Conflict and Natural Resources Relationship to Growth

Conflict and Natural Resources Relationship to Growth Is the incidence of Conflict and an abundance of Natural Resources in African States  correlated with Economic Growth? Table of Contents (Jump to) Chapter 1: Introduction 1.1 Aims and Objectives 1.2 Overview Chapter 2: Literature Review 2.1 The â€Å"Resource Curse† economic theory 2.1.1 The African Link 2.2 The causes of the â€Å"Resource Curse† 2.2.1. The â€Å"crowding out† cause 2.2.2. Quality of institutions 2.2.3. The â€Å"Dutch Disease† model 2.2.4 Other theoretical economic arguments 2.3 Civil war and economic growth 2.4 Natural resources role in Civil war Chapter 3: Influence of natural resources on economic growth 3.1 The cause of â€Å"the resource curse† 3.2 Is â€Å"the recourse curse† relevant to Africa? 3.3 Other influential factors Chapter 4: The role of conflict Chapter 5: Empirical evidence Chapter 6: Conclusion References During the course of the past two or three decades many economists and academics have been endeavouring to discover why a proliferation of natural resources, which is normally considered to be a wealth generating sources often have an adverse effect upon emerging economies, slowing rather than increasing the pace of development (Rodriguez and Sachs 1999, p.277 and Isham et al 2005, p.1). Other studies, concentrating particularly upon emerging nations is areas such as the African continent, have also claimed that there is a link between the proliferation of natural resources and political unrest and conflicts, which manifest themselves in â€Å"civil wars† (DiJohn 2002, p.1). A number of theories have been advanced in an effort to offer an explanation for this phenomenon. These include the â€Å"resource curse† theoretic model promoted by Gelb (1988) and Sachs and Warner (1997); the â€Å"rent-seeking† and â€Å"Dutch Disease† models referred to in research carried out by Torvik (2001 and 2002) and DiJohn (2002), whilst others link the causes more directly to the institutions and political conditions pertaining to the individual nation (Mehlum et al 2005 and Isham et al 2005). However, other researches have suggested that such models should be treated with caution. For example, Stijins (2005, p.3), suggest that earlier â€Å"resource curse† models have limitations, and this view is echoed in the works of Rosser (2007, p.39) and others. There have been similar divisions across the academic divide regarding the link between the level and treatment of natural resources and the propensity for civil unrest and violence, which culminates in most cases in civil wars. Whilst many observers view the cause of this unrest as being linked to natural resources and the political environment (Keen 2005, p.12) and the â€Å"difference in quality of institutions† (Mehlum et al 2005, p.3), others, including Rosser (2007, p.40), suggest that the level of strategic importance of the location of the individual nation may also be a determining factor, if not in the causality of civil war then in its potential longevity and likelihood of its reoccurrence. In addition, as Collier (2003, p.6), the globally perception held in many areas, that â€Å"nothing can be done† to end such disputes, add to the problem. The divergence of views and research results indicated previously does raise questions regarding the efficiency and effectiveness of any action that may be taken to resolve the issues outlined, either within an individual nation or when addressing a specific geographical area. For example, whilst addressing the â€Å"resource curse† or â€Å"Dutch disease† may have some positive impact on the economic growth and development in emerging economies, it could follow that without a simultaneous response to address the issue of political structure, institutions and civil war, such benefits would be negated by other influences. 1.1 Aims and Objectives The intention of this paper is to evaluate whether there is a common denominator that can be found to link the entire multitude of research together into one cohesive argument. Using the African states as a basis for this research it is felt that the conclusion of the paper could add to the continuing research into finding a unique theoretical model that will provide a format for improving the economic growth and development of poorer nations, particularly those that have not been seen to have gained economic growth and development benefits from their natural resource levels and capabilities. Thus, to identify a fundamental aim for this paper, it is considered that the conclusion of the study will be intended to seek an answer to the following question: â€Å"Is the incidence of Conflict and an abundance of Natural Resources in African States correlated with Economic Growth?