AP Comp Gov - The Resource Curse

Summary

The video introduces the concept of the 'resource curse,' a phenomenon where countries with abundant natural resources like oil face political and economic challenges instead of benefits. The speaker explains how resource-rich countries, such as Russia, Nigeria, and Iran, can become 'rentier states,' heavily reliant on oil revenues. While access to natural resources may provide immediate wealth, it can lead to economic over-dependence, inequality, corruption, and reduced democratic accountability. The discussion highlights potential pitfalls and policy approaches to mitigate the negative effects of resource dependence.

Takeaways

• 💡 The 'resource curse' is the phenomenon where natural resources like oil and gas, instead of benefiting a country, can lead to economic and political problems.
• 🛢️ A rentier state is a country that earns a significant portion of its revenue from leasing or exporting natural resources like oil and gas.
• 💰 Natural resources can provide a government with substantial funds, enabling large-scale investments in infrastructure, education, or other sectors.
• 🚨 However, over-reliance on a single resource, such as oil, can make a country vulnerable to price fluctuations and discourage economic diversification.
• 📉 The government may focus heavily on oil and gas sectors, neglecting other industries, making it difficult to sustain economic growth if resource prices drop.
• 📈 Oil-rich countries often experience currency appreciation, which can harm other export industries by making their products more expensive for foreign buyers, a problem known as Dutch Disease.
• ⚖️ Oil wealth can increase economic inequality if the government fails to distribute the revenue equitably, leading to social and political instability.
• 👥 Countries dependent on oil may have less democratic accountability because governments don't rely on taxes from citizens and thus feel less pressure to act in their interests.
• 💼 Resource-rich states are prone to corruption, as the wealth from oil creates opportunities for politicians to misuse funds and build patronage networks.
• 🛠️ Some countries, like Nigeria, rely on partnerships with multinational corporations to extract and refine their oil due to lack of capital and expertise.

Q & A

What is the resource curse?

The resource curse is a theory suggesting that countries rich in natural resources like oil and gas often struggle with economic development and democratization, leading to negative political and economic impacts.

What is a rentier state?

A rentier state is a country that derives a substantial portion of its government revenue from the renting or exporting of natural resources, such as oil and gas.

What are the main advantages of a rentier state?

The primary advantages include increased government revenue, which can be invested in infrastructure, education, or other public goods, and the potential for job creation both directly and indirectly related to the oil and gas industry.

What are the key disadvantages of relying on natural resources for revenue?

Disadvantages include economic overdependence on one resource, lack of diversification, vulnerability to fluctuations in global oil prices, potential for increased inequality, and a higher risk of political corruption and authoritarianism.

What is 'Dutch disease,' and how does it affect resource-rich countries?

'Dutch disease' occurs when a country's currency strengthens due to resource exports, making it harder for other sectors of the economy to compete internationally, thus discouraging economic diversification.

Why might the presence of oil and gas reduce the accountability of governments?

Governments in resource-rich countries may rely on oil and gas revenues instead of taxes, which reduces their need to seek public approval for spending, thus weakening the link between government accountability and citizen input.

How can natural resource wealth contribute to political instability?

Resource wealth can lead to corruption, patronage, and competition for control over the resources, as well as conflicts between regions or groups that feel disenfranchised from the benefits of the resources.

What are some examples of countries affected by the resource curse?

Examples include Russia, Nigeria, and Iran, which rely heavily on oil and gas exports for government revenue and experience political and economic challenges as a result.

What are some policy approaches to mitigate the effects of the resource curse?

Countries may nationalize their oil and gas industries, enter into partnerships with multinational corporations, or privatize their resources entirely, with varying impacts on sovereignty, political stability, and economic equality.

Why is economic diversification important for resource-rich countries?

Diversification is important to reduce dependency on a single volatile resource, protect the economy from price crashes, and ensure sustainable long-term growth across multiple sectors.

Outlines

00:00

💡 The Resource Curse Introduction

This paragraph introduces the concept of the 'resource curse' in the context of a country unexpectedly discovering significant oil reserves. The speaker prompts the viewer to imagine being the leader of a poor country and suddenly learning about these reserves, encouraging them to consider the potential benefits. The paragraph explains how this can lead to a situation where the government becomes a 'rentier state,' heavily reliant on oil and gas revenues. The potential advantages include increased government revenue, which can be used for public investment or personal gain, and job creation in the oil and gas sector. However, it also sets the stage for discussing the potential downsides, known as the 'resource curse,' which will be elaborated in subsequent paragraphs.

