Escaping the Resource Curse

Initiative for Policy Dialogue at Columbia: Challenges in Development and Globalization

by Macartan Humphreys (editor)

The wealth derived from natural resources can have a tremendous impact on the economics and politics of producing countries. In the last quarter century, we have seen the surprising and sobering consequences of this wealth, producing what is now known as the resource curse. Countries with large endowments of natural resources, such as oil and gas, often do worse than their poorer neighbors. Their resource wealth frequently leads to lower growth rates, greater volatility, more corruption, and, in extreme cases, devastating civil wars.



In this volume, leading economists, lawyers, and political scientists address the fundamental channels generated by this wealth and examine the major decisions a country must make when faced with an abundance of a natural resource. They identify such problems as asymmetric bargaining power, limited access to information, the failure to engage in long-term planning, weak institutional structures, and missing mechanisms of accountability. They also provide a series of solutions, including recommendations for contracting with oil companies and allocating revenue; guidelines for negotiators; models for optimal auctions; and strategies to strengthen state-society linkages and public accountability.

The contributors show that solutions to the resource curse do exist; yet, institutional innovations are necessary to align the incentives of key domestic and international actors, and this requires fundamental political changes and much greater levels of transparency than currently exist. It is becoming increasingly clear that past policies have not provided the benefits they promised. Escaping the Resource Curse lays out a path for radically improving the management of the world's natural resources.

Genres: Economics

Kindle Edition

First published June 1, 2007

Reviews

[Andrew · Rating 4 out of 5]

Escaping the Resource Curse, by a variety of authors including Joseph Stiglitz and Jeffrey D. Sachs, is an interesting look at the "Resource Curse" with special attention to oil. It takes a long look at the processes of oil production in a nation state, and how these processes can reduce potential incomes for the state, whether from royalties, taxation, production sharing, outright sale, or a combination.

This book goes quite in depth with macroeconomic principles, to a point I struggled to follow. Even so, the ideas in here are very interesting, and open ones mind to the complex process of resource exploitation, and why issues such as income inequality, Dutch Disease, overexploitation, and so on, occur. The book looks at the various types of oil contracts states sign with oil companies, from Royalty/Taxation contracts, where states charge a royalty (1/6 oftentimes) and double tax, 60% on production and 30% corporate tax, for example. This compares to Production sharing contracts, where the state directly splits oil production income with the state, often 60/40 for the state. A final contract type is a Service Agreement, where the state owns the oil constantly, and all revenues go to the state for saleable resources (this is because the oil company is nationalized). These contracts work in junction with state, private, and publically owned companies and resources. They also differ on the point the state owns the resource. Sometimes the company owns the resource after the block is auctioned. Sometimes the state, sometimes a combination.

They go in depth on the auctioning process as well. This is how oil companies compete for contracts on blocks of land, for exploration, and exploitation. These auctions can take many complex forms, and can be open or closed ballot, public or private, beauty contest or highest bidder. The various forms of auction are important for reducing corruption in the industry, avoiding agency issues, and getting the best contractual return for the state, while offering the least amount of damages socially and environmentally. Clearly, they are very complex, and the author of this section argues that certain forms of auction work better in certain income brackets, and depending on whether blocks are wildcat, downstream or developmental.

The book then goes in for a close look at resource macroeconomics, and to dispel the misnomer that resource rich states are flush with cash. This is not true, as states like the DRC, Gabon, Venezuela and such show. Instead, it is access to capital markets that can turn resource income into real growth. Without capital markets, exploiting resources does not generate income because their is no return on the money made off of the resource, and the depletion of said resource reduce the stock, so net return is often zero or lower (depending on the resource price). States need to be able to invest money made off of resources abroad, in order to gain a return on capital.

More is discussed in text, suffice to say that this was a complex and in depth analysis of resource macroeconomics, with particular attention paid to inequality, and state revenue maximization. IT takes an innovative approach, trying to balance social, corporate and environmental needs. Without this balance, the resource is unexploitable, which sounds good form an environmental standpoint, but will keep citizens socially and economically impoverished. A balance is needed to ensure states can use resource money to develop, and reach the potential to combat issues like environmental degradation, which is impossible without a certain level of income.

All in all, an very thought provoking book with some very complex theories on auctioning, contracts and macroeconomics. This is a good read for those interesting in resource management and environmentalism, as it covers the more complex topics in great depth and looks at solutions.

[Kara · Rating 3 out of 5]

Comprehensive review of why countries that have lots of natural resources also have lots of problems. Not a beach read. I skipped a couple of the chapters on economic theory, but still learned quite a bit.

[Gordon Kwok · Rating 4 out of 5]

A really good book but also a very difficult book for most readers. The book's chapters were written by prominent scholars in the field and encapsulated the oil cycle from discovery to receiving royalties. A lot of the topics were very interesting if not esoteric because it dealt with topics that most of us would never imagine in our entire lives...

1) What should the role of the state be? (passive partner to full on partner)
2) Understanding oil contracts? (they're complex)
3) How to negotiate oil contracts? (hint - hire experts, it's worth the cost)
4) How to successfully design an oil auction? (hint - transparency)
5) What is the resource curse?
6) How do you avoid the resource curse? (hint - invest in public infrastructure)
7) Should you design an oil fund like they have in Norway? (hint - it depends and the evidence is murky that they're a good idea. In fact, the take-away seems to be that good governance is usually a pre-condition to good management of oil resources not the other way around, it's a lot easier to build an oil pipe than to build a good government)

All in all, this was a good book and if you read just this one book, you'll be ahead of 99.99% of the population on this interesting topic.

[Andrew Gupta · Rating 4 out of 5]

Provides introductory understanding of how the oil and gas industry works.

[Jim Jewell · Rating 3 out of 5]

useful survey of the subject. a little pedantic at times.