COMMENT: Managing natural capital for development —Jamil Nasir - Tuesday, April 12, 2011

A number of studies have found that countries endowed with natural capital have lower rates of investment in education. Instead of investing in human resources, wealth associated with the exploitation of natural resources results in the enrichment of the few and impoverishment of the masses at large 

The matter of Reko Diq is under adjudication in the apex court. The verdict on, interalia, the bonafides of the award of a contract to the Tethyan Copper Company (TCC), a Canadian consortium, for exploring reserves of gold and copper in Reko Diq will be pronounced by the honourable court in due course after analysis of the relevant material and evidence. Nothing can be said with specificity until the matter is conclusively adjudicated upon by the court.

However, the allegations of lack of transparency and possibility of corruption in the Reko Diq deals are not something surprising or new. Rather, such allegations are reminiscent of the main findings of the theoretical and empirical research that has explored the nexus between natural resource abundance and development. According to the research that has gone into the subject, natural resources generate rent-seeking activities and have high potential for corruption by those who matter.

Corruption and other disastrous social and economic outcomes that accompany the natural endowments become a drag on economic growth and human development. The question is: does mother nature corrupt the countries abundant in natural resources, just like the wealthy parents who may spoil their children due to riches? Empirical literature replies, yes it often does as the majority of the countries rich in natural resources have generally tended to grow at lower rates compared with the countries that are scarce in natural resources.

Nigeria, Venezuela and Mexico, all oil rich countries, and Angola, Sierra Lone, Liberia, and Congo, countries rich in diamonds, are some prominent examples of the disastrous impact the abundance of natural resources can have on development, as these countries almost languish at the tail in terms of human development indicators and economic growth. On the other hand, Korea, Japan, Taiwan, Singapore and Hong Kong, although poor in natural wealth, have shown stunning progress on the fronts of sustained economic growth and human resource development.

Generally, the discovery of natural wealth like oil, copper, etc, is considered a source of celebration and joy. The common perception is that abundance of natural resources is a guarantee for the development of a nation. In this context, the negative correlation between the abundance of natural wealth and growth is a big economic conundrum. Economists have attempted to resolve this riddle and identified several channels like artificial appreciation of the exchange rate, misallocation of human capital, and contraction of the tradable sector, through which natural resource abundance negatively impacts economic growth and human development. But at the top among the channels identified by the literature having more relevance in our case is the corruption and rent-seeking activities that accompany natural resources.

Rent-seeking activities in turn act as a constraint on economic growth. Starting from the grant of licences to extract resources up to their export, each step is riddled with corruption. Thus, resource-rich countries are more susceptible to corruption, bad governance and poor institutional quality.

Further, a number of studies have found that countries endowed with natural capital have lower rates of investment in education. Instead of investing in human resources, wealth associated with the exploitation of natural resources results in the enrichment of the few and impoverishment of the masses at large.

But there are countries that have exploited the natural resources to the betterment of their people. The main thrust of their strategy has been to pre-empt the possibilities of corruption arising from the natural resource revenues by earmarking or assigning a share of such revenues directly to finance social programmes such as education and health. The examples of Norway, Indonesia and Chile are worth mentioning in this regard.

Norway is rich in oil but the Norwegians converted the natural resource riches to an unmitigated blessing by adopting sound policies. According to the law, Norway’s oil wealth is a common property and government takes in about 80 percent of the oil rent through taxes and fees for investing it in the education and other social sectors that benefit the citizenry at large. Norway is rated among the top few countries in terms of human development indicators and contribution of oil revenues has certainly played a vital role in its development.

The second example is from Indonesia. It embarked upon a massive programme of primary school construction in the country. The increased oil revenues were mobilised to finance this endeavour. According to the World Bank, this programme was the fastest primary construction programme ever undertaken in the world. The programme resulted in a substantial increase in school enrolment and the literacy rate in Indonesia.

Perhaps the most recent and pertinent example that fits our case is from a Latin American country. Chile is rich in copper. Its government imposed a tax on copper production in order to finance a Competitive Innovation Fund. This Fund currently receives more than 100 million dollars every year and is used to finance a variety of technology projects in both the public and private sectors. Funds are also allocated for the universities for research purposes.

Thus the point is that benefits of wealth from natural resources can be maximised through prudent policies and strategies. The wealth lying beneath the ground, may it be in Reko Diq or somewhere else in the country, is collectively owned by the people of Pakistan. It cannot be squandered away either in corruption or activities that do not directly benefit the citizenry. It is, therefore, required that there should be no compromise on the transparency aspect of the deals reached between the government and the extraction companies. In this regard, the proposal of Joseph Stiglitz, Nobel Laureate in Economics and Professor at Columbia, that natural resources companies should publish what they pay seems very pertinent.

Further, uses of the natural resource wealth should be clearly spelt out. People should know where the money goes. There is a need to change the culture of opacity. Institutional changes that enhance the accountability of the government and promote the citizens’ right to information are important to reduce the possibilities of rent seeking. Priority should be given to the social sector projects. If the natural wealth is extracted out of the ground and is not returned with value addition to the people at large, the next generations will become poorer due to the depletion of natural resources.

The education fund or some variety of innovation funds on the pattern of Chile may be some of the better uses of the money arising out of natural resource extraction. Transparency and clear demarcation of funds for social projects will go a long way in ensuring optimum utilisation of natural resource revenues.

The writer is a graduate from the Columbia University in Economic Policy Management. He can be reached at

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