† Furthermore, in order to provide a structure that will assist with the achievement of a conclusion to this conundrum, the author has set four main objectives for the research, which in concise terms can be identified as: Providing an assessment the relationship between a country’s economic growth and its dependence upon the export of natural resource products. Evaluating the claim that there is a link between civil war and economic growth and seek to distinguish the key elements that pertain to that link, which might include institutional and political performance. Assessing the level of probability of civil war resulting from a nations dependence upon natural resources. Reviewing the impact of strategic location, or lack of, and the potential influence this has upon internal conflict that might exist within the development process of an individual national or regional economy. 1.2 Overview For ease of reference the paper has been organised in the following manner. Following on from this introduction, in chapter two a critical review of recent theoretical literature relating to the subject being studied will be conducted. This will include an overview of the theories relating to natural resource impact and dependency, the relationship between civil war, natural resources and economic growth and other arguments that have been expounded upon in recent literature. Chapter three includes a discussion on the influence that natural resources has economic growth and political unrest and this is followed in chapter four by a more detailed analysis of the role of that conflict plays economic performance of nations who have these resources. In chapter six we provide and analyse the empirical evidence as it relates to the nations of Africa. This structure will enable us to reach a conclusion in chapter sever regarding the question set for the study (see page 5). A bibliography of sources and appropriate appendicles follow the conclusion of the research. As stated in introduction to this research, there has been a considerable amount of research carried out in regards to the influence that a wealth of natural resources has upon the economic growth of the poorer and emerging countries, as well as the relationship this has upon civil war and political unrest or imbalance. Within this review it is intended to focus upon the main economic and conflict theories that have been developed and discussed in recent decades. 2.1 The â€Å"Resource Curse† economic theory It is the negative or reduced economic growth patterns that have been experienced by nations that have significant natural resources, which has given rise to the term â€Å"resource curse,† and which has given rise to a considerable amount of literature and research since the late 1980’s, amongst the foremost of which is that conducted by Gelb (1988), Sachs and Warner (1997), Rodriguez and Sachs (1999) and Sala-i-Martin, and Subramanian, (2003, p.833), although there has been a proliferation of other works. The starting point and motivation for much, if not all of the research and literature relating to the â€Å"resource curse†, resulted from the significant difference that had been found to exist between the real economic growth performance of manufacturing and natural resource exporting countries over the years, as measured by the movement of GDP[1]. One of the latest examples of an analysis of this differential can be found in the review carried out for the World Bank by Isham et al (2005), which compared growth rates over a 40-year period (see figure 1). When converted into graphical format (see figure 2), the extent of the deceleration of national resource exporters and the differential between these and manufacture becomes more obviously apparent. As can be seen from the analysis (figure 1) in the first half of the period, when natural resources were being discovered and exploited, the GDP gap between these exporting nations and the manufactures exporters was more than halved, in fact in some periods the growth rate for natural resource rich countries was outperforming other areas (Le Billon 2005, p.13). But this improvement saw a dramatic reversal between 1975 and 1997. This performance has been directly linked to the movement of the natural resource revenue in other research, for example that conducted by Rodriguez and Sach (1999), where a similar pattern is revealed to be linked to the production of petroleum (see figure 3). However, taking the period in its entirety, as the figures and graph show, whilst the GDP for those countries that did not have a significant level of natural resources (the manufacturing exporters) grew by 1.02 %, even the best performing growth rates for natural resources elements, being diffuse at -0.43%, reveals a growth rate gap of 1.45%. At the extreme end of the scale according the Isham et al (2005, p.12) that gap exceeds 3.5%, which explains why when taken as a whole the differential between the two types of exporters increases to 3% by the end of the period being studied. 