One would commonly think that countries with an abundance of resources would be economically developed and have a large number of opportunities. This theory, however, is the complete opposite for many countries that have an abundance of high-value natural resources. The resource curse is a common economic theory used to describe the lack of economic development in a specific country despite the abundance of natural resources. Normally the exporting of these natural resources generates high levels of government revenues. Dating back to periods of colonialism, the resource curse is seen contemporarily in developing economies. The challenges to escape the resource curse prove that it is a multifaceted issue that must suffer through a long arduous process.
Within developing countries, the resource curse is manifested through a country’s allocation of all resources towards the production of one particular good. Resources such as fossil fuels are a prime example of a natural resource where economies place all their efforts towards the production of one specific good. Given the high demand for oil globally, improper management of these natural resources could negatively impact nations politically and economically. Dependency on volatile markets such as oil transitively makes countries more vulnerable to any shift within the market. Economies with these characteristics, economic shocks will cause countries to be inept to face these challenges. Valued commodities like fossil fuels only perpetuate the resource curse in developing countries even further. With an abundance of these high valued commodities, countries commonly fall under revenue mismanagement, corruption or political instability.
One way that citizens feel the burden of the resource curse is through the lack of economic mobility or opportunities. Other burdens citizens feel are undeveloped or non-diverse economies where job opportunities are concentrated on one specific country. Out of all parties which are affected by the resource curse, citizens arguably could be impacted the most. The lack of contribution citizens to have to better manage these natural resources results in citizens facing consequences made by national governments. In some instances, efforts made by governments to better manage their natural resources end up being more harmful than beneficial. It is for this reason escaping the resource curse could be so challenging or complex.
While all countries experience unique forms of the resource curse, there are still fundamental qualities that can be seen throughout all of them. First, there is an abundance of a natural resource which generates a substantial amount of economic activity. Second, there is an immense dependency on one sector of the economy. Third, an identifying factor of the resource curse in countries is revenue mismanagement. Specific countries such as Iraq which have experienced extreme cases of these three factors make the country a balanced case study to show the harsh consequences of the resource curse and the many strategies which need to be met for the country to elevate themselves from the resource curse.
Located within the Gulf region, Iraq is one of the highest fossil fuel producing countries in the world. As a founding member of the Organization of Petroleum Exporting Countries (OPEC), Iraq has found itself to be in a position of great significance in the global oil market. This significant role however in the market as well as being one of the top exporters in the country has not benefited the country overall. Iraq’s economic strategy in their fossil fuel sector are examples of mistakes many countries who are under the resource curse take. More specifically, Iraq’s lack of economic diversity, historical problems with revenue management, and political instability intensify the effects that are felt by the citizens.
Common to most countries who are caught under the resource, Iraq is completely dependent upon the revenues generated from the oil sector. More specifically, Iraq’s Gross Domestic Product (GDP) in 2017 was 89 percent reliant on the revenue of the oil sector. This dependency on the oil sector has caused Iraq to be economically vulnerable to any shock the economy faces. The lasting impacts of different political or economic shocks in Iraq’s society reflect its inability to recover from these shocks. Iraq’s lack of economic diversification and efficient revenue management has only negatively impacted its citizens.
Iraq’s most impactful consequence of the resource curse is its historical process of revenue management. When countries have a significant amount of revenue from a single industry, revenue management will allocate any surplus of revenue into different parts of the economy for a sustainable economy. Iraq, however, has experienced extreme cases of revenue mismanagement. In 1995, Iraq was placed under harsh sanctions by the United Nations Security Council (UNSC) in light of their invasion into Kuwait. Noticing how impactful these sanctions were to Iraqis, the UNSC established Iraq’s “Oil for Food Program” which allowed Iraq to export oil and the revenues from these transactions would be used to increase the food supply and other necessary commodities for citizens. This ideal situation of revenue management, however, never occurred. The money generated from fossil fuel transactions were used by dictator Sadam Hussein to increase the country’s military capacity. Due to the lack of oversight of this program corruption surrounding the sales made from oil in Iraq and little of the sales made were allocated for resources for citizens.
Another factor that stunts Iraq’s economic development is their dependency on the fossil fuel sector and the little which has been done to diversify their economy. Countries outside of Iraq, face similar situations where a significant amount of their GDP stems from one sector of the economy. To lessen the burden of this situation, countries have established different financial tools to mitigate the effects of economic shifts. One common tool used by countries in similar predicaments as Iraq is the establishment of sovereign wealth funds. Sovereign wealth funds are state-owned funds that are compiled through excess revenues of a flourishing economy. These funds could hold different purposes: social safety nets for citizens, pensions funds, or economic resilience usage. While the purposes are different, at the heart of it all, sovereign wealth funds allocate revenues from successful sectors and put aside for the betterment of the country in the long run. Despite the pattern neighboring countries have taken, Iraq has not established an official sovereign wealth fund. Without any form of safety net in place, it only makes Iraq more vulnerable to economic shocks.
Policy Recommendation
Given Iraq’s history in the global oil market as well as the fundamental challenges which follow the resource curse, Iraq should reconsider the management of their revenues from their exports in trade. At the core of all recommended reforms are needed to cater to different policies towards the benefits of citizens rather than key elites or dominating sectors. Through the establishment of a sovereign wealth fund, it would ensure that future generations are given the necessary tools to be economically resilient. While the cost and process may be long and arduous, economic diversification will allow for Iraq to diversify its GDP., which will subsequently cause a positive ripple effect to spread out through different sectors of the economy and society. Reforming Iraq’s most powerful economic sector will harness the success generated and invest back into society to benefit citizens more than trading partners.