05:02

📉 The Downside of Resource Abundance

The second paragraph delves into the potential negative consequences of a country becoming overly reliant on its natural resources, particularly oil. It outlines several key issues: the lack of incentive for economic diversification leading to an over-reliance on oil, the government's tendency to invest disproportionately in the oil sector at the expense of other industries, the volatility of oil prices which can lead to budget deficits or irresponsible spending, and the 'Dutch disease' effect where a strong currency can harm other export industries. The paragraph also touches on the potential for increased inequality and political instability due to the concentration of wealth and power in the oil sector, as well as the reduced accountability and increased corruption that can accompany resource-rich governments.

10:02

🛑 Policy Responses to the Resource Curse

The final paragraph discusses various policy approaches that countries might adopt to mitigate the negative effects of the resource curse. It mentions nationalization of oil and gas as a common strategy, where the state claims ownership and control over these resources. The paragraph also explores partnerships with multinational corporations as a means to leverage foreign expertise and capital, as seen in Nigeria's relationship with Shell. Additionally, it touches on the recent Mexican example of allowing state-owned companies to engage in joint ventures with private investors. The paragraph concludes by suggesting that privatization of natural resources is another policy option, with its own set of implications for sovereignty, political stability, and economic equality.

Keywords

💡Resource Curse

The resource curse refers to the paradox where countries with an abundance of natural resources, particularly oil and gas, often experience negative economic and political outcomes. Despite the potential wealth from these resources, such countries may struggle with economic development, corruption, and authoritarian governance. The video discusses how reliance on oil revenues can lead to instability and underdevelopment, with examples from countries like Russia, Nigeria, and Iran.

💡Rentier State

A rentier state is a country that derives a significant portion of its government revenue from the rent of indigenous resources to external clients. In the video, rentier states like Russia, Nigeria, and Iran gain a large share of their income from oil and gas exports. This wealth can be spent freely by the government, potentially leading to overdependence on oil revenues and neglect of other sectors.

💡Economic Diversification

Economic diversification involves expanding an economy’s sectors beyond one dominant industry, such as oil. The video emphasizes that rentier states often fail to diversify their economies, making them vulnerable to fluctuations in global oil prices. Without diversification, the country becomes overly reliant on a single source of income, leading to economic instability.

💡Dutch Disease

Dutch Disease is an economic phenomenon where the discovery and export of natural resources, such as oil, causes a country's currency to strengthen, making other industries less competitive internationally. The video explains how this can harm industries outside the resource sector, reinforcing over-reliance on oil exports and hindering broader economic growth.

💡Nationalization

Nationalization is the process by which a government takes control of private industry, particularly in the oil and gas sectors. The video mentions that most of the case study countries, except the UK, have nationalized their oil industries, meaning the state owns and controls the extraction and sale of oil for the supposed benefit of the people.

💡Corruption

Corruption is a major issue in rentier states, where the control of oil revenues leads to non-meritocratic competition and misuse of funds by politicians. The video highlights that corruption is rampant in countries like Nigeria and Iran, where oil money is often used to dispense political favors rather than for the public good, weakening democratic accountability.

💡Oil Price Volatility

Oil price volatility refers to the frequent fluctuations in global oil prices, which can have severe economic impacts on rentier states. The video points out that no single country can control the price of oil, and when prices drop, it can lead to budget shortfalls and economic crises in countries dependent on oil revenues, like Russia or Nigeria.

💡Sovereignty

Sovereignty, in the context of oil resources, refers to a country’s control over its natural resources. The video discusses how some countries, like Nigeria, rely on foreign companies like Shell to extract and refine their oil due to a lack of expertise or capital. This can lead to concerns about the loss of national control over key resources.

💡Political Accountability

Political accountability refers to the responsibility of the government to its citizens, often through mechanisms like taxation. In rentier states, governments rely less on taxes due to oil revenues, which weakens their accountability to the people. The video notes that this can reduce citizen influence on government spending and priorities, fostering authoritarianism.