2.1.1 The African Link The majority of the research that has explored the â€Å"resource curse† has determined that this phenomenon has been particularly noticeable in the case of poorer and developing nations where, despite their high levels of natural resource and reserves, growth levels have been low or even regressed, in stark contrast to the performance of other nations that do not have the luxury of natural resources (Rodriguez and Sachs 1999, p.277 and Sach and Warner 2001, p.828). For example, Mehlum et al’s (2005) research concludes that many African countries with such resource levels have been afflicted by the curse, particularly those in the Sub-Saharan regions, which include Nigeria, Zambia, Sierra Leone and Angola. In support of the link between the â€Å"resource curse† and the African nations, researchers have used data from a variety of sources as evidence to support their hypotheses, most of which is based upon the analysis of GDP. For example, using a similar period to Isham et al (2005) (see figure 1 on page 8), the World Bank â€Å"World Development Indicators† show that, although rich in resources to a similar if not better level than other developing countries, the Sub-Saharan regions of Africa have fared much worse than others (see figure 4), Similarly, long-term patterns, dating back nearly two centuries (see figure 5), are used to support the fact that the curse is caused by factors outside of the possession of the resource itself. 2.2 The causes of the â€Å"Resource Curse† In investigating the cause of the â€Å"resource curse,† current literature has a divergence of views relating to the economic, political and other elements that conspire to create this environment. Various researchers have identified a number of different factors as being the root causes of, or significant contributory reasons for the â€Å"resource curse.† 2.2.1. The â€Å"crowding out† cause Of the most widely cited research, which includes the studies of being Sachs and Warner (2001) and Gelb (1998), describe the main issue as a effectively being a â€Å"crowding out† situation, whereby the concentration upon the natural resource has led to a situation where other exportable resources, such as manufacturing and production exports, which are considered to be important elements in a nations economic growth process, are at worst effectively neglected, or at best considered to be of reduced importance. This theory is supported by other research. Torvik (2002, p.455-456) acknowledges that this â€Å"crowding out† theory works on the premise that â€Å"an increased amount of natural resources then lowers productivity in all [other] sectors† of the economy. One popular variation of this model that has been developed is known as the â€Å"Rentier† state model (Torvik 2002, p.455). Torvik (2002, p.456) explains that in this case the negative impact on growth is generated by the fact that as powerful groups are attracted to the natural resource, they create an overcrowding within the natural resource sector, which again has the effect of contributing to the lowering growth rates. Sachs and Warner (2001, p.833) suggest that the major elements of â€Å"crowding out† are the fact that perceived and actual increase in wealth generated from the resource increases demand and leads to higher prices throughout the economy, thus making manufacturing less competitive, particular in respect of international trade. In addition (Ibid, p.835) the research also suggests that another contributory factor is the loss of â€Å"knowledge† available to manufacturing and other sectors caused by the profit attraction of the natural resource sector, which adds to the diminishing of the competitiveness of these sectors. Innovative entrepreneurs will be attracted to take their resources away from production and into the natural resource sectors, which offers them a higher level of profit and return at a relatively lower costs. In comparison therefore, the manufacturing areas are seen to be unproductive (Mehlum 2005, p.5), which is bad for economic growth. This explanatio n concurs with the results of Sala-i-Martin and Subramanian (2003, p.15 and Le Billon, 2005, p.5), which indicates that the movement of labour away from agriculture to natural resources has contributed to a near halving of this sectors share of GDP in many countries, as evidence in Nigeria. 2.2.2. Quality of institutions Other research, in dissimilarity to the popularity of the popular Sach and Warner view (Mehlum et al 2005, p.5), promotes the theory that the causes of â€Å"natural resource curse† are more closely related to the political and institutional failure to deal with the revenue, or â€Å"Windfall Gains† as Dalgaard and Olsson (2006, p.1) and others describe them. Sala-i-Martin and Subramanian (2003, p.8) findings in a study of the economic growth situation in Nigeria suggest that natural resources are â€Å"detrimental to institutional quality.† However, their research does find that this adverse effect of institutions appears to be more significant with oils and minerals than other natural resources and that once there is control within these institutions, the negativity impact ceases (Sala-i-Martin and Subramanian 2003, p.12), a view that Isham et al (2005, p.21) takes further by suggesting that the type of resource will â€Å"play a large role in shaping what kin ds of institutional forms exist and persist.