Democracy Lab

Embarrassment of Riches

Natural resources would seem to promise easy money. Welcome to the dark side.

Can great wealth do more harm than good? Everybody enjoys moral tales about Richie Riches made miserable by the worship of Mammon at the expense of family, friendship, and self-respect. But can wealth (in particular, natural wealth) be a liability for a whole country?

Actually, the question is relevant for a startlingly large number of economies in transition ranging from Saudi Arabia and Iraq to Venezuela and Russia. And while the consequences of being the resource king of the neighborhood are mixed -- Angola barely survived the consequences of generous deposits of oil and diamonds, while Chile has thrived on mountains of copper -- the dilemma known to economists as the "natural resource curse" does offer insights into the delicate, complex process of development.

Let's get one thing settled. Yes, a whole host of countries (in no particular order, Canada, Australia, the United States, Malaysia, Norway) have managed very nicely indeed with big natural resource endowments. But happy endings (or, for that matter, happy middles) seem more the exception than the rule. Why?

Resource-rich countries typically depend heavily on just a few commodities to pay for imports, to service foreign debts and to fund government services. Nothing inherently wrong with that, save one thing: Natural resource prices are far more volatile than the prices of most industrial goods and services.

Oil, of course, is a great example: The price of a barrel (adjusted for inflation) has topped $100 twice since 1998 -- and slipped to less than $20 in between. But what goes for oil also goes for most hard-rock minerals. Copper tripled between 1998 and the peak of the 2008; tin hit $38,000 a ton in the early 1980s, then sunk below $5,000 early in the new millennium. Nor have crops -- especially the tropical food crops that spell the difference between a strong economy and a week one for a number of small countries -- been immune to the roller coaster ride. Coffee prices increased five-fold between 2002 and the spring of 2011; cocoa tripled between early 2007 and early 2010.

Now, countries could offset the impact of this volatility in all manner of ways, most of which come down to saving in boom times and spending in lean. And some (like Norway, Chile, and even Russia) do just that. But most developing countries lack the political will or the institutional constraints to take the long view. Typically, they become trapped by commodity price cycles, over-committing on the up side and suffering the consequences in terms of budget deficits, currency volatility, and inflation when the balloon deflates. Among other problems, the resulting macroeconomic instability makes it difficult to attract investment in manufacturing and services: arguably just what these countries need to diversify away the impact of commodity price volatility.

There's a related problem for commodity exporters called "Dutch disease." It was named (by The Economist magazine) after the problems encountered by the Netherlands when vast natural gas fields were discovered offshore in the late 1950s. Gas exports brought a bonanza of foreign exchange earnings, tending to drive up the exchange value of the Dutch currency. And that, in turn, made other Dutch exports (notably, manufactured goods) uncompetitive in foreign markets - which made manufacturers and their employees very unhappy.

Note that Dutch disease may or may not hurt an economy as a whole; not every country needs a healthy manufacturing sector to thrive. But there's a case to be made (especially in the case of poor countries) that manufactured exports generate all sorts of positive spillovers that spur development. For example, large-scale manufacturing creates a demand for sophisticated finance and management, both of which are foundations to economic growth.

Nonetheless, the pernicious effects of Dutch disease are pretty clearly visible in contemporary Russia, which exports little besides oil, gas, and minerals. (The main exception is weapons, but that's a whole other story). Russian industry, much of which was beyond repair in the last, dark days of the Soviet Union, lost all its foreign markets once its former satellites were free to look to the decadent West to buy tractors that started on cold mornings and airplanes that rarely crashed. Today, Russia can't attract investment to build a competitive industrial base for a whole bunch of reasons -- not least of them the fact that revenues from natural resource exports prop up the exchange rate of the ruble.

These arguments hardly seem adequate, though, as an explanation for, say, the Dickensian poverty of oil-rich Nigeria or the vertigo-inducing imbalance of the Saudi Arabian economy, where two young men in five are unemployed and there's an 18-year waiting list for home mortgages. In such cases, the link between resources and stagnation is institutional development (or, rather, the lack thereof).

