Political Context of Botswana's Development Performance," Journal of
Southern African Studies, December 1996; C. B. Hill, "Managing Commodity Booms in Botswana,"
World Development, September 1991; C. Hill and N. Mokgethi, "Botswana: Macroeconomics Man
agement of Commodity Booms, 1975-1986," in Successful Development in Africa (Washington, D.C.:
The World Bank, Economic Development Institute, 1989).
5D. E. Hojman, "The Political Economy of Chile's Fast Growth: An Olsonian Interpretation,"
Public Choice, April 2002; R. Mikesell, "Explaining the Resource Curse, with Special Reference to
Mineral-Exporting Countries," Resources Policy, December 1997; R. A. Schurman, "Chile's New
Entrepreneurs and the 'Economic Miracle': The Invisible Hand or a Hand from the State?," Studies
in Comparative International Development, September 1996.
6A. Booth, "The State and the Economy in Indonesia in the Nineteenth and Twentieth Century,"
in The New Institutional Economics and Third World Development, eds. J. Harris, J. Hunter, and
C.M. Lewis (London: Routledge, 1995); J. Temple, "Growing into Trouble: Indonesia after 1966,"
unpublished paper, Department of Economics, University of Bristol (United Kingdom), August 15,
2001; N. Usui, "Policy Adjustments to the Oil Boom and Their Evaluation: The Dutch Disease in
Indonesia," World Development, May 1996; N. Usui, "Dutch Disease and Policy Adjustments to the
Oil Boom: A Comparative Study of Indonesia and Mexico," Resources Policy, December 1997.
7R. Rasiah and I. Shari, "Market, Government and Malaysia's New Economic Policy," Cambridge
Journal of Economics, January 2001; R. P. Royan, "From Primary Production to Resource-Based
Industrialization in Malaysia," in Development Policies in Natural Resource Economies, eds. J.
Mayer, B. Chambers, and A. Farooq (Cheltenham, United Kingdom: Edward Elgar in association with
the United Nations Conference on Trade and Development, 1999); A. B. Shamsul, "The Economic
Dimension of Malay Nationalism: The Socio-Historical roots of the New Economic Policy and Its
Contemporary Implications," The Developing Economies, September 1997.

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 AVOIDING THE RESOURCE CURSE 17

8G. Wright and J. Czelutsa, "Resource-Based Economic Growth

at the 2002 World Congress of Environmental and Resource E
stanford.edu/~czelutsa/wrightgav.pdf, accessed January 20, 200
'"Resource curse" is often defined in a much wider way to inc
damage, human rights abuse, and greater internal conflict. M.
on the economic dimension.

,0R. Auty, "Resource-Based Industrialisation and Country

Tobago," Geoforum, August-November 1986, and Sustaining D
The Resource Curse Thesis" (London: Routledge, 1993); R. Au
Economic Development (Oxford: Oxford University Press, 2001
History of Latin America since Independence, Cambridge Lat
(Cambridge, United Kingdom: Cambridge University Press, 1
cal Economy of Poverty, Equity and Growth (Oxford: Clarendon
Model of Development," in Liberalization in the Process of Econ
and K. Kim (Berkeley: University of California Press, 1991); J.
Resource Abundance and Economic Growth, Working paper n
National Bureau of Economic Research, 1995); J. D. Sachs and
Abundance and Economic Growth," paper, Cambridge, Massac
for International Development and Harvard Institute for Intern
and A. M. Warner, "The Big Push, Natural Resource Booms an
sachusetts, Harvard University, January 1998.
"In the World Bank development indicators, agriculture is d
facturing 15-37, and services 50-99. This is referred to in the te
domestic product, although it also excludes ISIC Divisions 38-4
plus construction).
12For example, G. T. Nankani, Development Problems of M
Working Paper no. 354 (Washington, D.C.: World Bank, 1979),
as the cut-off point.
I3P. J. Stevens, op. cit.
I4M. D. Modise, "Managing Mineral Revenues in Botswana,"
Resource Economies.

l5Ibid., p. 88.
I6R. Love, op. cit.
,7R. Auty, Resource Abundance and Economic Development.
18K.R. Hope, op. cit., p. 543.
'"Ibid.

20R. Auty, Resource Abundance and Economic Development.

21K.R. Hope, op. cit., p. 540.
22R. Auty, Resource Abundance and Economic Development.
23Ibid„ p. 83
24R. Love, op. cit.
25Ibid.

26M. D. Modise, op. cit., p. 95.

27B. Tsie, op. cit., p. 601.
28The concept of "developmental states" is discussed in greater detail in the fifth section of this
paper (The Policy Lessons).
29R. Auty, Resource Abundance and Economic Development.

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 18 THE JOURNAL OF ENERGY AND DEVELOPMENT

30K. R. Hope, op. cit., p. 543.

3IM. D. Modise, op. cit., p. 88.
32Ibid„ p. 95.
33Ibid.

34K .R. Hope, op. cit.

35B. Tsie, op. cit.
36R. Love, op. cit.
"J. Cobbe, op. cit., p. 131.
38Ibid.

39R. Love, op. cit.