† An efficient, effective or strong institution or government can be modeled largely on the western demographic models, where this is a large degree of interaction and connection between the political forces and the citizens, with transparency and accountability being an integral part of the institutions structure (Moore 2004, p.313). Similarly, in cases where strong institutions exist, he likelihood is that the natural resource will be owned by the people, (albeit it through shares in corporations), rather than the state itself. The only connection between state and resource will be through the taxes that it levies on the commercial profits made from that resource. Weak institutions tend to be less democratic, in some cases being controlled by dictators and military juntas that pay little heed to the needs of the citizen, preferring simply to concerns themselves with the needs of their power and personal wealth. Mehlum (2006, p.5) studies also confirm the institutional quality as being an important influence, in this respect leading to their conclusions that the â€Å"resource curse† is more prevalent in countries that have weak or poor quality of institutions, being those that are undermined by ethnic or non-democratic processes (Le Billon 2005, p.24). They describe these weak institutions as being â€Å"grabber friendly† A survey carried out during the course of their research found that out of 87 countries examined, only 15 were considered to have level and quality of institutions necessary to be effective in avoiding the affects or the curse. As with the earlier discussion on GDP, Isham et al (2005, p.13), again provides us with data support of the institutional influence (see figure 3). If we look at the top half of this list, which represents the elements of weak institutions, we see that whilst manufacture exporters still achieve a growth pattern, albeit small, resource exporters are afflicted with negative growth. Conversely, with the stronger elements of institutions in place, the natural â€Å"resource curse† is not apparent, with the resource exporters showing all the signs of reasonable levels of economic growth. Whilst agreeing with the principle that, particularly in Africa, institutions and the political structures are weak and therefore at risk from the â€Å"resource curse,† Dalgaard and Olsson (2006, p.4) add another element to the discussion, claiming the â€Å"windfall† element of the resource rent, added together with the level of Aid the country receives, exacerbate the problem of â€Å"resource curse.† Likening the resource windfalls to a lottery win Dalgaard and Olsson suggest that, faced with this relatively sudden new found source of wealth, the institutions are not sufficiently experienced in being able to administer it effectively and this produced a negative effect in institutional areas such as the rule of law and levels of corruption (Dalgaard and Olsson 2006, p.25). This is evidenced by the fact that â€Å"An IMF report on Angola, for example, suggests that close to $1 billion disappeared from the state coffers in 2001 alone, due to corruption, while fiscal discrepancies over the previous several years represented between 2 and 23% of the country’s GDP† Ross, 2003, p.9). 2.2.3. The â€Å"Dutch Disease† model To the extent that the â€Å"Dutch Disease† model relates to the potential for a reversal of industrialisation Sach and Warner (2001) favour the â€Å"Dutch Disease† model, although they do not support the element of this argument that suggest an increase in workers wages in all areas of the economy (Sach and Warner 2001, p.836). As the term indicates, the â€Å"Dutch Disease† theory was based upon the events experienced by the Netherlands following the discovery of natural â€Å"gas† resources within the country’s national waters in the mid 1950’s (Gylfason 2001, p.2). The elements of this theory rest upon three main areas. Firstly, the fact that the upward movement of the currency for a particular country following the discovery of resources exacerbates the manufacturing and servicing sectors, in that it reduces their price competitiveness (Gylfason 2001, p.2 and Sach and Warner 2001, p..834). As Torvik (2002, p.2) indicates, because it is because â€Å"changes in the composition of production that determines the level or the growth rate of productivity,† that the upward movement of currency prices has such a negative impact on internal production and welfare. Secondly, historically is has been noted that the global prices of resource materials is subject to a high level of fluctuation, which is caused by changes in the stocks, both in the resource rich country and other areas of the world (Gyflason 2001, p.3) For example, in the case of Norway, if other gas resource rich nations run out of supplies, the Norwegian resource will increase in value. Finally, the combination of the two previous elements causes financial exchange rate instability (Sach and Warner 1997 p.358 and Gyflason 2001, p.4). Gfylason suggests