BY WAYNE ELLWOOD
Say what you will about the late Venezuelan President Hugo Chávez; he had chutzpah. What better place to a make a point about Latin America’s colonial inheritance than in front of the world’s media? So it was with a sense of occasion that the smiling Chávez strode across the floor of the Summit of the Americas conference in April 2009 to present US President Barack Obama with a book. And not just any book. It was a copy, in Spanish, of Uruguayan writer Eduardo Galeano’s 1973 classic, The Open Veins of Latin America: Five Centuries of the Pillage of a Continent.
Cheeky, yes, but the point was made: history is important. Galeano’s analysis of the continent’s economic plight was not new – the book summed up, in a swashbuckling and provocative style, what economists like Raúl Prebisch and Andre Gunder Frank had been arguing for years. They had a term for it: ‘dependency theory’. Galeano gave the theory ‘street cred’, hauling it out of the murky backwaters of academia. (Years later he explained his book’s enduring popularity to the New York Times, calling it a work of political economy ‘written in the style of a novel about love or pirates’.)
Dependency theory can be as arcane as any economic treatise. But the main assumptions are clear. The core argument goes something like this. The economies of the South were warped by 500 years of colonialism and imperialism, shaped and determined by their colonial masters. The colony’s early role, whether in Latin America, Asia or Africa, was to ship raw materials to the imperial ‘centre’ – and to provide a market for ‘value-added’ manufactured exports from the centre. Sometimes the natural resources were minerals like silver, copper or diamonds; sometimes they were agricultural products like bananas, cotton or sugar. The result was the same: colonies became dependent on the export of a handful of cash crops and raw materials produced by cheap labour. The system became deeply entrenched over centuries and irrevocably shaped social, political and cultural structures – even after decolonization led to political independence. Basic transport, energy and communications systems were tilted towards commodity exports; education systems and bureaucracies were groomed to handle exports.
Cheap raw materials made good business sense for the dominant nations and for the companies that piled up super-profits from their colonial advantage. As the UN Conference on Trade and Development (UNCTAD) has pointed out, apart from short-term price booms, the ‘terms of trade’ – the price of resource exports relative to manufactured goods – have been falling for more than a century.
As a result, global economic structures geared to primary exports did little to advance prosperity or social welfare in the South. Poor countries were not undeveloped, they were intentionally underdeveloped – a yin-yang process that directly linked the enrichment of the North to the impoverishment of the South. The upshot was that corrupt politicians, local élites, profit-driven corporations and a global trading system tilted to favour the rich nations meant that benefits of the ‘extractive model’ of development bypassed the poor majority.
Those days are over, you might say. Economic power houses like South Korea, India, Brazil and China prove that poor countries, with enough gumption, can scramble their way to the top. They just need to capture as much as they can from their natural wealth and reinvest it to benefit their citizens. We had the ‘Asian tiger’ economies, so why not ‘resource tiger’ success stories?
There’s no question the demand is there. The world’s voracious appetite for raw materials and new energy sources sparked an explosion in commodity prices from 2002 to 2012 – the so-called ‘commodity supercycle’. Since 2000, average prices have doubled while more countries than ever are dependent on commodity sales. UNCTAD notes that 94 of 156 developing countries currently depend on resources for at least 60 per cent of their export earnings.1 Most of the increased demand has come from China (and to a lesser extent India and Brazil) where double-digit economic growth boosted resource imports and sparked a frenzy of exploration activity.
You might think higher prices for resource exports are a good thing. Troublingly, the opposite seems to be true. There is growing evidence that dependence on a few commodities can release a cascade of problems, often referred to as the ‘resource curse’. On average, resource-rich countries are economic laggards. Studies show a direct correlation between resource dependency and declining GDP. They get stuck on the export treadmill, rarely diversifying. This is partly due to the ‘enclave’ nature of commodity production, which makes it hard to develop ‘forward linkages’ (processing raw materials) or ‘backward linkages’ (making the machinery used to dig the mineral or harvest the crop). In Africa, for example, as former US Assistant Secretary of State for African Affairs, Hank Cohen, points out, ‘commodities are being exported with virtually no value added’.
