Do Natural Resource Exports Curse Governments? Some Insights from Latin America

By Ryan Saylor

When a country strikes oil or discovers mineral deposits, politicians and citizens are often euphoric. But many economists and political scientists despair. They believe that some types of natural resources promote a “resource curse,” characterized by weak governments, dictatorships, and civil war. Even so, there are lots of exceptions to the resource curse. This article contends that the political effects of resource wealth depend on if exporters are part of a country’s ruling coalition, or if they are excluded from political power.

Countries used to rejoice when they discovered oil or when prices boomed. Carlos Andrés Pérez, who governed Venezuela during much of the bountiful 1970s, is reported to have frequently told his cabinet ministers that “We are going to change the world!” Resource riches, Pérez announced to his countrymen, would let them be “actors in the great national transformation that is going to make Venezuela one of the great countries of the world.” Yet amid the bliss, Juan Pablo Pérez Alfonzo, a former Venezuelan oil minister who helped found OPEC, lamented that oil “is the devil’s excrement. We are drowning in the devil’s excrement.”1 Because oil wealth so often seems to result in dashed hopes, today’s government leaders are measured when discussing it. After Brazil discovered a sizeable offshore reserve in 2007, then-President Luiz Inácio Lula da Silva declared it a “gift from God.” But his chief of staff (and current President), Dilma Rousseff, emphasized that the newfound riches had to be managed well and that the government was “creating the conditions to avoid the oil curse, that terrible curse that has kept many oil-rich countries in poverty.”2

Many scholars believe that oil typifies a problem facing countries with lots of natural resource wealth. Exports of oil and other primary commodities, such as minerals or agricultural products, can be taxed easily. This easy revenue can have corrosive effects on governments. Numerous political scientists have found that countries with abundant natural resource wealth tend to feature weak public administration, authoritarian governments, and a greater likelihood of civil war. Easy revenue dampens the need to build strong taxing bureaucracies, and the resulting weak government institutions have trouble controlling corruption. And if leaders do not rely on their citizens for tax revenue, they are less likely to give them a voice in governance. Lucrative resources may also prompt insurgents to try to capture them, possibly triggering civil wars. These afflictions are collectively known as the “resource curse.” Oil epitomizes the resource curse because oil production generates massive economic rents and yields huge revenue windfalls to governments.3 It is no coincidence, many researchers claim, that some of world’s most notorious recent leaders, such as Mahmoud Ahmadinejad, Hugo Chávez, and Vladimir Putin, came from oil-rich countries.

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I look beyond institutions and to the politics that surround primary commodity production to consider how resource exports can enhance government capabilities. I find that major resource booms vary greatly in their political effects, depending on who controls government and policymaking.

And yet some of the world’s largest oil producers, including Canada, Norway, and the United States, are well-governed democracies. They have honest public bureaucracies and are not beset by civil strife. Thus the link between a country’s resource endowments and its political fortunes may be overstated. For instance, for much of their modern histories, Peru and Chile relied on the sort of rent-generating commodities that worry political scientists. Peru was historically a guano and nitrate exporter, while Chile exported nitrates and copper. In many ways, Peru seemed to be cursed by the easy revenues derived from these exports, even as Chile harnessed its mineral wealth to underwrite Latin America’s most effective public institutions. Similarly, the politics surrounding coffee production triggered conflict in Colombia historically, while coffee has undergirded Latin America’s longest-lived democracy, in Costa Rica. Plenty of countries do not seem cursed by their natural resource wealth.

Scholars try to account for such inconsistency by stressing the quality of government institutions to explain why commodity exports harm some countries but not others. In contrast to countries with weak institutions, Norway’s effective bureaucracy enabled it to judiciously manage revenue windfalls from oil and gas discoveries in the 1960s. Chile has used strict budgetary rules that require politicians to save copper earnings from boom times, for use during inevitable slump periods. Observers hope that Brazil’s recent use of such countercyclical policy – something arguably made possible by improvements in its bureaucracy – will continue, to smooth out the wild fluctuation in tax receipts from the volatile commodity trade.4 But since most developing countries have weak public institutions, they cannot contain the resource curse.

