Diamonds are Forever, Natural Resources Wealth is Not: Why Only Some Nations Effectively Manage Resource Windfalls

In the Lord of the Rings series of fantasy novels, written by JRR Tolkien, the dark lord Sauron crafted 9 rings of power, that he granted to the great lords of elves, dwarves and men as gifts. Although the rings granted great powers to their bearers, they also allowed Sauron to corrupt and dominate those …

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In the Lord of the Rings series of fantasy novels, written by JRR Tolkien, the dark lord Sauron crafted 9 rings of power, that he granted to the great lords of elves, dwarves and men as gifts. Although the rings granted great powers to their bearers, they also allowed Sauron to corrupt and dominate those who wore the rings. One can analogize the rings of power in the Lord of the Rings to the discovery of natural resources in developing countries with weak institutions. The discovery oil or diamonds often results in an explosion of corruption and civil conflict. The natural resource curse has hit sub-Saharan Africa especially hard, as many nations have the dubious gift of abundant natural resources, but inherited a colonial legacy of bad institutions. In today’s podcast episode, I will be exploring how countries in Africa are dealing with the natural resource curse. In part one, I will discuss how Chad, a nation with an unstable dictatorship, has wasted its natural resource boom on weapons and the military. In part two, I will discuss how Uganda under the more stable dictatorship of Yoweri Museveni, has seen the state monopolize natural resource rents both for purposes of development and self-enrichment. Finally, I will discuss how strong institutions and the rule of law have allowed Botswana to ensure rapid growth, and broad based prosperity for its people.

Chad has a long and grim history of civil war and political instability. No change of head of state has occurred outside of civil war and revolution, and the country has seen non-stop war between the Christian south from 1965 to 2010. It was threfore, with some trepidation, that the World Bank agreed to finance 1,070 km pipeline in 2003, at the time the largest private sector investment in sub-Saharan Africa. The World Bank hoped that innovative governance systems would help ensure the oil wealth that resulted from the pipeline would benefit ordinary Chadians. The core institutional arrangement was that the bulk of oil revenues would be deposited in an escrow account in London, and the government could only withdraw money from this fund for projects that would benefit ordinary people in Chad. However, the deal started falling apart even before the ink was dried. The dictator of Chad, Idris Deby, threatened to cause geopolitical chaos, including expelling 200,000 Darfuri refugees back to Darfur, unless the World Bank released funds to the government. The World Bank cancelled the deal in 2008, as it became clear it could not govern how Idris Deby used his country’s natural resource wealth. The core problem faced by Deby was that it was rational for him to funnel Chad’s oil wealth to the military. Idris Deby has created a small, but highly professional military force recruited primarily from his own ethnic group, the Zaghawa. The military force has allowed Chad to intervene in the politics of the Central African Republic, become a player in the Libyan Civil War, and be the most effective group fighting Boko Haram. It has also allowed Chad to finally end its decades long civil war, and western support for Idris Deby means that Deby does not have to fear threats from within his own armed forces. While Idris Deby has benefited magnificently from his countries natural resources the same cannot be said for ordinary people.

At first glance, Yoweri Museveni, the dictator of Uganda came to power under similar circumstances. The history of Uganda before Museveni was civil war, and rule by brutal dictatorship until Museveni achieved power in 1986. Unlike Idris Deby, Museveni has been able to impose stable political control over his country, allowing Museveni to take a more long term approach to economic development. Economic growth rates in Uganda have consistently averaged above 6% a year since Museveni came to power. Although Uganda had no oil at the time, Museveni invested heavily in the institutional capacity of the country’s oil ministry, and many geologists within the PEPD ( Petroleum Exploration and Production Department) received training from elite foreign universities. When Uganda finally made major oil discoveries in 2009, Uganda had the technocratic capacity to deal on an equal basis with multinational oil companies. The Museveni centralized negotiating with multinational oil companies to close family members, and with the support of the PEPD, were able to keep a higher share than most other nations in sub-Saharan Africa. The government of Uganda, a stable dictatorship, did not have to worry about investing heavily in the military to avoid overthrow or in making populist promises that would burden the economy in the long run. While Museveni has managed to extract maximum concessions from oil companies, it is far from clear the benefits will flow to the people of Uganda. The government has used arbitrary dictatorial power to evict 200 families without compensation who lived along oil pipelines, and spent $740 million of reserves for period of low oil prices to buy Russian fighter jets. The Ugandan government, unlike that of Chad, is by all accounts genuinely committed to long term development. It is expected that Uganda will earn $2.5 billion a year from oil once production commences, and there is reason to fear the Ugandan governments commitment to development and good governance will recede in the future.