that this has an adverse effect on other areas such as foreign investment. Nevertheless, irrespective of these factors, in the case of Norway, their effect was limited and this is an element that Gylfason concentrated his efforts on discovering why this country’s economic performance did not perform in the same adverse way that other â€Å"OPEC† countries experienced as a result of the discovery of natural resources, which included nations located in Africa, nor did it have the same longer term effect. The discovered differential relied upon two main elements. Firstly, that Norway had been a developed nation for some years prior to the discovery and, secondly, as a result of the development position financial, social and political institutions in Norway were more â€Å"mature† (Gylfason 2001, p.10), therefore more likely to be able to avoid the adverse effects of the â€Å"resource curse,† which was not the case with other OPEC countries. These results reinforced the conclusion of other researchers in regards to two areas, these being that there is a relationship between â€Å"weak institutions† and the curse of natural resources and that the negative elements of the â€Å"Dutch disease† is essentially only a major issue for such institutions. 2.2.4  Other theoretical economic arguments Recently, economists and observers have sought to further clarify the theoretical argument relating to the â€Å"curse† of national resources by looking at other potential theoretical arguments, which would both support and potentially extend the existing literature on the subject of the â€Å"resource curse.† For example, Dalgaard and Olsson’s (2006, p.25) research indicated that there might be a connection between foreign aid and the resource curse, particularly in African nations that are the recipients of such aid. Whilst stopping short of agreeing with Burnside and Dollar’s (Quoted in Dalgaard and Olsson 2006, p.13) conclusion on this subject, this being the â€Å"aid only stimulated growth if accompanied by sufficiently sound macro-economic policies: e.g. low inflation and budget balance,† it was felt that further research into the systems and processes used for the distribution of aid was needed, as the likelihood of a connection with the eco nomic performance of a recipient nation could not be discounted. Another argument that has been put forward as elements of cause for the â€Å"resource† curse is the impact of an individual nation’s culture and geographic position. Dalgaard and Olsson (2006, p.19 and 20) believe that these issues should not be discounted. They point out that culture has been found to have a direct link to the level of corruption that exists within a nations political institution. In terms of geographical position, Dalgaard and Olsson’s study promote two arguments to support this being a classed as a source. The first of these is related to size, where it is argued that the greater the size of the country, the more extensive will be its institutions and, therefore, if the culture has a high corruption level, this will be increased (Dalgaard and Olson, 2006, p.19). Secondly, there is a potential for a historical link between geographical and institutions (Dalgaard and Ollsson 2006, p.14). In this case, the study sets the case for arguing that, because of the problems associated with areas such as the tropics, which includes high mortality rates and tropical climates, the early influence of Western institutional structure did not expand into these areas of the world as they had in others. As an example, they cite the colonial spread, which was not as widespread in the African continent as it was in places like India. Thus, this element of the theory is based upon the fact that those countries who had a foundation of good western institutions being better able to escape the â€Å"resource curse.† Phenomenon. However, other researchers do not agree with this scenario. Sach and Warner (2001, p.2 and 3) argue that using these determinates within the resource curse studies would lead to anomalies id data, with some countries appearing to be â €Å"high-natural resource† economies simply as a result of the inadequate or negative performance of other area of their economies, and visa-versa. In this regard they hold that â€Å"geography and climate variables do not eliminate the natural resource variable.† Sach and Warner 1999, p.5). Finally, but not totally unconnected with other arguments, is the argument relating to the problem of managing sudden excess. Referred to within Dalgaard and Olsson (2006, p.1) as the ineptitude of institutions at managing â€Å"windfall gains,† other reason it is the false perception of security that accompanies natural resources, which effectively provide â€Å"people with a false sense of security and lead governments to lose sight of the need for good and growth-friendly economic management, including free trade, bureaucratic efficiency, and institutional quality† (Gylfason 2001, p.7). Taking a slightly different tangent, although with a similar vein, Rodriguez and Sach (1999, p. 278), define that these countries are effectively â€Å"living beyond their means.