Fuelling War

Natural Resources and Armed Conflicts

Philippe Le Billon

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136592942
• Edition: 1
• Topic: Economics
• Subtopic: Environmental Economics
• Index: Economics

A generous endowment of natural resources should favour rapid economic and social development. The experience of countries like Angola and Iraq, however, suggests that resource wealth often proves a curse rather than a blessing. Billions of dollars from resource exploitation benefit repressive regimes and rebel groups, at a massive cost for local populations. This Adelphi Paper analyses the economic and political vulnerability of resource-dependent countries; assesses how resources influence the likelihood and course of conflicts; and discusses current initiatives to improve resource governance in the interest of peace. It concludes that long-term stability in resource-exporting regions will depend on their developmental outcomes, and calls for a broad reform agenda prioritising the basic needs and security of local populations.

CHAPTER ONE

The resource curse

In the aftermath of the Second World War and the rise of the development agenda, much hope was placed in the promise that their resource endowment would ‘lift’ many countries out of poverty. Not only would resource exploitation generate fiscal revenues and jobs, but also the necessary investment capital for an economic take-off. Windfall resource revenues, in other words, should prove a bonanza. Although Chile and Malaysia provide examples of countries that developed largely as a result of mobilising their resource sectors, such success stories are few and far between, and often tainted by authoritarian regimes and human-rights abuses. Rather, the experience of most resource-dependent countries appear to support the resource curse thesis.

Poor economic growth and exposure to shock.

Countries benefiting from a wealth of natural resources have experienced on average a lower economic growth rate than resource-poor ones over the past 30 years.¹ Small countries relying on mineral exports have been the worst affected, for example copper-exporting Zambia, which suffered greatly from the collapse of copper prices in the mid-1970s. Relative under-performance has also characterised many oil exporters.

Low standards of living, poverty and inequalities.

Mineral and oil dependence are correlated with lower levels of social development, such as child mortality.² Oil dependence is associated with high rates of child malnutrition, low health-care budgets, poor enrolment in primary and secondary education, and low adult literacy rates. High levels of mineral dependence are strongly correlated with higher poverty rates and lower life expectancy, and to a lesser extent, with greater income inequality. Even in the case of a ‘success story’ like that of Botswana, which benefited from sustained high levels of economic growth and significantly better governance than in most sub-Saharan African countries, and a per capita GDP of $6,872, prominent inequalities have left about 60% of the population of Botswana living on less than $2 a day.³

High levels of corruption.

Governments in resource-dependent countries tend to be more corrupt as a result of discretionary control over large resource rents.⁴ Corruption appears to be particularly rife in less developed economies with weak institutions. Among the worst recent examples, the late General Sani Abacha reportedly embezzled an estimated $2.2bn over his four-year rule of oil-rich Nigeria.⁵

Authoritarianism and poor governance.

Both oil and mineral wealth appear to inhibit democracy and worsen the quality of governance.⁶ Rather than promoting democratisation, resource rents tend to strengthen autocratic rule, all the more so in countries with poorly diversified economies. The predominance of autocracies among Middle Eastern oil producers is often used to illustrate this relationship. Although critics point to the specific history and culture of the Middle East, the correlation also holds true for resource-dependent countries in other regions.

Risk of civil war.

Economists Paul Collier and Anke Hoeffler have found that resource-dependent countries are more prone to civil war, the risk being highest when resource exports represent about a third of GDP.⁷ In their view, highly diversified economies are generally associated with industrialised democracies (a group largely insulated from civil wars), while highly resource-dependent countries have sufficient rents to buy social peace and buy off political opponents, and to build security agencies deterring large-scale rebellion (if not terrorism or foreign intervention). Powerful energy importers are also eager to ensure the stability of these countries – through military assistance and acquiescence to non-democratic rule and poor human-rights practices – although not always without backlash, as demonstrated by the case of Iran. More generally, abundant renewable resources in otherwise poor countries and non-renewable resources in all countries are reported to increase the likelihood of armed conflict.⁸ While examples as diverse as Angola, Iraq and Papua New Guinea seem to confirm these findings, several studies have found that these relationships are not robust, with the possible exception of oil.⁹