💡Environmental Impact

The environmental impact of oil extraction is significant, especially in regions with heavy oil production like Nigeria. The video briefly touches on how local populations often suffer the environmental consequences of oil production, such as pollution and habitat destruction, while receiving little benefit from the revenues generated, leading to social unrest and conflict.

Highlights

Introduction to the concept of the 'resource curse' in AP Comparative Government, focusing on how natural resources can negatively impact a country's economic development and democracy.

Leaders of resource-rich countries, like those with oil reserves, may initially think they have a huge economic advantage.

The concept of a 'rentier state' is introduced, where a government gets a significant portion of its revenue from natural resource exports.

Countries can either nationalize their resources or partner with foreign companies to extract and sell them, with both methods having pros and cons.

Countries like Russia, Nigeria, and Iran are examples of rentier states relying heavily on oil and gas exports.

The potential benefits of having natural resources include increased government revenue, job creation, and investment in public goods like infrastructure.

The disadvantages of resource dependence are highlighted, such as economic over-reliance on a single sector and vulnerability to fluctuating global oil prices.

The concept of 'Dutch disease' is discussed, where a country’s currency becomes stronger due to oil exports, making other industries less competitive.

Countries that rely heavily on oil often fail to diversify their economies, which can lead to long-term economic instability.

The political implications of the resource curse include reduced accountability, as governments rely less on taxes and more on oil revenues.

The potential for corruption in resource-rich states is significant, as politicians can use oil revenue for personal or political gain.

Oil wealth can exacerbate economic inequality, as the benefits often do not reach the broader population.

Resource-rich countries may face internal conflicts over control of oil resources, as seen in the Niger Delta and in diamond-rich regions of Africa.

Countries use different policy approaches to manage oil resources, such as nationalization, partnerships with foreign companies, and privatization.

Case studies like Nigeria, Iran, and Russia will be explored in the course to illustrate the varying impacts of the resource curse on political and economic systems.

