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Finding a cure to the resource curse

Ghana outstrips Uganda on most indicators of democracy, development and governance, yet Uganda is much stronger when it comes to getting a good deal for the country from natural resource extraction. It's not about what institutions you have in place, but how they function.

Piers Purdy
26 July 2017
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Deep Ocean Ascension off Cape Town, South Africa, awaiting transit to the waters of the Gulf of Mexico. The ship had been recently built in South Korea. Photo: Christopher Griner / Flickr

This interview is part of the series 'Development in the Face of Global Inequalities'. You can find out more about the series, read its articles and explore the interactive roundtables by clicking here.

Good sense might suggest that for a country pursuing a developmental agenda the abundance of natural resources can only be a good thing. Building schools, hospitals and infrastructure costs a lot of money, and the more natural resources you have, surely the more ambitious a country can be. Yet recent history is rich with examples contrary to this logic. In fact, quite perversely, the countries displaying the highest levels of poverty, inequality and deprivation are often those thought to be ‘blessed’ with high natural resource endowments.

In extreme cases, but all too frequently, the wealth of natural resources have been found to tear countries apart through civil conflict, as in the Democratic Republic of Congo, the Niger Delta and Iraq. Similarly, in Russia, Trinidad and Tobago and Venezuela, the rapid exploitation of oil reserves led to ‘Dutch disease’ – the negative consequences arising from the appreciation of an economy’s currency value, usually after a significant natural resource discovery - severely crippling their national economies. And in other cases, governments have simply not been able to effectively capture the benefits of natural resource endowments, or worse, they have, but they’ve failed to effectively distribute the benefits across society.

So how does a country intent on development most effectively use its natural resources? I meet with Sam Hickey, professor of politics at Manchester University and Joint Director of Research at the Effective States and Inclusive Development Research Centre (ESID), who has been leading research into this question.

He starts by telling me that possible answers to the issue of effective natural resource management are intrinsically linked to broader debates around development. For many years, development policy emphasised what types of institutions needed to be in place, advocating ‘good governance’ and public sector reform. However, after countries having spent a lot of money, with unconvincing results, over the last decade the emphasis has returned to forms of politics and the political settlements that underpin them:

Political settlements are about a relationship of power, and what political settlements analysis does is it puts these relationships of power back at the centre of investigation. Other forms of analysis ask ‘what types of institutions do you need?’, but when you look at political settlements, you take a step behind these and ask ‘how feasible is it for these institutions to actually function?’

You might have the best institutions on paper, with multi-party elections, or the right constitution in place, but whether they function when they come into contact with the realities of politics is another matter. And if we want to understand the possibility for natural resource economies to have positive outcomes, protecting countries from global capital and generating enough resources that can be inclusively distributed throughout society, then good institutions aren’t enough – it’s about the relationships between elites, their ideas and their incentives.

 

What are the power relations?

There are two levels to understanding political settlements, Sam tells me. On the upper level, we have the relationships amongst elites, who are often fighting with one another for the spoils of public institutions that can provide their political supporters with access to rents, jobs and other procurements. And then below that, we have the relationship between elites and social groups in wider society. This understanding of political power as having a social basis, and the potential consequences of inter-elite relations on a government’s capacity to distribute state resources is clear, so I ask if we can categorise these political settlements in any way?

In ‘dominant’ settlements, where there is a high concentration of elite power, and the dominant group’s political position is safe from the threat of upcoming elections or political challenges, then they have the capacity to deliver with a longer-term vision. Whereas, where you’ve got weak states, and weak civil societies, but democratic competition, as is characteristic of lots of low-income countries in the Global South, it can be difficult for political parties to mediate demands that come from below. In these ‘competitive’ settlements, there is the continual struggle against challenges from elites, supported by popular factions, that are powerful enough to take power at the next election.

In the context of ‘competitive’ settlements, Sam explains that political elites in power have the tendency to misuse public institutions, and usually for short-term gains such as obtaining political advantages before elections. Seen in this light, it’s also possible to see how competitive settlements can produce scenarios in which governments are ineffective in both capturing natural resource rents and distributing them inclusively throughout society, and conversely, how more dominant settlements have the potential to be far more effective. This again suggests that it’s not only about what institutions are there, but how they function. Elections and other good democratic institutions may well be in place, but it is how the political power relations fit within these institutions that determines their effectiveness.

