Contents Page

Executive Summary 3
1. Introduction 5
2. A History of Interest in Resource Impact 5
　2.1 Conclusion 7
3. The Presence of Resource Curse 7
　3.1 Conclusion 9
4. The Transmission Mechanism Between Large Resource Revenues And Poor Performance 10
　4.1 Long Term Decline in Terms of Trade 10
　4.2 Revenue Volatility 10
　4.3 Dutch Disease 11
　4.4 Crowding Out Effects 13
　4.5 Increasing the Role of The State 13
　　4.5.1 General Issues 13
　　4.5.2 Bad Decision Making 13
　　4.5.3 Enhances Corruption and Rent Seeking 14
　　4.5.4 The Nature of Investment Decisions 15
　　4.5.5. Industrial Policy 15
　4.6 Socio-cultural and political impacts 16
　4.7 Conclusion 18
5. How Might Resource Curse be Avoided - The Theory and the Practice 18
　5.1 Leave it in the Ground 18
　5.2 Diversification 19
　5.3 Revenue Sterilisation 20
　5.4 Stabilisation and Oil Funds 20
　5.5 Investment Policy 22
　5.6 Political Reforms Needed to Carry out the Corrective Politics 22
6. Conclusion 24
Bibliography 25

EXECUTIVE SUMMARY

1. INTRODUCTION
Common sense and economic theory argue that large revenues from natural resources should generate wealth. Yet much evidence suggests the opposite and that such countries suffer from “resource curse”. The paper provides a survey of the growing academic literature on the impact of natural resources on an economy.

2. A HISTORY OF INTEREST IN RESOURCE IMPACT
The topic has long attracted interest from a variety of sources. Initially this was focussed on primary products generally, but after the oil shocks of the 1970s, attention switched to the impact on oil exporters. An interest that subsequently extended to other minerals. More recently interest has revived and attracted a wider audience due to growing pressure from a variety of NGO’s. This has produced a number of results. The World Bank has instituted an “Extractive Industry Review” to consider the Group’s role in such projects. The more responsible multinationals are also looking at the impact of such projects and how to mitigate negative consequences. These concerns are heightened because a number of countries are about to receive large oil and mineral revenues and are therefore vulnerable. Also those financing such projects are concerned that negative impacts will threaten the viability of the projects themselves.

3. THE PRESENCE OF RESOURCE CURSE
There is a large body of empirical work that tries to establish a negative relationship between resource abundance and poor economic performance. For the most part this evidence appears to support the “resource curse” hypothesis. However, such work is not without criticism. The results are very sensitive to the period chosen. How “natural resources” are defined is also important. The methodology used also attracts
criticism from some quarters. Apart from the negative impact on economic performance, the impact on poverty also attracts attention, as does the tendency of resource abundance to create conflict and to retard political change. However, despite fairly compelling evidence of the presence of “resource curse”, the literature also asserts that some countries managed to avoid it and instead receive a “blessing”. A recent study attempts to establish which these countries might be and concludes that some mineral rich countries have succeeded. Thus the paper argues for dropping the term “resource curse” and instead using the term resource impact and then determining whether it was a curse or a blessing.

4. THE TRANSMISSION MECHANISM BETWEEN LARGE RESOURCE REVENUES AND POOR PERFORMANCE
There exists a huge literature on why countries might suffer “resource curse”. The paper considers six transmission mechanisms . a long-term decline in terms of trade; revenue volatility; Dutch disease; crowding out effects; increasing the role of the state; and finally the socio-cultural and political impacts. The paper considers the literature in each of these areas. The increasing role of the state in addition to general issues, considers bad decision-making, enhanced corruption and rent seeking, the nature of investment decisions, and industrial policy. Socio-cultural and political impacts considers why the apparently successful policies to avoid problems were actually undertaken by the political and bureaucratic institutions. Much of the discussion concerns the nature of rentier societies, the nature of regimes and in particular the role of “developmental states” versus “predatory states”.

A clear conclusion from this section is that there is no simple single explanation of what creates a “blessing” rather than a “curse”. Nor is there any agreement on any collection of explanations. This argues for a caseby-case approach rather than trying to force some sort of generalization and adds support to the argument to substitute the term “resource impact” for “resource curse” and then evaluate the nature of the impact. Another aspect is making the distinction between macro-economic policy that may aggravate or avoid problems and why that particular policy was followed in the first place. Thus it is not just what the transmission mechanisms were but why they were allowed to operate (or not as the case may be). This lack of clarity on the transmission mechanisms presents a serious challenge. If it is not clear what causes the problem, then treatment is likely to prove equally elusive.

5. HOW NEGATIVE IMPACTS MIGHT BE AVOIDED . THE THEORY AND THE PRACTISE
This section considers what policy decisions the governments actually made and why they made those decisions and not others. Various options to avoid problems are analysed. These include - not developing the mineral deposits; diversifying the economy away from dependence on oil, gas and mineral exports; sterilizing the incoming revenue; the use of stabilization and oil funds; and finally reconsidering investment policies. The section finishes by assessing what political reforms might be needed to carry out the necessary policies. This involves two possible strands. The first is to develop democracy although the evidence suggests this is far from being a necessary condition. The other strand is the need to remove corruption and contain rent seeking. The issue of transparency as an aid in this process is also considered. The importance of the presence of a ”developmental state” is emphasised together with the need for an alignment of interests within the society. Of particular importance is the institutional capacity of the society to translate a developmental ideology into effective policies.

6. CONCLUSIONS
Clearly the whole issue of what causes a “curse” rather than a “blessing” and how to enjoy the latter and avoid the former is an extremely complex issue. The literature is divided on both causes and cures although there is a growing consensus that essentially it is something to do with governance and the answer lies more in political economy than macro-economic analysis. Hence the key question is not what was done? It is why
was it done?

Several further areas of study are identified: -

• What are the implications of an attack of “resource curse” for the actual project economics and how might these implications be fed into the project appraisal process?
• How can the work on resource impact at a national level be fed into the impact at a regional level?
• What role might civil society play in converting a predatory into a developmental state and what role can the IFI’s and the Multinationals play in encouraging civil society?
• Is the impact from oil and gas projects different from the impact from mineral projects. Both are what the literature has termed “point resources” but arguably their effects may well differ in terms of such issues such as volatility and their various linkages.