The resource-curse thesis is not without its critics, however.¹⁰ Most of the resource-curse symptoms characterise poor countries in general. Since many of these are resource-dependent, the resource curse could simply be a classic poverty trap. Yet negative economic effects resulting from resource windfall revenues have also affected industrialised countries. In the 1970s, the economy of the Netherlands was affected by what became known as the ‘Dutch disease’ as large foreign earnings from gas exports led an appreciation of the exchange rate that badly affected the manufacturing sector, an effect that has since been noted in the agricultural sectors of many developing countries benefiting from large mineral rents. Critics also point to the historical contingency of the resource curse. Although more research is needed, resource-rich countries were generally outdoing resource-poor ones economically until the 1960s. In the contemporary period, the oil shocks of 1973–78 and 1979–81 had severe consequences for most economies. Yet the impact on resource-dependent countries, including oil exporters, was more long lasting. Terms of trade declined for most primary commodity exports over the past 25 years, and most resource-dependent countries suffered from economic specialisation, the postponement of reform and debt overhang – not to mention the direct impact of outright rent embezzlement and depletion of resource reserves. Finally, critics point out that fuel or mineral-dependent economies have not under-performed on most economic and social indicators compared to other developing countries. As conceded by Richard Auty, economic geographer and strong proponent of the ‘resource curse’, the phenomenon ‘is not an iron law, rather, it is a strong recurrent tendency’.¹¹

No doubt the symptoms of the resource curse reflect broader causes and processes than those directly related to resource sectors. A country’s political and economy history, its level of institutional development prior to resource discovery and exploitation, and the motivations and capacities of its leaders can all play a part. As such, resource-dependent countries are not equally exposed to the resource curse (and obviously not all wars stem from resource-related causes). Among the regions most negatively affected by resource dependence is Africa: a continent that relies on primary commodities for more than two-thirds of its exports; whose share in world exports declined from 6% to 2% between 1980 and 2002; and where the incidence of civil wars failed to decrease significantly over the 1990s, unlike most other regions in the world. The Middle East closely follows Africa, as most economies in that region have failed to diversify. Large oil rents have consolidated autocratic and often militaristic regimes, with Iraq under Saddam Hussein providing the most dramatic example.

Iraq and the resource curse

The oil sector played a growing role in Iraq during the twentieth century, from the colonial ‘invention’ of the country by British interests seeking to control potential oil-fields, to domestic political and economic life, and the decision of the US administration to invade Iraq in 2003 (Iraq’s oil wealth made economic leverage over the regime of Saddam Hussein more difficult, and the war enabled a reorganisation of the Iraqi oil sector to make it more amenable to US interests). The responsibility of Saddam Hussein in the recent tragic history of Iraq cannot be denied, but beyond his individual responsibility lays a vast array of additional factors, one of which is oil wealth.

Economically, the Iraqi state benefited greatly from the 1970s oil boom, having nationalised its industry a few years before. Annual economic growth averaged 14% in the 1970s, and by 1979, Iraq was the second largest OPEC oil exporter behind Saudi Arabia. Oil represented about 55% of Iraq’s GDP and more than 90% of government revenue. Oil revenues provided massive financial resources to the Iraqi state, strengthening the rule of its elite through patronage and coercion, and enabling a massive arms build-up that gave substance to increasing military ambitions. As historian Charles Tripp remarks, ‘the restricted circles of the rulers and the primacy of military force have combined with the massive financial power granted to successive Iraqi governments by oil revenues to create dominant narratives marked by powerful, authoritarian leadership [and] the ideas of politics as discipline and of participation as conformity’.¹² If the Ba’ath Party allocated a vast proportion of this windfall to a massive arms build-up and the private interests of the regime’s cronies, this windfall also benefited much of the population through quickly rising living standards.

Iraq’s costly 1980–88 war with Iran and falling oil prices after 1981 resulted in a drastic economic turnaround. Negative growth averaged 6% per year during the 1980s. This growth collapse was further aggravated by the imposition of economic sanctions by the UN after Iraq’s invasion of Kuwait in August 1990. By 1994, when the UN sanction regime was still in full force, Iraq’s real per capita GDP was estimated to be close to that of the 1940s.¹³ This situation was improved under the UN Oil-For-Food Programme, but by the time of the 2003 US-led invasion, Iraq faced staggering financial obligations estimated at up to $383 billion, a devastated economic and public service infrastructure in need of an estimated $53bn and a largely destitute population.¹⁴

If oil allowed the Ba’athist party-state to extend the reach of its patronage and security apparatus, the regime proved relatively ineffective at building consensual national politics and a strong economy. As Iraqi academic Isam al Khafaji remarks, with the 1970s oil windfall the regime,

forcibly imposed a destructive concept of unity among Iraqis which sought, and succeeded to a certain extent to atomise the population and linking the individuals directly to the state … marginalising and suppressing entire communities and regions … political, family and clannish cronyism deprived Iraqis from any autonomy and enhanced a perception among them that the state does not owe anything to the people. Rather it was they who owed their living to the state.¹⁵

As the state withdrew from many basic social and economic services from the mid-1980s onwards, non-state institutions such as religious organisations once again asserted their social importance while the regime continued to rely on large-scale domestic political violence to ensure its survival. In the context of 13 years of UN sanctions, corruption and arbitrary rule became central elements in the survival of the Iraqi regime: the entourage of Saddam Hussein wielded tight control over smuggling and clamped down on competing sanction-busters.¹⁶ Illicit earnings from oil smuggling and kickbacks under the Oil-for-Food Programme between 1997 and 2002 amounted to an estimated $10.1bn.¹⁷ Although the concentration of wealth within the ruling family is certainly not exceptional in the region, the level of neglect and abuse of the population certainly was.