In very poor countries like Nigeria (or Gabon, Equatorial Guinea, or the Democratic Republic of Congo), resource wealth leads to corruption, which in turn leads to dysfunctional government. Oil and mineral wealth, as opposed to wealth linked to the production of low-margin good and services, makes corruption overwhelmingly tempting. A manufacturer that operates in a competitive global market may credibly threaten to leave (or never show up in the first place) if officials stick their hands out at every opportunity. By contrast, an oil company that can extract crude for, say, just one-tenth of what it's worth on the market has a far greater incentive to pay bribes in order to keep on pumping.

Corruption allows government to build and lock-in authority through patronage rather than through the efficient delivery of services. Indeed, it creates (or at least perpetuates) a zero-sum economic culture in which the most realistic path to success is to skim the cream rather than to make something people actually value. And corruption, it's worth remembering, is a communicable disease, typically infecting everybody from traffic cops to tax collectors if it's understood that the Big Men are on the take, too.

Consider Nigeria, which ranks 133rd out of 183 countries on the World Bank's Ease of Doing Business Index -- largely because its business environment is so hobbled by corruption. It takes the better part of a year and fees equal to ten times the per capita income to obtain an electricity connection. Bureaucracy run amok, you say? Sure, but there's method to the madness, since every bottleneck creates a profit opportunity for the bureaucrat who can grease the wheels of the creaky government machinery.

But even where the result of easy resource wealth is not blatant corruption, it can inhibit growth by reducing the pressure for change. In Saudi Arabia, just 12 percent of working-age women are in the work force -- a culturally driven waste of productive capacity that is perpetuated because oil generates enough income to make it tolerable. Saudi men refuse to do drudge work (or much work at all), and get away with it because the state can afford to keep them on the dole, paying Pakistanis or Palestinians to keep the coffee hot and the streets repaired. Here, merit gives way to family, tribal connection, and feudal order. The process of natural selection broadly writ, in which institutions that encourage productive activity trump unproductive institutions, is blunted.

As I suggested earlier, some countries cope well, or even thrive, with huge natural wealth. And not all of them are rich. Chile, for example, has largely neutralized the budget-busting, growth inhibiting effects of an export sector dominated by copper. But Chile had fairly strong growth-inducing institutions to begin with, and now ranks 39th on the Ease of Doing Business Index. Moreover, as Harvard's Jeffrey Frankel has shown, it's possible to put in place automatic mechanisms that buffer commodity price volatility and reduce the temptation for politicians to play Santa Claus in boom times.

All that said, the natural resource curse is very real, and especially difficult to overcome in poor countries. Indeed, there's a pretty good argument to be made that a lack of resources is, on balance, a blessing. Before you scoff, consider that South Korea's GDP per capita was below that of Nigeria's in the 1960s.

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Argument

The Muddle Kingdom

China has a serious PR problem.

Wang Xuming is different. Unlike other Chinese officials, he actually enjoys communicating with the world outside of the Communist Party. As a spokesman for the Ministry of Education, he released his cell phone number to the media. "I was available 24 hours a day," he told me in November. "There are some journalists with mental disorders who would call me at 10 or 11 at night. Of course I don't mean you," he added with a smile. He peppers his speech with flowery expressions and blunt asides, unlike his counterparts, who often sound like Karl Marx audiobooks. Remarkably, he would actually admit when he didn't know anything. Chinese reporters saw him as a rare light in Beijing's darkness, which is why he was fired in 2008 for being too outspoken.

Both domestically and internationally, the Chinese Communist Party has a public-relations problem: Its officials do not know how to communicate with the media. Decision making is highly centralized, and the relatively low-ranking officials tasked with speaking to reporters don't want to offend their superiors by saying the wrong thing. Although Reporters Without Borders ranks China's media as 174th in its latest Press Freedom Index, just slightly better than Iran and worse than Sudan, news is transmitted through Twitter-like micro-blogging services, of which roughly 250 million Chinese use. Though few expect China's stilted state-run media to be crusaders for change, there are more independent newspapers, like the business magazine Caixin and the newspaper the Southern Metropolis Daily, and journalists there increasingly ask difficult questions about everything from pollution cover-ups to low-level official corruption.

Spokesmen, though, hide from the domestic and international press. Besides Wang, all of the half-dozen current and former spokespeople I've met have declined to give me their contact information besides a general office phone number. Wringing a comment from a government ministry more often than not involves the request to fax a list of questions, which are rarely answered.