Botswana, since the discovery of vast reserves of diamonds in the late 1960s, has long stood out for the extent to which it natural resources have been used to further the well being of its people. In 2016, Botswana produced 20.4 million carats of diamonds, making it the second largest diamond producer in the world. Given a population of only 2.2 million people, Botswana is one of the most natural resource nations in the world. Between 1966 and 1989, Botswana had the fastest growing economy in the world, with rates of GDP growth regularly exceeding 10% a year. Moreover, the government of Botswana avoided corruption that seems almost inevitable with resource booms. Transparency International ranks Botswana as the 34th least corrupt country in the world, with levels of corruption similar to wealthy countries like Spain and Botswana. Botswana has been ranked as free and democratic by Freedom House every year since 1973. The root of Botswana’s success lies in the countries strong institutions. Although Botswana officially became part of the British Empire in 1885, the British government incorporated Botswana for its strategic location, but governed the region as little as possible. The traditional institutions, which emphasized collective decision making and participatory government, survived relatively intact. After independence in 1967, these norms were incorporated into a democratic system, while the authority of traditional chiefs granted the government an unusual level of legitimacy. The Botswanan government, through its equal partnership with DeBeers, played a major role in ensuring Botswanans benefited from the country’s diamond wealth. Diamond wealth was used to modernize the countries meat and livestock industry, encourage Botswanans to start businesses in new industries, and invest heavily in infrastructure and public services. At the same time, the government maintained a market-oriented political economy with regular budget surpluses to ensure macro-economic stability, and strong protection of private property rights. Botswana’s strong institutions will soon face their biggest test, as Botswana’s declining diamonds reserves, mean they will need to discover not just how to manage prosperity, but how to generate it as well.

In today’s podcast episode, I have discussed how Chad, Uganda, and Botswana are managing their natural resources. The impact of natural resources on a countries economy depends heavily upon the nature of a country’s government. Unstable dictatorships have every incentive to spend natural resource wealth on their military, or in Swiss bank accounts. Countries with more strongly institutionalized dictatorships have a mix of incentives that can lead to development under certain circumstances, and stagnation under others. Countries with strongly institutionalized democratic institutions are most likely to see sustained economic development. To be clear, their is immense cross-national variation, and democracy is not a guarantee of wise natural resource management, and dictatorship not an unsormountable obstacle to escaping the resource curse, strong democracies manage natural resource wealth with the greatest success. Like the rings of power in the Lord of the Rings, natural resources have the power to cause serious harm to democracies. However, unlike the rings of power, natural resources are not a curse to all who own them. Those countries with strong democratic institutions can use their resource wealth to fuel long term sustained development.

Selected Sources:
What do we know about natural resources and civil war?, ML Ross
The natural resource curse: a survey, JA Frankel
Natural resources, democracy and corruption, S Bhattacharyya, R Hodler
Tropics, germs, and crops: how endowments influence economic development, W Easterly, R Levine
CHRONICLE OF A DEATH FORETOLD: THE COLLAPSE OF THE CHAD-CAMEROON PIPELINE PROJECT, Scott Pegg
Uganda Under Museveni, Crawford Young
State Formation and Governance in Botswana, Neil Parsons and James Parsons
The role of TNCs in the extractive industry of Botswana , Keith Jefferis
CATTLE, DIAMONDS AND INSTITUTIONS: MAIN DRIVERS OF BOTSWANA’S ECONOMIC DEVELOPMENT, 1850 TO PRESENT, Ellen Hillbom
Botswana’s “Developmental State” and the Politics of Legitimacy , Ian Taylor
THE IMPACT OF ECONOMIC INFRASTRUCTURE ON LONG TERM ECONOMIC GROWTH IN BOTSWANA , Strike Mbulawa
Public Sector Management in Botswana Lessons in Pragmatism , Nimrod Raphaeli, Jacques Roumani, A. C. MacKellar
Botswana: Macroeconomic Marnagement of Commodity Booms, 1975,-86 , Catherine Hill, Nelson Mokgethi
Escaping the resource curse: The case of Indonesia, Andrew Rosser
Natural Resources, Democracy and Corruption