Resource Richness / Population Poverty

It is generally admitted that resource-rich economies are the victims of the "curse of natural resources” and experiencing poor economic performance. This is particularly the case in the DRC where we support a project.

Photo by Hans Eiskonen

The first reason is technical. The exchange rate is determined by the supply and demand of the national currency. Indeed, the large-scale exploitation of resources is earning the country massive foreign exchange thanks to the huge investment in the extractive sector and the taxes levied on the export of raw materials. It causes an increase in commodity prices in other sectors, the competitiveness of which is declining, particularly in the agricultural and industrial sectors where productivity is often very low. Penalized local businesses may consequently reduce their activities or even close, thus increasing unemployment and in turn, jeopardize growth.

Secondly, since the income generated by the exploitation of resources is higher than in other sectors in terms of rents and wages, the extractive and related industries divert workers and investments from other sectors. As a result, their operations and development are hindered, naturally leading to a reduction in the diversification of the economy. This is why most African countries with abundant natural resources become single-export economies with low value-added exports. On the employment side, it is estimated that the mining sector employs only 1% of the workforce in Africa. Agriculture, which employs more than 60% of the labor force, is one of the first victims of the reduction in the diversification of the local economy.

We of course need to mention the illegal appropriation of the masses of currencies and the poor state control leading to the absence of transparency in the resources management, implying corruption and impunity of the political leaders and the justice. Poor and corrupt governance is no incentive to reform and improve a business climate that could diversify the economy. The corrupted elites are indeed a formidable lobby that will block any attempt at reforms including those related to entrepreneurship that could threaten their interests. In the absence of good practices, investors in other sectors have little guarantees and stay reluctant, unless they further fuel corruption.

We can only hope for a reform of the rules of the game to change the incentives for leaders to direct their energy and strength to productive activities instead of rent seeking. Otherwise, rentier economies will remain trapped in the "curse of natural resources".