Mining, especially, is capital intensive and provides relatively few jobs. The benefits redound to high-income countries where the big transnationals are headquartered. In addition, easy profits from resource extraction soak up scarce investment capital and discourage long-term investment in infrastructure that could support a more diverse economy. The orthodox development path of ‘import substitution’ – developing domestic industries to replace foreign imports and so jump off the resource treadmill – is less likely in today’s globalized economy. When an industrial powerhouse like China takes up so much space, it’s virtually impossible for small players such as Ghana or Bolivia to compete. None of this has been helped by the neoliberal prescription for deregulated markets, which means that newly industrializing countries can no longer defend themselves with protective tariffs. In sub-Saharan Africa, for example, average manufacturing tariffs fell 45 per cent from 1990 to 2010. At the same time, the US and European Union relaxed their restrictions on Chinese clothing imports. The two moves combined to wipe out the nascent African clothing industry.
In addition, the prices of raw materials are notoriously fickle, rising and falling with the gyrations of the world market. This volatility has knock-on effects on national governments for both debt service and budget planning, since revenues are uncertain from one year to the next. This insecurity has been compounded in recent years by the ‘financialization’ of commodity trading, the latest twist of the ‘casino economy’. Big banks, hedge funds and money managers scour the globe for opportunities to invest surplus capital that will reap the biggest returns in the shortest time. The lessons of the 2008 economic crash, it seems, have yet to be learned. Short-term financial flows continue to unsettle the world economy. In the year 2000, commodity assets controlled by finance capital amounted to $10 billion; by 2012 that figure had topped $439 billion. UNCTAD notes that investors are now warping commodity markets so that ‘prices are detached from supply and demand’. This leads to ‘high volatility and distorted prices’ – generating tidy profits for speculators but financial insecurity for farmers, miners and nations whose income depends on these markets.
Commodity dependency can also lead to the ‘Dutch Disease’, a term coined by The Economist in 1977 to describe the effects of the North Sea natural gas boom on Holland in the 1960s. Foreign investors poured money into the gas industry, artificially inflating the value of the guilder and pricing Dutch manufactures out of domestic and export markets. Resource-rich countries tend to have strong currencies. As the Dutch case shows, this can backfire – even in so-called ‘developed’ countries. In both Australia and Canada today, domestic manufacturers are being sandbagged by the high value of their respective currencies. Canada’s overvalued dollar, buoyed by tar sands oil, has made it tough for its manufactured exports to compete; while Australian coal exports to China inflate the Oz dollar. This is a slippery slope – an overvalued currency also encourages more debt by making interest payments cheaper. Not a problem as long as exports are booming: both private and public lenders love good collateral and resources in the ground are certainly that. But easy credit can also bolster corrupt governments and lead to spectacular defaults if resource earnings suddenly plummet. When the value of a currency falls, debt service increases.
Countries whose economies centre on resource extraction are also more prone to conflict, corruption and authoritarian governments. Oxford University economist Paul Collier found that if a third or more of a country’s GDP came from the export of commodities, the likelihood of conflict was 22 per cent. For similar countries without commodity exports, it was one per cent. Examples abound. But perhaps the most shocking case is the Democratic Republic of Congo (DRC) where fabulous mineral wealth – gold, diamonds, copper, coltan – has financed decades of brutal fighting, mass rapes, mutilations and the coercion of thousands of child soldiers. Corruption is rampant and these ‘conflict minerals’ are at the heart of it. Congolese military officers make less than $100 a month but cruise around in expensive 4x4s and live in luxury. ‘War in this country is business,’ a UN official told reporter Geoffrey York. ‘It’s like the Mafia. With every military operation, people say that the commander must be buying a new house.
Oil may be the most poisonous resource of all – and we are not just talking climate-altering carbon emissions. Many of the globe’s worst-governed countries today are petroleum addicts. Azerbaijan, Saudi Arabia, Iraq, Chad, Libya, Equatorial Guinea – the list is long. Political scientist Terry Karl argues that oil-dependent countries ‘eventually become among the most economically troubled, the most authoritarian, and the most conflict-ridden in the world’. Oil wealth not only poisons democracy, entrenches corrupt élites and worsens inequality – it also hobbles the state.