Nevertheless, some developing countries – including Argentina and Chile – prospered from their resource wealth before they built much institutional prowess. These facts are perplexing because one might expect them to have been incapable of avoiding the resource curse. My research grapples with such puzzles. I look beyond institutions and to the politics that surround primary commodity production to consider how resource exports can enhance government capabilities, or what political scientists call the growth of state capacity. I find that major resource booms vary greatly in their political effects, depending on who controls government and policymaking.5

Politicians appeal to myriad groups in their quest to gain public office, but they cannot cultivate support from everyone, since some groups have irreconcilable policy goals. Political scientists consider officeholders’ core supporters to be the members of a country’s ruling coalition. I contend that the composition of ruling coalitions ultimately determines if a resource curse takes hold. When ruling coalitions include groups with direct stakes in exporting, such as producers or merchants, governments tend to treat the export sector delicately: they limit taxes on the sector, provide producers with transportation networks or easier credit access when they ask for it, and so on. But when these export-oriented actors are politically marginalized, governments tend to tax exports heavily, ignore pleas for public goods, and redistribute export wealth as patronage, since officeholders do not depend on support from exporters.

In the short-term, ruling coalitions that exclude exporters are more likely to create the conditions that manifest a resource curse. In the longer-term, political coalitions that marginalize exporters are less likely to accrue the institutional gains that come from collecting taxes from a variety of sources and providing and maintaining public goods. Their states will be weaker. Overall, different types of political coalitions go far to explain why commodity booms provoke a growth of state capacity in some countries but not others.

My work analyzes how ruling coalitions responded to the first major commodity booms in Africa and Latin America, including in Chile, Argentina, and Colombia.6 Around 1850, Chile experienced booms in wheat and copper. Export-oriented actors throughout the country sought public goods, including railroads to reduce transport costs and joint stock banking to improve credit accessibility. But only a segment of exporters – large landowners in the northern central valley, around Santiago and Valparaíso – were in the ruling coalition.Other exporters, specifically copper producers in the desert north and small-scale wheat farmers in the southern periphery, were politically marginalized and frustrated by public policy. For instance, the government subsidized railroads in the northern central valley but refused to financially assist railway construction elsewhere. Contention between exporters provoked two civil wars in the 1850s. Afterward, Chile’s ruling coalition strengthened state institutions to foil its opponents, such as by usurping the authority of municipal governments. The politics surrounding exporting helped Chile emerge as Latin America’s strongest state by 1900. Today, Chile’s lauded public institutions are partly the outcome of these developments.

Argentina similarly benefitted from its first major commodity boom, in wool. Wool ranchers in Buenos Aires province, who dominated politics, pressed the government to build railroads, improve credit access, and open up new ranchlands. Ranchers from Buenos Aires were competing with upstart pastoralists from the country’s other littoral provinces. The Argentine government therefore provided public goods in ways that disproportionately aided power holders. The government formed a mortgage bank in Buenos Aires province to provide cheap credit, while disallowing them elsewhere. Not surprisingly, relations between Buenos Aires and the other provinces were acrimonious and sometimes violent, prompting the central government to build institutions in the hinterland. By the 1880s, the rancher-dominated state had solidified Buenos Aires’s hegemony over the country and impressively expanded state capacity.

Certain commodities do not intrinsically harm a country, and government institutions are ultimately built, or not built, by politicians trying to maintain their coalitions. Coalitional politics determines why resource wealth is a blessing to some countries but a curse to others.