40Ibid., p. 83.
41R. Auty, "The Transition from Rent-Driven Growth to Skill-Driven Growth: Recent Experience
of Five Mineral Economies," in Development Policies in Natural Resource Economies.
42E. Aninat, "Chile in the 1990s: Embracing Development Opportunities," Finance and Develop
ment, March 2000.

43R. A. Schurman, op. cit., p. 86.

44R. Auty, "The Transition from Rent-Driven Growth to Skill-Driven Growth: Recent Experience
of Five Mineral Economies."

45R. A. Schurman, op cit., p. 83.

46Ibid.

47Ibid., p. 87.
48D. E. Hojman, op. cit.
49R. Auty, "The Transition from Rent-Driven Growth to Skill-Driven Growth: Recent Experience
of Five Mineral Economies," p. 70.
50See the fifth section of this paper (The Policy Lessons) for further discussion.
5ID. E. Hojman, op. cit.
52A. Booth, op. cit.
"Ibid., p. 287.
54Ibid.

55P. G. Warr, "Indonesia's Other Dutch Disease: Economic Effects of the Petroleum Boom," in
Natural Resources and the Macroeconomy, eds. J. P. Neary and S. van Wijnbergen (Cambridge, Mas
sachusetts: The MIT Press, 1986).
56A. Booth, op. cit., p. 300.
57J. Temple, op. cit.
58N. Usui, "Policy Adjustments to the Oil Boom and Their Evaluation: The Dutch Disease in
Indonesia" and "Dutch Disease and Policy Adjustments to the Oil Boom: A Comparative Study of
Indonesia and Mexico."

S9A. Booth, op. cit.

60J. Temple, op. cit.
6lIbid.

62A. Booth, op. cit., p. 303.

63Ibid., p. 304.
64P. Barnes, Indonesia: The Political Economy of Energy (Oxford: Oxford University Press,
1995).
65R. Rasiah and I. Shari, op. cit.

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 AVOIDING THE RESOURCE CURSE 19

66M. Z. Abidin, "Competitive Industrialization with Natur

Resource Abundance and Economic Development.
67Ibid., p. 58.
68R. R Royan, "From Primary Production to Resource-Bas
Development Policies in Natural Resource Economies.
69Ibid.

70M. Z. Abidin, op. cit.

71Ibid.

72A. B. Shamsul, op. cit., p. 251.

73R. Rasiah and I. Shari, op. cit., p. 67.
74Ibid., p. 58.
75A. B. Shamsul, op. cit., p. 243.
76M. Z. Abidin, op. cit.
77in 1990, according to World Bank data, the percentage of population in rural areas was 72 percent
for Botswana, 69 percent for Indonesia, and 57 percent for Malaysia. Only in Chile did the non-rural
population dominate with 86 percent in urban areas.
78The following draws heavily on T. Mkandawire, "Thinking about Developmental States in Africa,"
Cambridge Journal of Economics, May 2001. See also R. Auty and A. Gelb, "Political Economy of
Resource Abundant States," in Resource Abundance and Economic Development and D. Lai and H.
Myint, op. cit.
79T. Mkandawire, op. cit., p. 120.
""Otherwise, the concept is a tautological hypothesis, i.e., a "developmental state" is a state that
develops!
81 At first sight, this appears unattractive commercially since delay reduces the present value of
revenue flows. However, if speedy development induces a bad attack of "resource curse," this ulti
mately could threaten the viability of the project and hence the company's investment.
82It also is controversial since some authors view a weak civil society as a feature of "developmental
states" because this strengthens the ruling elite, allowing it to impose its ideological hegemony. See,
for example, A. Leftwich, "Bringing Politics Back In: Towards a Model of the Developmental State,"
Journal of Development Studies, February 1995.

Appendix

The Data

Except where specified, all the data used in this paper have been drawn from the World Deve
ment Indicators of the World Bank. The 2001 CD-ROM has been used together with the print
online series for 2002.

Export Data: This covers "fuel exports as a percentage of merchandise exports" and "ores
metals exports as a percentage of merchandise exports." The data have been taken at five-year interv
starting in 1965 up to 1995.

GDP Data: Per-capita GDP at constant 1995 dollars is taken converted at official exchange rate
Also used is the value added in agriculture, manufacturing, and services as a percentage of

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20 THE JOURNAL OF ENERGY AND DEVELOPMENT

Unfortunately, the GDP data of the Organization for Economic Cooperation

are extremely poor in the World Development Indicators. Thus, for Norway
taken from Statistics Norway, Annual Statistical Yearbook (Oslo: Kongsvin

Infant Mortality: Infant mortality is per 1,000 live births for 1995. The eq

IMLOG = 3.2947 - 0.56729 GDPLOG

SE 0.078126 0.023315
t-ratio 42.1716 -24.3310

R-squared =0.77285

Life Expectancy: Life expectancy is

LELOG = 1.5186 + 0.08839 GDPLOG

SE 0.018474 0.0055058
t-ratio 82.2008 16.0541

R-squared =0.59975

Literacy: The literacy rate is the adult total (percentage of people aged 15 and above) for 1995.
The equation for all countries is

ILLLOG = 2.7913 - 0.52639 GDPLOG

SE 0.24487 0.077263
t-ratio 11.3992 -6.8129

R-squared =0.76356

Human Development Indices (HDI)

velopment Program.

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