† The view here is that resource rich countries are consuming the revenue from this resource without taking into account the fact that, unlike other areas of production, the stock of these resources can not be produced or expanded as quickly, therefore creating an increasing gap between revenue and expenditure, which eventually lead to a situation where the nation will reach a point where future revenue may have to be mortgaged to meet current expenditure. In summary, perhaps Gyflason (2001, p.8) puts it succinctly when he states that, irrespective of which argument one supports or how the individual may qualify it in academic terms, the core agreement is that â€Å"an abundance of natural capital may erode or reduce the quality of social, human, and physical capital, and thus stand in the way of rapid economic growth.† 2.3 Civil war and economic growth Irrespective of the divergence of views expressed within the literature outline in the previous sections of this chapter, one area that almost all are agreed upon is that in addition to the lack of economic growth resulting from the â€Å"resource curse,† this growth can also be adversely affected by the political stability of the nation, particularly where conflict and civil war is involved. The common definition of civil war is that conflict which leads to one thousand deaths or more. Similarly, the popular western perception is that the causes of such conflicts are caused by racial or religious tensions (Collier 2000, p.95-96). Whilst this may be true in terms of the sides taken in internal power struggles (Keen 2000, p.24), in most cases these are fuelled by a struggle to control resources. To this extent there is an economic element (Keen 2000, p.22 and Berdel and Malone 2000, p.28). Mehlum (2003, p.275) and Keen (2000, p.29) reinforce this viewpoint with the findings that those involved with these conflicts include elements from all aspects of society, such as rebels, military, political and commercial factions. In other words, particularly in countries with weak political controls â€Å"a war may be seen as continuation of economics by other means† (Keen 2000, p.22) rather than a simple clash of ideologies. Methlum et al (2005, p.6) confirm this argument, showing that in a country that have institutions and governments deemed to be weak, which is the case in many African states, this results in a situation where â€Å"the government is unable to provide basic security.† They conclude that such a situation creates an environment that fuels an increase in violence and civil wars, with control of natural resources being the main success target of the conflict and, ironically, used to finance many of these activities. Providing evidence of this in his study relating to the phenomenon of conflict diamonds, Olsson (2004, p.3) states that in countries with rich resources and weak institutions, natural resources can often lead to a triangular conflict environment of â€Å"a ruler (the prey) in control of a flow of natural resource rents, and a rebel (the predator) who might choose to prey on the ruler’s natural resource,† with the ordinary person in between these, that can create an adverse economic effect. Because the rebel wants to appropriate the natural resources, this forces the ruler to invest resources in defence, thus lessening the resources available for production and reducing the potential for economic growth. As is indicated later in this same research (Olsson 004, p.14), this situation of fuelling conflict and lining the pockets of dictators is not just limited to diamonds, but extends to a number of other natural resources. Other literature has confirmed the connection between the potential for conflict and economic growth. Rodrigueaz and Sach (1999, p.19) commenting upon the aspect of nations living beyond their means, found that, in the case of Venezuela, this leads to unrest and conflict. Dalgaard and Olsoson (2006, p.8) also identified that the high level of natural resources, when combined with weak government and low productivity in areas of production not related to natural resources, produced a â€Å"higher risk of potential conflict.† Both of these studies concluded that these conflicts served to deepen the adverse effects on economic growth. As Rodrik (1998, p.3) showed in his research, the biggest falls in GDP rates post 1975 occurred in countries that were socially divided and unable to manage conflict and these countries, more often than not, were those with high levels of natural resources (Wagner 2007). Thus it is concluded that civil war can serve to significantly damage economic growth (Rodrik 1998, p.3). 2.4 Natural resources role in Civil war One of the recurrent themes in the literature relating to natural resources, as has been identified within the previous sections, is the impact that natural resources and economics has upon social unrest and conflict. For example, Le Roux’s (2004, p.3) research suggests that as