Upon cursory review, the prospect of striking large amounts of mineral wealth appears to be a cause for celebration, evoking romanticized notions of great periods of developmental transformation, like the California Gold Rush or the Texas Oil Boom. Such enticing imagery, however, only serves to veil the potentially regressive economic and social reality of such abundance. There exists a growing discourse validating the resource curse paradox, an economic theory that correlates a nation’s mineral plenitude with an inhibited rate of economic and social progress. While such a relationship might initially seem counterintuitive, upon the examination of the phenomena that underpin such a claim, one may find that there exists a substantial amount of evidence that warrants further consideration in the policy making process in relation to nations dependent on resource rents, especially those in the oil-saturated Middle East.
Defining the Resource Curse and the Nature of the Rentier State
First coined in 1993 in his book Sustaining Development in Mineral Economies, economic geographer Richard Auty outlines the resource curse paradox, in which he notes that the economic and social welfare of nations wealthy in hydrocarbons and hard minerals were “inferior to those of non-mineral economies at a similar level of development” despite the flow of wealth one would expect from the additional means of taxation and foreign exchange. He explains that much of this dissonant relationship is due to the nature of a nation’s mining and extraction industries being more dependent on foreign capital than domestic labor, with most export revenue leaving the country to feed back into foreign capital investment and leaving the exporter with only residual tax revenue. Auty’s most compelling explanation of the resource curse’s hindrance to development, however, lies within his observation of how mineral economies are often at the mercy of the economic phenomenon known as the Dutch disease. Originally referring to the Netherlands’ lagging manufacturing sector, the term refers to a change in “exchange rate movements following a large inflow of foreign currency… due to a natural resource discovery… , foreign aid, or investment” and the subsequent detrimental economic impact on a country’s industrial and agriculture sectors. As a mineral economy subjects itself to large flows of foreign investment, its domestic currency appreciates to the level wherein the prices for non-mineral exports become too expensive to be competitive. Meanwhile, these periodic influxes of foreign wealth result in consumers demanding a “shift to the production of domestic goods that are not traded internationally” to accommodate increased consumer spending, ultimately resulting in all non-mineral market sectors collapsing in favor of consumer goods. Whilst there exists a counterargument that the flow of foreign capital would offset any need for other export industries through comparative advantage, one must not discount that, in allowing the Dutch disease to take root, developing nations with mineral economies leave themselves at the mercy of often volatile mineral markets amidst shrinking sectors that would otherwise ameliorate crises in the event of scarcity. There exists a visible testament to this in the form of Venezuela's ongoing financial crisis. From 2007 to 2017, Venezuela's liquid steel and automotive manufacturing industries fell by 93% and 98%, while its rice and corn production fell by 58% and 55%, respectively. Whilst these declining industries may have had their losses previously concealed with petrodollar-funded imports, the oil glut of the 2010s and subsequent reduction of Venezuela's imports by three quarters from 2012 to 2017 served to mark how truly fragile a mineral economy can be, as one may witness from the subsequent commodity shortages and scarcity that have greatly served to perpetuate the ongoing political violence.
Whilst the long-term economic risks posed by a mineral economy’s unwillingness to diversify exports has the capability to drive developing democracies into economic ruin, it is this very same lagging development allowing other developing nations to perpetuate autocratic governments, particularly within the context of the petroleum-rich rentier state. Brought into modern discourse through the writings of former Egyptian Minister of Finance Hazem El Beblawi, the rentier state is characterized by its dependence on “external rent… to sustain the economy without a strong productive domestic sector”, more often than not through rents on mineral resources, with “the government [being] the principal recipient of the external rent”. Such a term is often used in the context of the various petroleum-exporting nations of the Middle East, particularly;Gulf States such as Saudi Arabia who possess oil profits that comprise over 90% of their respective budget revenues. Due to the state being the primary medium of distributing these mineral rents to its citizens, the government is able to freely “[distribute] favors and benefits to its population”. This, when coupled with the minimal or nonexistent taxation in most rentier states, creates an environment that is inherently contradictory to the democratic social contract of government representation at the cost of taxation. Instead, political apathy dominates as a citizen of a rentier state has little incentive to participate in civil society or agitate for social change. Furthermore, in the event that mounting political pressure does lead to calls for democratization, the state’s absolute control over mineral rents ensures that it is able to mollify any dissenting groups through favorable rent payments. One may see this phenomenon at work in the wake of the initial Arab Spring protests in Tunisia, after which the Kuwaiti government announced that each citizen would receive the equivalent of $3,500 and free food staples for 13 months, or through Saudi Arabia’s $10.7 billion social welfare increase following the fall of Hasni Mubarak’s regime in Egypt. This pacificatory of state patronage may also take a less overt form through government mandated employment, with rent-funded programs such as Saudi Arabia’s Nitaqat and Qatar’s Qatarization initiatives offering their citizens guaranteed job security in the public sector for the sake of preventing job insecurity from adding to the costs of living in an autocratic state.