Transcripts

hey there it's time to talk about

one of the concepts in ap comp gov that

most routinely makes people go

what i had no idea and that is the idea

of the resource

curse um and in order to set you up to

go what i had no idea what i would like

you to do

is briefly on your honor pause this

video

and think about this scenario imagine

that you are the leader doesn't matter

at the political system for these

purposes

of a relatively poor country and

somebody

has just come in and told you that you

are actually it turns out sitting on

really significant reserves of oil

pause please and just make a list of all

the exciting things that you can now do

of all the reasons that your country is

suddenly in better shape now that you

have this piece

of information

so probably one of the things that you

said

was that this means that you can extract

the oil you can export the oil you can

tax the oil you can give oil to your

people and the consequence will

be that your government will suddenly

have a lot more money to spend on cool

fun stuff

than it previously did what that makes

your state is a rent here state

a renter state is a state that gets a

considerable portion there isn't a

numerical threshold but a bunch of money

of government revenue from um either

exporting oil and gas

and or um leasing its oil and gas

revenues or resources to other countries

so if i've found oil deposits in my

state i might set up a national

petroleum corporation

i might drill the wells i might build

refineries myself and then sell it and

have all that money go directly to the

state

or if i lack the technology if i believe

in privatization

if i lack the capital uh up front to

invest i might

sign a contract with um shell or exxon

mobile or somebody uh saying

you can come in and drill our oil and

you have to give us 50

of revenues every year or something like

that the states that are in this

position in this course are going to be

russia nigeria and iran those are all

the states that get a pretty big chunk

of their government budget

from oil and gas exports or leases every

year

um and there's a couple of there's some

some really fundamental advantages that

could accrue to you as the results of

your ntr state status

um you could and they generally stem

from having

access to a bunch of money uh that your

government can dispose of however it

wants

in principle you could invest that money

in all kinds of cool stuff

you could buy schools you could buy

puppies for everybody you could build a

nice national railroad network you could

build a beautiful presidential palace

with

yourself a statue of yourself in solid

gold whatever you want

um and so in principle uh your

government has a bunch of money that it

can spend on doing cool stuff

for the public good or just for your own

personal ego whatever i'm not here to

judge

um the alternate in addition you could

also say um that this is potentially a

job creating industry right um

both directly from people who are

working in oil and gas extraction and

refinement

and indirectly from the people who you

know sell them lunch while they're at

work

um and even less directly from the

people who benefit from all that

government investment that you may or

may not be doing

so in principle having access to natural

resources can be an amazing thing for a

country

that will increase its overall standard

of living however

there's also some pretty considerable

possible disadvantages

and the pattern of countries thinking

that they have

a huge boon in the form of oil and gas

deposits that they nationalize

and then turning out to have massive

political and economic problems as a

result

of exploiting those resources that

pattern is so common

that there's a term in the political

science and economics literature

for when having oil and gas make things

go south in your country and that turn

is the resource curse a little over

dramatic but whatever

the resource curve sometimes you'll see

it uh described as the resource trap or

the oil curse or something like that

there's these equivalent terms bouncing

around

um the resource curse refers to the

theory that having natural resources

make it harder to achieve economic

development and democratization so again

negative economic impacts

and negative political impacts at least

if you subscribe to the theory

that democracy is better than

authoritarianism which your textbook

authors most certainly do

um and in general especially in

particular in this course the most this

most commonly happens with oil and gas

in principle i think you could probably

have it was if your country had massive

deposits of something like diamonds

but all the countries that we care about

in this class

have uh oil and gas as their major

natural resource

um so why might it be a bad thing to

have oil i have about 17 different

reasons for you and i'll run through

them relatively quickly

one possibility is that there's really

no reason

if it's easy to make money by exporting

or by renting or leasing oil and gas

there's really no incentive for economic

diversification or development in the

worst case scenario your economy starts

to become

completely dependent on that single

natural resource

and so if we move to that carbon free

future that everybody's talking about or

if the oil price crashes suddenly you

don't have a whole lot to fall back on

um related to that is that the

government you know tends to

invest in certain sectors of the economy

and there's a strong strong

temptation in a red-tier state uh to

spend

all of the government's investment

potential in the oil and gas industry

um and to neglect other industries and

other things that are going to make a

broader segment of the population's

lives

better a third is that um

no one country has control over the

price of oil they will sometimes band

together we'll talk a little bit later

in this course about opec

and how it can increase country's power

but no one country

has total control over the price of oil

because there's a bunch of different

countries

selling oil on the world market and

there's nothing particularly special

about nigerian or iranian oil that makes

it better than oil that's

drilled in texas and so when the

oil price falls a country doesn't have a

ton

of ways to to control that slide in oil

prices

and so you might project your uh you

know the people who plan your budget

might project having this much money um

coming in from sales of oil and gas

and if the price crashes then all of a

sudden you're left with a massive

deficit you're left with way less

revenue

conversely when the oil price goes way

higher than you're expecting

that can be a great thing if you spend

it wisely but it can be a bad thing

if you take that opportunity to borrow a

bunch more money because people are

willing to lend to you cheaply

or if you take that opportunity to just

spend all your oil revenues on some

irresponsible project

that you're not actually going to be

able to complete um once the oil price

goes back down again

so having uh being dependent on a

resource whose price is largely beyond

your control

can have some really obvious problems

there a fourth problem

um and my economi my macroeconomics

background is too fuzzy to explain this

super cogently to you

um but a fourth problem is known as

dutch disease because it happens to the

netherlands