And when poorly trained spokesmen and officials do speak, PR disasters often ensue. On Tuesday, rumors swirled online that a vice mayor named Wang Lijun in the city of Chongqing attempted to defect to the United States (the State Department on Wednesday confirmed only that he had met officials at the consulate and left "of his own volition"). Wang shot to fame for overseeing Chongqing's highly publicized fight against organized crime, and a scandal involving Wang could hurt Chongqing Party Secretary Bo Xilai's chance of promotion. The Chongqing government's official microblog responded that Wang was taking a "vacation-style leave." This ridiculous response drew 21,000 comments and has been re-tweeted an astonishing 60,000 times, blowing up the story domestically. "This style of PR really makes me disappointed by the government," wrote one Weibo user. "What a sense of humor!" wrote another.

After a high-speed train crashed in Wenzhou last year, killing 40 people, the railway ministry tried to clean up the accident before an official investigation could take place. The railways spokesman claimed, unconvincingly, that this was done to aid rescuers. He told reporters, "Whether you believe it or not, I believe it anyway." The ministry sacked the spokesmen, the fourth ministry official to be fired after the crash, but his remarks only added to public anger and added to grassroots pressure for the government to reform the ministry.

China faces a worse PR problem internationally. After the Nobel Committee awarded imprisoned dissident Liu Xiaobo the Peace Prize in 2010, China's Foreign Ministry spokesman called the decision "blasphemy," a response that immediately fueled comparisons between China's response and that of Nazi Germany, when the Nobel Committee awarded the prize to a German dissident. The Western world perceives the Chinese government as unreasonable toward the Tibetans in part because of its officials' tendency to issue tin-eared statements calling the Dalai Lama names like a "wolf in monk's robes."

Chinese government officials complain of an anti-Chinese bias in Western media, but the foreign journalists whose reporting shapes Chinese perception almost always have a difficult time getting the Chinese government's side of the story. Government officials and spokesmen rarely give interviews. Chinese dissidents are generally far more media savvy. The Dalai Lama has given hundreds of one-on-one interviews to foreign media. So has dissident artist Ai Weiwei. President Hu Jintao has given none. With the exception of Premier Wen Jiabao, for the past few years neither have any of the other members of the Standing Committee of the Politburo, ostensibly the nine most powerful men in the country.

Yiyi Lu, a former Chatham House fellow and expert on Chinese civil society, wrote a paper entitled "Challenges for China's International Communication," due to be published in April.  She reports that China's bureaucratic system punish those who make mistakes when talking to journalists but doesn't reward those who say positive things, creating strong disincentive for officials to engage the media. In addition, "spokespersons dare not comment on officials who are more senior than them. Since most spokespersons are middle-ranking officials, it means many topics are off limits," she writes.

Things used to be much worse. One of the Communist Party's founding mandates was to "thoroughly break off connection of any kind with bourgeois intellectuals and similar parties," and the country was closed to outsiders for much of the Mao years. China first appointed a spokesman for the Foreign Ministry in 1983 who held weekly press conferences but didn't allow questions; the second spokesman appeared in the Taiwan Affairs Office in 2000. After being slow to respond to successive PR disasters, like the SARS outbreak in 2003 and the Tibetan riots in 2008, the government has made it more of a priority to try to present its side of the story to the international media, but has yet to set up a functioning system of spokespeople.

"I think today's spokespeople are in a bottleneck period," says Wang, the ousted Education Ministry spokesman, who now directs the ministry's Language and Culture Press. "The question of whether or not there are spokesmen in China has already been solved. The far more difficult question is what should spokesman say, and should they say anything at all?"

But instead of focusing on domestic accountability or openness, the Chinese government has been investing heavily in the internationalization of its own TV and news stations, to counter what it perceives to be anti-Chinese bias in the Western media. The state broadcaster CCTV yesterday launched a new program in English called CCTV America, which it says will "project China" to the world. The central government has reportedly committed $6 billion to the global expansion of its state run media. But by allowing its spokesman and officials to actually say something and convincingly present their side of the story would go a long way to countering perceived media bias.

That is the goal of Wang, who has become China's most vocal spokesmen for spokespeople: He released a book last month about how to be a good government spokesperson in China, and he has criticized his former brethren in print and other media. "Our party is very great," he says. "But party, government, is very abstract. The way we understand it is through people. I hope we can have flesh and blood spokespeople." He adds, "Spokespeople cannot be useless, like deaf people's ears. If a spokesperson doesn't speak, than he's not a real spokesperson."

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