A country that is blessed with valuable natural resources faces many exciting opportunities, but also some demanding challenges.
Several surveys have been conducted comparing the economic and democratic development in countries with significant deposits of natural resources with countries that have no or limited amounts of such resources. Surprisingly enough, these surveys show that countries without natural resources tend to have a better economic growth compared to countries with abundant natural resources.
This negative relationship holds true even after controlling for variables found to be important for economic growth, such as initial per capita income, trade policy, government efficiency, investment rates and other variables.
A sound, responsible management of natural resources involves two main challenges:
1. To ensure that revenues from these resources benefit the entire population
2. To ensure that the resources are mined or extracted in accordance with good management principles locally, nationally as well as globally.
Monitor cash flows to stem corruption
Countries that depend heavily on minerals in their national economy are more likely to suffer from institutional governance problems like corruption.
Corruption is very often strongly associated with the extraction of natural resources. The money goes into the pocket of the financial or political elite, rather than to improve living conditions for the benefit of the entire population. The temptation for people in various positions of trust to steal from community values and resources is probably the same in all parts of the world.
However, missing legislation and the absence of control of monetary flows are important reasons why corruption is so serious and widespread in many developing countries where corruption is a major reason for the lack of economic development and makes it difficult to establish a well-functioning trade and industry.
There is one powerful instrument to counter widespread corruption: keeping a maximum transparency connected to the significant cash flows that follow the extraction of natural resources. It should be an inevitable requirement that cash flows that emanate from taxes, signature bonuses, etc. could be monitored in every stage of transfer both in the state's and the various companies' accounts.
Due to lack of regulations and legislation, many countries have far too modest incomes from the exploitation of the country's natural resources. Knowledge transfer may also be limited because companies prefer to bring in their own people from outside rather than to train the country's own labor force.
Managing the riches with a long-term perspective
When money flows into the treasury, another danger is lurking: the temptation to pour too much money into the economy over a short time to meet basic needs for education, health, infrastructure and other necessary purposes.
However, experience from unrestrained spending is scary: a sudden increase of foreign currency, appreciation of the exchange rate and decreasing competitiveness in other exporting sectors. It is therefore important to find a good balance between investment, consumption and savings.
Taking into account that these mineral riches have been built up and deposited over millions of years, there is another good reason why the exploitation should have a more long-term perspective. It is not fair to deprive future generations their legitimate right to benefit from the country's natural resources.
A balanced and moderate production rate is also in better compliance with sustainable environmental and climatic considerations. But through the help of new technology it is possible today to extract natural resources quickly and efficiently. Mining companies, oil companies and other companies engaged in the extraction of natural resources will push for the most efficient operation and optimum returns.
However, key economic, social and environmental considerations make it necessary for the authorities to regulate both the pace and how the operation should be organized from the search starts, throughout the manufacturing process and ultimately how the company will clean up after themselves when production ceases.
There are plenty of temptations and pitfalls along the road to develop a responsible and just extraction of natural resources. But at the end of this road a golden opportunity emerges: to transform mineral wealth into economic growth and improved standard of living covering the whole population.
#DemocracyMatters is a three-week series exploring the intersection of democracy, development and natural resources management in partnership with International IDEA, the Institute for Democracy and Electoral Assistance.
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