Africa's Resource Curse - What Is the Resource Curse and Its Impact on Sub-Saharan Africa?

Africa's Resource Curse

What is the Resource Curse and its Impact on Sub-Saharan Africa?

Primary commodities or natural resources should actually help the countries to grow, but from

a long-term perspective the resource curse thesis says that countries rich in natural resources

have less economic growth than countries without an abundance of natural resources

(Humphreys, Sachs, Stiglitz 2007). This thesis was already stated by Sachs and Warner

(1997), who say that there is a correlation between the share of natural resource exports in

GDP and growth. If the initial share of resource revenues in GDP increases by 10 percent to

20 percent, Sachs and Warner predict a decline in growth by 0,33 percent points per annum.

However, natural resources do not necessarily result in a curse and less economic growth, it

can also be a blessing and help low-income countries to climb up the income ladder. About 44

percent of all Sub-Saharan African countries have an abundance of natural resources in

average per capita, and in addition Africa's export share of primary commodities in GDP

account for 9 percent and this is the third highest share in the world, only the Middle East and

East Asia have higher shares (Jones 2008; Collier and Gunning 1999).

Why Resource Rich Countries Fail to Grow

The failure to grow of most resource-rich African countries has several reasons. One major

side-effect of the abundance of natural resources is an increase in prices for other export

goods such as labor-intensive manufactures or services, which results in the country no longer

retaining a competitive position in exporting these goods and services. This effect is called the

'Dutch disease,' the currency's value is increased through an increased demand of the local

currency caused by exports of natural resources. The problem of the 'Dutch disease' is also

one of the major challenges which aid agencies are facing, because the inflow of aid as

foreign exchange automatically increases the demand of the local currency and strengthens it

in comparison to other currencies. The effects of the 'Dutch disease' are seen can be seen in

the case of Nigeria during oil boom in the 1970s. Nigeria's share of oil revenues in the GDP

rapidly went up, and simultaneously there was a rise in the prices of the agricultural export

goods such as peanuts and cocoa. Even if these sectors had not a very large growth potential,

they lost its value in the domestic market and thus the production collapsed. From another

perspective the 'Dutch disease' also interrupts the terms of trade of a country. Normally

imports are the incentives for export and in a functioning economic system imports are

financed through exports. However, in resource-rich countries the predominant source for

foreign exchange are natural resources, export goods and services domestically loose value

and cannot be traded internationally (Collier 2008).

Another big problem of the abundance of primary commodities is corruption and bribery that

can accompany it. Countries with instable or deficient political systems provide a platform for

rent-seeking activities, where the country's leading people can deploy the resource rents for

their own wealth instead of using them for investing into public services to foster

development. The investment decisions of governments are often determined by the networks

and linkages of the leading people. Therefore, the decision makers in the governments spend

the resource surpluses on sectors, where they own shares and directly benefit from the

revenues. Corruption and misleading policies as result of resource abundance don't only occur

in autocracies, but autocracies are often induced by the endowment of resources.

In the context of the resource curse the debatable characteristic of democracies is the electoral

competition, which is in low-income countries and in most of SSA carried out without

political restraints and checks and balances. This unrestrained political competition is often

used by the leading parties to exploit surpluses of the resources for patronage, in terms of

buying their votes or regional community leaders, who the people in ethnic communities

follow due to their little objective information. The outcome is that the leading parties'

intentions are focusing on the security of the next elections and not on the provision of an

improved public sector. However, democracies at large