The myth of the resource curse: a case study of Algeria.

Author:Akacem, Mohammed
Position:Case study
  1. Introduction

    Endowed with natural resources, Algeria should have done well in the fifty-plus years since it gained independence from France in 1962. But it has yet to make measurable progress on both the economic and political fronts. The country has stumbled from one turning point to another, all marked by the direct or indirect influence of the military. There is no political class in the true sense of the word, despite the multitude of parties that proliferated after the October 1988 riots. On the economic front, Algeria has relied on the oil and gas sector and has failed to diversify its economy and to create much-needed jobs for the millions of disaffected youth.

    In exploring the oil and democracy theme, this paper compares Algeria to Norway in the context of the resource curse theory. An extensive literature on this subject has concluded that countries rich in natural resources exhibit low rates of economic growth (De Mesquita and Smith 2011; Karl 1997; Ross 2012; Sachs and Warner 1995). An alternative explanation for the presumed ills of oil-rich nations examines the role of weak or ill-designed institutions. Similar to Ploeg (2011), we argue that the role of institutions advances a more consistent explanation for the much-discussed and analyzed alleged negative impact of natural resources on a country's economy, and offers a way out of economic underperformance in terms of policy implications. Acemoglu and Robinson (2012) examine the role that institutions play in the fall or rise of nations. Contrary to Sachs (2003), they assert that institutions explain many failures of nations. Data on institutions and other indices for Algeria further support the claim that oil does not lead to a resource curse and that institutions play a central role.

    Section 2 discusses the dynamics of the natural resource curse. Section 3 offers a literature review of this economic problem. Section 4 discusses Algeria and its institutional framework. Section 5 presents an econometric model that supports the argument that the presence of natural resources is not the main source of a country's economic underperformance. Section 6 discusses policy implications, and section 7 concludes. (1)

  2. The Natural Resource Curse

    Frankel (2010) explores the natural resource curse and outlines five channels through which it could impact economies: (1) volatility of commodity price--in our case, oil prices; (2) crowding out of manufacturing (data presented in this paper stress the importance of the rule of law and enforcement of property rights if countries are to avoid the oil curse); (3) institutions, which are central to our main argument but appear to be one of many arguments in Frankel's approach; (4) anarchy; and (5) the Dutch disease, which impacts the country's exchange rate and negatively impacts the economy. However, none of these factors led to the same result for our benchmark country. Norway faced the same volatility of oil prices as the rest of the oil producers but avoided negative impacts on its economy and started a sovereign wealth fund that is the envy of other oil-producing nations. Because commodities trade internationally and are part of a country's exports, price volatility can lead to central bank reserves volatility. The result can be difficulties in paying external debt and speculative attacks on the domestic currency if the exchange rate is expected to depreciate in the short run or if there is exchange rate volatility, in the case of a floating exchange rate regime.

    The sectors that rely on the natural resource can pay higher average wages than other sectors, crowding out high human capital labor from other sectors (such as manufacturing) and slowing those sectors' productivity growth. In addition, the government may impose regulations that slow the diversification of the economy, increasing the dependence on the natural resource beyond the case of an unregulated market. The crowding out of manufacturing did not occur in Norway, as other industries managed to coexist with the oil sector. Frankel (2010) points to autocratic or oligarchic institutions as a possible factor in explaining the loss of economic growth and development.

    The argument that the presence of high-value resources leads to weak institutions or even anarchy weakens when considering whether the resources were discovered before or after the country's institutional framework was set up. In Norway, oil was discovered after democratic institutions were in place, but in Algeria (as in other countries), oil was discovered before a solid institutional framework was developed. This means that in Algeria, political institutions evolved as an extractive framework of oil resources to the benefit of the ruling class. Frankel (2010) also notes that natural resources could affect economic performance through civil wars or, as in the case of Algeria, civil strife. The Economist (2014) presents data on the civil wars and internal conflicts in the Middle East (1975-2014). Algeria has the second-highest number of deaths with 200,000, behind Sudan (because of the Darfur genocides). Civil strife was not the result of oil resource rent capture or even "archaic institutions" per se, but rather the cancellation of elections in 1991 when the Islamic Salvation Front was clearly ahead in the results and poised to win by a large majority. The military chose to abort the elections because it did not like the possible outcome and feared the consequences of Islamic rule. The civil strife was the result of deliberate actions by one group and was not due to other factors. In effect, the Algerian military and its actions were not directly linked to oil.

    Finally, Humphreys, Sachs, and Stiglitz (2007) point to the increased spending on defense by oil economies. Data support their claim both for Algeria specifically and for the Middle East and North Africa (MENA) in general. Since 1998, Algeria has spent more than the United States has on defense as a percentage of its GDP. Other than the period 1988-1993, Algeria has also spent more than Norway on defense as a percentage of its GDP. The increases were particularly noteworthy in the 1990s due to the "bloody decade" that Algeria went through following the cancellation of elections on December 26, 1991 (figure 1).

    Finally, consider the case of the Dutch disease, named after the loss of international...

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