Preparing for a Post-Rentier Future
Despite the elaborate way in which this unique form of social contract has upheld authoritarian rentier states for decades, there does exist a growing trend that indicates such regimes--particularly those in the Middle East--are to inevitably plan for a post-rentier future. With OPEC crude oil prices having fallen by 38% from 2019 to 2020 and the COVID-19 global economic crises resulting in economic contractions for the majority of rentier states, many rentier states both abroad and in the Middle East have found themselves unable to sustain their generous distribution of rents. Such crises serve a twofold detriment to the rentier state, as they not only highlight said governments’ atrophied public health institutions in favor of those that produce resource rents, but also the inability of such states to sustain its pacification measures when under economic duress. In such cases, upper-class citizens in rentier states who have offered guaranteed employment, namely the Gulf States, have engaged in an en-masse departure from their countries of origin in an effort to secure financial stability elsewhere, resulting in overwhelming waves of capital outflow. For a country directing their rents primarily towards the middle class, however, the consequences of this pressure to abandon the rentier system appear to be much more severe, resulting in explicit civil unrest. Nigerian President Muhammadu Buhari’s 2020 decision to cease the country’s long standing and popular subsidization of oil and electricity, spurred by the need to reallocate oil rents to combat the coronavirus, has resulted in the mass eruption of protests that threaten to undermine the foundations of the current Nigerian government. For increasingly youth-saturated rentier states such as Saudi Arabia, a nation with 25% of its population being below the age of 14, typical rentier systems of mollification such as state-mandated employment may find itself no longer able to guarantee employment to the eventual influx of youths entering the workforce. With the insidious regression caused by the resource curse made apparent, one must reconsider if the United States’ attempts to embargo foreign nationalized oil industries truly do serve only as mere economic retaliation. Though the United States has been criticized for its recently tightened sanctions directed towards Venuzuela’s state oil company, Petróleos de Venezuela, S.A. (PdVSA), for their admitted role in harming the nation’s economy through “accelerating a decline in oil production”, policy-makers must consider the true value of accelerating recovery at the cost of allowing Venezuela to depend on an industry responsible for siphoning its agricultural sector and leading it into its current crisis.
Though the United States itself can hardly be considered a rentier state, policy-makers must be wary of its constituent states’ susceptibility to the resource curse, namely the states of Alaska, North Dakota, and Wyoming, who draw 72%, 54%, and 39% of their respective net tax incomes from mineral severance taxes. It is apparent that the same 2010s oil glut responsible for Venezuela's economic downfall has not left these oil-dependent states unscathed, with Alaska in particular, a state dependent on energy taxes for 90% of its general fund revenue, dropping by as much as 84% from its 2007-2013 average. Whilst the United States possesses the necessary economic and political institutions to mitigate persistent economic regression in such instances, it is necessary that policy-makers regard the reality that even the United States is not immune to the economic fragility wrought by the resource curse, and ensure that states that normally flourish from severance taxes do not do so at the expense of a diverse industrial base and neglected non-mineral industries.
In light of how mineral wealth gnaws at the foundations of the democratic social contract and supports regimes built upon apparati of repression, one must use this knowledge to both understand future global trends concerning the rentier state and the operational possibilities such an understanding offers. For rentier regimes that have indicated that they are ready and willing to diversify their economy in preparation for a post-rentier future, it is recommended that the United States accelerate this transition via selective multilateral trade negotiations. However, the United States must also prepare itself for the inverse concerning rentier regimes expected to enter a period of mass civil unrest following the collapse of the rentier system if it is to successfully prevent possible regressions into failed states.
Notwithstanding the presence of a strong social contract and relatively stable democratic institutions, the United States must nonetheless acknowledge its constituent states’ susceptibility to the economic vulnerability wrought by the resource curse, and is urged to take any steps it deems necessary to diversify its local economic sectors. In regards to its dealings abroad, however, it is apparent that the US may capitalize on the rentier state’s dependence on mineral wealth through embargoes on such goods, forcing any repressive regimes build upon the rentier system to diversify their economy and subsequently develop in a way that facilitates a civil society conducive to democratic ideals.