 

Ghana and Uganda: Managing resources

If we are to understand how a country most effectively uses its natural resources, we first need to see how a country’s political power relations determine its ability to capture nature resource benefits as they come out of the ground. Again, good sense would suggest that a country with established democratic institutions and good governance would be more effective, but is there any evidence contrary to this? Sam draws upon his recent research into Ghana and Uganda at ESID:

From an institutional perspective, we would have expected Ghana to do way better at managing its natural resources. It outstrips Uganda on almost all indicators for development, democracy and governance. But when we look at oil deals, and legislative arrangements, we’re actually finding that Uganda is able to make better deals with international oil companies, holding back until legislative arrangements are in place, as opposed to rushing in. The dominant political settlement in place meant that the President had a leading role in deal-making, and importantly he enabled technocrats to have the last say. The result was good deals, not just above the African average, but in line with the global average for the rate of return on a barrel of oil.

Ghana, on the other hand, received significantly less profitable deals – despite confronting the same oil companies. How does this relate to political power sharing? In Ghana’s ‘competitive’ political environment, the government had the electoral cycle in mind and moved quickly to include offshore oil into the budgetary figures ahead of the 2012 elections. To do this, it didn’t wait for the right legislation to be introduced, and in fact overturned previous legal provisions in place intended to offset ‘Dutch disease’ effects, so that it could pursue its short-term, politically motivated objectives.  What’s more, many of Ghana’s deals later had to be unpacked, after it was found that they were tied to party political interests. 

 

Bolivia: Distributing resources and development

So it’s clear that we cannot depend solely on institutions to ensure effective capture of natural resource benefits, and that the political power relations that sit within them actually give us a very important indication of how a country will perform to the regard. When I ask Sam how this perspective can guide our understanding of how effectively resource benefits are distributed through society, he refers to research carried out on Latin American mining.

Over the last a hundred years, the type of political settlements that have been most redistributive have tended to be more ‘dominant’, whether it’s the more Leftist-military regimes of the 1950s, such as in Peru or Bolivia, or the more recent Evo Morales-type social coalition, which is heavily reflective of small-scale artisanal miners, and makes up a significant proportion of the natural resource economy. So, the investment in that area, small-scale as well as large-scale private mining, has meant that the industry has had a more distributive effect and also ensured the earmarking of taxation revenue for social transfers.

What I find interesting about Bolivia is that its ‘dominant’ political coalition has a strong popular basis from within the natural resource production community. This might be possible in countries where mining is the source of revenue, but when it comes to oil you don’t have this large number of workers on which you can build popular support. So the type of natural resource industry in place seems also to be an important factor as to how political elites capture and distribute resources.

Another question my conversation with Sam raises is whether we should favour ‘dominant’ political settlements? Examples of concentrated power settlements suggest they are more effective at capturing and distributing of resources than competitive systems, which could support the idea that more authoritarian regimes are better equipped for pursuing growth and development. Sam is keen to point out, however, that while dominant political settlements may be more effective in certain areas, they are generally quite bad at delivering public services. He gives the example of quality education, where you need multiple actors involved, and collective action from teachers, parents and civil society organisations to work with and challenge the state.

Natural resources, such as oil, mining, as well as others, will only become more important to developing countries in the future as sources of wealth. What I take away from my conversation with Sam is that instead of jumping to prescribe institutional reforms, the international community can support these countries by first understanding their politics. Where politics is dominated by a particular group, and the system is free from political jockeying, system-wide reforms may be worth pursuing in order ensure a more effective capture and distribution of natural resource wealth.

But as Ghana shows us, these reforms can be less effective in a system where power is dispersed, and institutions are often co-opted by political interests. In such cases, the challenge is perhaps greater, and international developmental efforts should be more focused on building socio-political coalitions across elite and popular groupings that are capable of competing in the competitive political landscape. If we approach the resource curse like this, perhaps we won’t find our cure in good governance or engineered institutions, but rather amidst the politics than work within them.

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You can read Sam's answers on the Politics of Inequality roundtable here.

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