In the late 1970s, there was an attempt to organize ‘producer cartels’ so commodity-dependent countries could control supply and thus stabilize market fluctuations. OPEC is one of the few remaining producer cartels still standing. This was tied to the creation of a New International Economic Order which would include ‘international commodity agreements’ and a price stabilization mechanism called the ‘common fund’. But with the rise of neoliberal economics in the 1980s, and the faith in markets über alles, this intervention was dismissed as ‘inefficient’ meddling. The debt crisis of the 1980s led to ‘structural adjustment’ agreements, which in turn killed national commodity marketing boards and gutted international commodity agreements.
Markets were deregulated; prices fluctuated wildly. In addition, neoliberal ‘reforms’ led to privatization of state-run mining companies and discredited government involvement in commodity production in general. This opened the floodgates to private investment in resource industries across the globe – which is more or less where we are today. With investment barriers shattered and demand booming, the extractive industries are blanketing the world in search of new opportunities, often in so-called ‘frontier markets’ far from major cities.
Could this surge be an opportunity to turn the ‘resource curse’ on its head? Oxford’s Paul Collier believes the world’s hunger for raw materials will continue and that countries blessed with natural resources need to get smart. The challenge, he suggests, is how to use this wealth as a springboard for future development. Collier and others are working on a Charter of Natural Resources to manage the relationship between citizens, producer states and private companies with the goal of turning it into a legally binding international convention. There is also the World Bank-backed Extractive Industries Transparency Initiative (EITI) run by a coalition of governments, NGOs, companies and investors, launched more than a decade ago. The EITI is supposed to ensure ‘transparency in how a country’s natural resources are governed’ and ‘full disclosure of government revenues’. So far it has been little more than a smokescreen for corporations and states to pursue at breakneck speed their own pro-mining agenda.
Resource-dominated economies: Ratio of Commodity Exports to Total Merchandise Exports, by region, 2009-10 averageUNCTAD, SPecial Unit on Commodities
Nations as diverse as Norway and Botswana have shown there are alternatives. Norway has managed to squirrel away more than $905 billion in its sovereign wealth fund – a state-owned vehicle which collects taxes from oil and invests in stocks. Seventy per cent of Botswana’s income is from diamonds but the country stands in stark contrast to its African neighbours, channelling mining income into education and healthcare. But it wouldn’t be that way had Botswana not played hardball with diamond giant De Beers. Resource-rich states need a balanced approach – but first they need full value for their natural gifts. After all, resources in the ground are not about to disappear.
But perhaps that is the point. Whether it is expanding oil palm plantations in Sierra Leone or new coal mines in Mozambique, the extractive industry faces stiff opposition from local communities. Citizens under threat are refusing to accept the steep cost of ‘development’ – a price calculated in fractured communities, human rights violations, flattened forests, poisoned land, polluted water and loss of self-determination. The London Mining Network and Mining Watch Canada are just two organizations that have painstakingly documented the death and destruction visited on the planet by the resource industry over the past decade.
According to Gaia Foundation Director Liz Hosken, ‘mining is invading indigenous territories, protected areas, World Heritage Sites and fragile ecosystems around the world at an alarming rate. Nothing is safe in the face of this assault.
In response, local communities are standing up to this violence and intimidation, opposing a model that destroys the environment and their right to live in the way they choose. There has even been a new word coined to capture this resistance: ‘Yasunization’ – derived from Ecuador’s failed plan to ‘keep the oil in the soil’ in Yasuní National Park, an Amazon rainforest region of breathtaking biodiversity. According to the consortium of environmental justice groups, EJOLT, Yasunization is a concept that ‘questions economic growth, fossil-fuel dependency and climate change’ while ‘conserving nature, community ways of life’ and ‘protecting human rights and the rights of nature’.7
This may sound fanciful, maybe even naïve. But it is already happening. From the Peruvian Amazon to the boreal forests of northern Canada, people are beginning to say ‘no’ to a model of progress that appears more bankrupt and destructive with each passing day.
‘Yasunization?’ Better add it to your dictionary.
-by arrangement with the New Internationalist magazine
0 Responses to "Resource Curse and Extractive Economics"