which is that when you're exporting oil

um a bunch of other countries

currencies are chasing after your

currency and your currency is going to

become more valuable

on the world market relative to other

currencies this is great for your

citizens when they want to go

shopping somewhere else because they

have more buying power

but it's actually really bad for every

other industry in your country that's

trying to

export anything that's trying to sell

their goods to any other country

because given those exchange rates it's

relatively more expensive for

consumers in other countries to buy

stuff made in your country

um and so if you have a bunch of other

countries currencies chasing after your

currency because they need to buy your

oil in your currency

that can actually reinforce that pattern

of you know discouraging economic

diversification encouraging

over-reliance on the oil sector

and so it can actually be bad for other

sectors of your economy

um a fifth thing is that oil and gas

can lead to massive inequality if you

don't find a way of system out of both

diversifying your economy

and of redistributing the revenues that

come to your government

as a result of oil and gas you're going

to get

increasing economic inequality and we've

talked already in this course about how

economic inequality can be politically

destabilizing

um and then bleeding into the political

stuff

these arguments start to be a little

more controversial

but i think they're important to engage

with and to think about how they work in

our specific case study countries

one argument for the resource curse as a

political

um as a as a negative political

phenomenon

um is that countries and specifically

government

actors that have a steady stream of

revenue from oil and gas

have no incentive to modernize they have

no incentive to diversify their economy

as we've said

but they also have no incentive to

become more democratic in a big part of

the reason why

is that they're actually not necessarily

uh reliant they don't necessarily depend

on

citizens paying taxes and so they face

less of an incentive to occasionally go

back to the citizens and say hey

you pay us taxes how do you want this

money to be spent in other words there's

not really a link between whether the

government's getting money in its annual

revenues

and whether the government is doing

things that its citizenry wants it to do

so you can make an

argument um that there's a lot less

accountability

in a government that has all these

independent revenues from natural

resources

related to that problem is that there is

just a massive possibility for

corruption

and you'll see this particularly in

nigeria you'll see some of it in iran

and russia

as well just the amount of oil and the

amount of power that is kind of flowing

around

together in any country with really

significant natural resources

means that you often see just tremendous

amounts of corruption

partly because people are competing in

sort of non-meritocratic ways

to get access to control over the oil

partly because

oil revenues will give politicians a big

big source of money that they can use to

dispense patronage to their supporters

instead of actually doing things with

the power of the state that are good for

all citizens

um finally i think that's an argument i

articulated already when governments

rely less on taxes

citizens don't have as much voice in the

decisions of the government

finally you see this in countries with

oil we'll talk about it in nigeria some

of you will do a panel on it

alternatively if you're familiar with

the phenomenon of blood diamonds

and conflicts over diamond mines in west

africa and central africa over the last

couple of decades

this might be a familiar argument to you

already kanye west actually once

pretended to do a song about that

phenomenon

um but the uh if you have natural

resources

in a particular area of the country um

and the citizens of that area of the

country

say feel um disenfranchised uh one thing

that they might do

as is the case in nigeria sometimes is

to sabotage oil production

as a way of expressing their discontent

that they don't benefit from this fast

national patrimony

despite what's often the negative

environmental consequences of

living next to a massive oil and gas

extraction operation

sometimes you'll actually see more

direct uh you know physical conflict

over who gets to uh drill the oil or who

gets to mine the diamonds

um and so those you who are doing the

niger delta panel will address that

issue pretty directly

in a week or so um the last thing i want

to leave you with

is not an exhaustive discussion but just

a couple of policy approaches to

consider

um because we're going to look at you

know five of the six

case study countries every country

except the uk gets some amount of

revenue from oil extraction

and gas extraction in this course and

three of those countries

iran nigeria and russia are pretty

heavily reliant

our qualifiers run tier states so a

couple of different policy approaches

that countries will take in an attempt

to mitigate the negative effects of the

resource curse

um most basically uh many many countries

will nationalize

oil and gas the united kingdom which

does actually produce some oil off the

coast of scotland the united kingdom is

the only case study country in this

course

that hasn't nationalized its oil and gas

revenues the other five

all have provisions their constitution

or laws that say

oil and gas in this country are the

property of the state and they will be

extracted and used

or rented out for the benefit of the

people whether or not that's actually

true is a slightly different story

so many many many countries will

nationalize oil and gas at least to some

degree

some countries and nigeria is going to

be the foremost example here

won't necessarily have the capital or

the technology

or the expertise to extract and

particularly to refine that oil

themselves

and so they have to enter into

partnerships with multinational

corporations

so shell for instance is based in the

netherlands but does a huge amount of

business in nigeria

and you might make the argument that

shell's importance to the nigerian

economy and to the nigerian state's

budget

has given it an amount of political

power that's really out of all

proportion

um to what you know the amount of

political power it should actually have

in that country

another option here slightly overlapping

is that

in mexico within the last decade under

the pena nieto administration as you

know pimx

the state-owned oil company has just

recently been allowed

um to engage in joint ventures with

private investors from both inside and

outside of mexico

and so that's a slightly um you know you

you could in principle have less

dependence on foreign companies

but still allow private investors to get

involved in your oil industry in some

way even in the context of a

nationalized oil industry

and then of course there are countries

that will privatize their natural

resources all together

and you might want to be prepared to

think through the consequences of doing

that

in terms of sovereignty in terms of

political stability in terms of economic

equality etc etc etc

that's it we'll come back to the

resource course when i talk to you next

about nigeria and we'll revisit it in

russia and

in iran thank