The current Iraqi state will not be in a position to regain such hegemony in Iraqi society in the next few years. With annual petroleum revenues forecasted at only around $20bn dollars in the coming years – compared to about $50bn at the height of the 1970s for a population half its current size – the fiscal leverage of the fledgling post-Saddam state remains limited; all the more so as insurgents and looters continue to incapacitate the oil sector.¹⁸ Ironically, this situation may help to ensure political plurality, but it also leaves it more depend on foreign donors and their agendas. In the context of the insurrection against the US presence and the internecine conflicts between rival Iraqi groups, a financially weak and donor dependent Iraqi state is a risky proposition. Oil revenue shortfalls will limit the capacity of the state and legitimacy. Ultimately, the governance of the oil sector will have a major role in the success or failure of the current political and economic transition in Iraq.

The tragic history of Iraq is not unique, as demonstrated by the plight of populations in many African oil-dependent countries.¹⁹ Iraq’s path of underdevelopment, however, should not be over-generalised. Sound economic policies and institutions can adapt to and tackle the many challenges of resource dependence. Yet, as political scientists Michael Shafer and Terry Karl have demonstrated, resource-dependent states often embody extreme levels of institutional conservatism and inertia, as organised interests and state bureaucrats controlling resource rents fight to maintain a status quo in their favour, while governments rely on fiscal transfer rather than statecraft to sustain the regime.²⁰ In short, resource dependence does not condemn a country to developmental failure, and even less so to war, but nevertheless represents a potential source of problems, creating conditions conducive to the outbreak of war. In this regard, attention should be paid to the negative economic and political impact of resource dependency and to the conflicts and various forms of violence directly associated with resource exploitation.

The collapse of economic growth

Resource exploitation can provide a valuable source of foreign exchange, employment and technological transfer. Yet, the general picture is one of relative economic underperformance in resource-dependent countries, with most empirical studies demonstrating that such dependence can lead to the collapse of economic growth, a major factor of instability and armed conflicts. Resource dependence can adversely affect the economy through a number of factors, including declining terms of trade and revenue shocks, budgetary mismanagement and negative effects on non-resource economic sectors, which are poorly integrated with the resource sector and rarely benefit from resource wealth.

Since the 1970s, the decline and volatility of most primary commodity prices have significantly reduced per-capita economic growth in exporting countries.²¹ Non-fuel primary commodity prices have declined on average by about 30% over the past 30 years. Not only are declining prices affecting terms of trade, but price volatility is making budgetary and longterm planning major challenges. The price of oil, for example, increased nearly sixfold between December 1998 and March 2005. Between 1957 and 1999, primary commodity prices on average experienced a boom-and-bust cycle every six years, with prices falling 46% during slumps and rising 42% during booms.²² Responses to declining prices have varied. But while government economic policy and the quality of governance and institutions are certainly relevant to the resource curse, these appear to have made little difference to the generalised economic slowdown of many resource-dependent countries over the last 30 years.

Low resource prices in the context of increased international competition have promoted a cost-cutting and consolidation strategy affecting the least productive and riskiest projects. In the context of structural adjustments, and with more capital and technology deployed to access resources and increase productivity, local governments have lost out to multinational corporations through massive privatisations and in negotiations over revenue sharing. Political risks and the foreign investment climate have also become more important. Many multinationals prefer to face higher exploitation costs and technological challenges than political risks that could affect their reputation or long-term investments. The threat of closure for less profitable resource projects has sometimes pushed local governments to subsidise their resource industries, but at the cost of greater fiscal deficit and further depression of international commodity prices. The massive subsidisation of their own resource sectors by industrialised countries has been internationally condemned for its effect on poor resource-exporting countries; for example, US subsidies and tariffs in the cotton and steel sector.

In times of high resource pri...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Maps, Tables and Figures
• Glossary
• Introduction
• Chapter 1 The resource curse
• Chapter 2 Resources and armed conflicts
• Chapter 3 Implications for conflict prevention and termination
• Conclusion
• Acknowledgements
• Notes