Colombia contrasted with Chile and Argentina. With Colombia’s first major commodity boom, in coffee, export producers wanted improved transportation infrastructure and supportive banking and monetary policies. But they were politically marginalized. Government leaders neither had direct stakes in exporting nor did they represent the coffee heartland. They neglected coffee producers. Railroads were built in piecemeal fashion and away from coffee zones. The government worsened credit availability. It would not form a public mortgage bank and increased private banks’ reserve requirement. Policymakers also adopted loose monetary policy, which angered coffee producers for a variety of reasons. Coffee elites responded with civil insurrections, including the catastrophic War of the Thousand Days (1899-1902). The government prevailed, and the ruling coalition continued to disregard coffee interests. State institutions remained feeble and sequestered in Bogotá. Colombia’s first major commodity boom ended with little benefit to state capacity, unlike in Chile and Argentina, where export-oriented coalitions prevailed.

These cases suggest that the composition of political coalitions determined why some Latin American countries translated commodity booms into new state capacity, while others did not. This period between 1850 and 1900 was important. It was when Latin American countries solidified their global economic links and went through their formative state building eras. And these state building trajectories have proven durable. Within Latin America, those countries that had the most state capacity around 1900 possess more of it today as well.7

Yet the path to new state capacity in Chile and Argentina was often downright reprehensible. Exporters advanced their economic interests ruthlessly and with little regard for public well-being. When Chilean plebs began establishing family wheat farms in the southern frontier, landed elites had the government designate them as “squatters,” eject them from frontier areas, and allow existing elites to consolidate haciendas, many of which lay fallow for fifty years. Argentina’s government behaved similarly toward Indians and gauchos, the cowboys of the pampas. The government enacted internal passport requirements to keep people near ranches, which had trouble finding workers. People found outside of their district of residency were pressed into military service – and often sent to the southern frontier, where the army was warring with Indian tribes. These episodes caution us against thinking that a righteous policy solution to state weakness in developing countries is to simply empower exporters.

Coalitional politics likely affects how countries treat their natural resource wealth today as well. Researchers maintain that countries can temper the resource curse by using things such as countercyclical policy (a fiscal reserve fund) or by designing contracts to mitigate risk (for instance, by indexing contract prices to future market fluctuations of a commodity). These ideas require that countries possess institutions that can depoliticize and sustain policies that may be unpopular at times. Policy advocates therefore encourage resource-rich countries to improve public administration via “capacity building.” My research suggests that not all contexts are ripe for such projects. If Chile, Argentina, and Colombia are any guide, some political coalitions would be more willing to improve public administration to manage resource wealth. Other coalitions prefer the benefits they can receive by preying on resource exports. It matters who controls policymaking. This conclusion is commonsensical, but has been undervalued. Certain commodities do not intrinsically harm a country, and government institutions are ultimately built, or not built, by politicians trying to maintain their coalitions. Coalitional politics determines why resource wealth is a blessing to some countries but a curse to others.

 

About the Author

Ryan Saylor is Assistant Professor of Political Science at the University of Tulsa (Oklahoma, USA). He researches political development in Latin America and Africa. His first book, State Building in Boom Times: Commodities and Coalitions in Latin America and Africa, will be published by Oxford University Press in summer 2014.

Reference

1. As quoted in Terry Lynn Karl, The Paradox of Plenty: Oil Booms and Petro-States (University of California Press, 1997), pp. 71, 69, and 4, respectively.

2. Stuart Grudgings, “Brazil needs to beat corruption to enjoy oil bonanza,” Reuters, September 1, 2009.

3. Michael Ross, The Oil Curse: How Petroleum Wealth Shapes the Development of Nations (Princeton University Press, 2012).

4. Jeffrey Frankel, Carlos Végh, and Guillermo Vuletin, “On Graduation from Fiscal Procyclicality,” Journal of Development Economics 100(1) (January 2013): 32-47.

5. I develop this argument in my forthcoming book, State Building in Boom Times: Commodities and Coalitions in Latin America and Africa (Oxford University Press, 2014).

6. My book also analyzes the African countries of Ghana, Mauritius, and Nigeria.

7. Marcus Kurtz, Latin American State Building in Comparative Perspective (Cambridge University Press, 2013)

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