Economy

The Paradox of Plenty

Let’s look at two oil-rich countries – Venezuela and Norway.

Venezuela is a country in Latin America that struck liquid gold in the early 1920s. It has the world’s largest amount of proven crude oil reserves, amounting to almost 25% of total OPEC countries’ produce. However, Venezuela is reeling under hyperinflation and recession currently.

While this despondent situation can be attributed to a variety of factors like poor governance, politics, and corruption, there also arises an interesting concept here – the paradox of plenty. Also called resource curse, this refers to a contradictory phenomenon where often countries that are blessed with an abundance of natural resources fail to fare well economically. According to the International Monetary Fund, 29 out of 51 countries tagged as resource-rich have shown poor growth performance. Why does this occur?

One of the major reasons behind this unfortunate circumstance is insubstantial investment in diverse industries. When a country realizes that it has a plethora of a particular natural resource, it tends to place the entire dependence of its economy on this commodity. All of the country’s investment capital and infrastructure development tend to gravitate towards the development of industries that specialize in the export of this resource and the government often fails to spread its investments across sectors. Thus, the economy becomes completely reliant on the price of that particular resource, limiting the growth of the country in other sectors. Naturally, when the price of this commodity tumbles, the entire economy of the country collapses leading to a recession.

People are a country’s most crucial asset. A skilled human resource that works in diverse sectors propels the country’s economy. In this scenario, when the majority of the investment is stocked together for the production and export of just one commodity, training and upskilling remain limited to the walls of just this industry. As a result, when there is a dip in the prices of this commodity and unemployment starts to take over the market, the majority of the population isn’t equipped enough to switch to other industries.

This is what happened in Venezuela. The government placed over-reliance on the oil and gas sector and failed to diversify its investments. During the years of a booming oil market, Venezuela made hay. In 2017, oil made up a whopping 98% of Venezuela’s export earnings. However, the highly oil-dependent economy subjected to a corrupt government and poor politics failed when there was a drop in oil prices, and the nation has now spiraled down to extreme debt and hyperinflation with 90% of its people living under poverty.

Another reason behind the occurrence of this phenomenon is appreciation in the exchange rate. A country that discovers a natural resource tends to have its currency value appreciated. This is because of the increase in the demand for exports. This rapid increase in exports injects foreign cash into the country’s economy as a result of which, the local currency’s value goes higher. This makes the cost of local production go up and thereby reduces price competitiveness between imports and local produces. As a result, other industries of the country face a hit. This is also called the ‘Dutch Disease’, named after the economic situation that prevailed in the Netherlands after the discovery of vast natural gas resources in the late 1950s. While the revenues went up in Netherlands due to the export of natural gas, the appreciation of its local currency value lead to a decline in the profits of the manufacturing sector, thereby leading to rampant unemployment. However, before things went completely out of hand, Netherlands got the situation under control. This was done by decelerating the appreciation of the exchange rate and increasing the competitiveness of the manufacturing sector.

Venezuela too had fallen victim to this disease with its black gold exports, with excessive focus directed at the oil and gas industry and other sectors neglected. And when the global oil prices fell, Venezuela had no backup option to fall back on.

Norway, on the other hand, is another country that has a large oil supply and a well-established oil industry. Norway first discovered petroleum in the North Sea in 1969 and is among the 10 largest crude oil exporters of the world. It is also the largest exporter in Europe. But Norway serves as a stellar example of how to get better of the resource curse. Norway steered clear of falling prey to the greed of oil richness by investing the returns from oil and gas exports in a giant sovereign wealth fund, also called the oil fund. The objective was that the income from oil exports will not be converted into the domestic currency, thereby avoiding exchange rate pressure on it. Revenues would be accumulated in the oil fund which would be invested into international financial markets. All this saving and not spending has helped keep a check on Norway’s economy, where prudence and pragmatism are the governing principles. In addition, the Norwegian government took cautious checks and balances to ensure the petroleum industry does not cross roads with the development of other industries or with environmental regulations.

Another country that has survived this imprecation well is Botswana, a country in Southern Africa. Botswana has a profusion of a much rarer resource – diamonds. When Botswana got its independence from Great Britain in 1966, its gross domestic product was a mere 51.46 million USD. As of 2019, its GDP had multifold to 18.34 billion USD. It is at par with upper middle-income countries like Argentina and Brazil. This can be attributed to good economic and fiscal governance and the right handling of the good luck that the country struck! As in case of Norway, the Botswana government decided to stock up the revenues from the exports in the government treasury instead of lavish spending. The government garnered more money in taxes than what was required for the running of the government, thereby curbing spending and restricting the flow of cash in the market. This money collected through taxes was transferred from the Botswanan economy to the government treasury. By slowing inflation and counteracting the price-increasing effects of the central bank’s money printing, Botswana beat a hasty retreat from the Dutch disease and maintained the competitiveness of its export sector.

Both Norway and Botswana are archetypes that prove that this curse is not infallible! In the end, it’s not about what you have; it’s about how you use what you have!

-Rekha Chander (Freelancer)



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