Investing in the ‘resource curse’

The IMF has again cautioned against the ‘resource curse’. The thesis, by Richard Auty, is that resource abundant countries paradoxically grow slower than countries with far fewer resources.

It is widely suspected that the ‘curse’ is largely caused by the effects of over-dependence on resources. Governments, perhaps believing resources will never run dry (in their time), fail to wean economies off these commodities. One of the consequences of this is that in times of high prices, the real exchange rate rises making local industries less competitive, while encouraging borrowing as it becomes relatively cheaper to do so.

The danger though is when prices fall, exchange rates fall and debt repayments soar, and this is after industries have contracted, which dramatically decreases tax revenues. Sure, taxes could be pushed up to compensate, but this wouldn't do much for competitiveness.

Over-dependence is the big issue though. Botswana still gets 70 percent of its export revenues from diamonds, while Burundi, Rwanda and Uganda all earn more than 50 of their export earnings from coffee. Looking west to cotton producing nations, the picture isn’t really any better. And, then, of course, there’s oil, which earns Nigeria 95 percent of its export income. Perhaps part of Chad’s defection to China was because the Asian giant is more likely to be able to buy all of Chad’s oil than Taiwan is.

While earning lots of money from diamonds, coffee, cotton and oil should be encouraged, an economy that makes most of its money in one area, especially in mining, makes for a potentially unstable country, both economically and politically. Governments and militants can't easily steal the resources of a service industry; they can only try to tax it.

The rumours that Uganda’s president was trying to grab oil land shows quite clearly the temptation that goes with controlling what could be the most successful sector by far in the economy. A diversified economy makes it far more difficult to identify a sector for a 'coup' and, consequently, harder for unscrupulous governments to find military allegiance.

It also means that investments cover a broader spectrum of sectors, which, if well managed, effectively hedge against each other making for a more stable economy. This should make it far easier for governments to plan ahead.

Botswana may still find a way off diamonds; given the vast amount of money it spent on education to develop human capital. But perhaps governments can’t always be blamed.

Chris von Zastrow, a coffee specialist working for USAID and EAFCA, hinted at the possibility that much of the volatility in East African coffee markets is because too many farmers don’t see their farms as ‘a business’. They grow coffee one year, make some money, and then abandon their farms until they need money again.

So the bigger question perhaps is how do we get farmers, and indeed the entrepreneurs needed to truly diversify economies, to see their ventures as investments?