Mitigating the Resource Curse: A Proposal for a Microfinance and Educational Lending Royalty Law

By Gaille, S. Scott | Energy Law Journal, January 1, 2011 | Go to article overview

Mitigating the Resource Curse: A Proposal for a Microfinance and Educational Lending Royalty Law


Gaille, S. Scott, Energy Law Journal


SYNOPSIS: The "natural resource curse" is the phenomenon whereby a country that is rich in natural resources may experience less economic growth than countries lacking natural resources. This occurrence has been blamed on a variety of factors, including weak governments susceptible to corruption, the concentration of economic activity in the petroleum sector, and insufficient investment in education and human capital. Over the last few decades, efforts to combat the curse have focused on "top down" approaches that impose alternative institutions on petroleum states or otherwise police the spending of resource wealth. This paper proposes an alternative "bottoms-up" approach that diverts a small percentage of resource wealth to microfinance and educational lending programs. Similar lending institutions are active in the developing world, and additional funding from a modest royalty could mitigate aspects of the resource curse by diversifying economic activity and increasing investment in education.

I. INTRODUCTION

"'Ten years from now, 20 years from now, you will see,' former Venezuelan Oil Minister and OPEC co-founder Juan Pablo Perez Alfonzo predicted in the 1970s, "oil will bring us ruin.'"1 Indeed, OPEC nations as a whole have seen their GNP per capita decrease by 1.3% per year on average from 1965 to 1998 whereas the rest of the developing world saw its GNP per capita increase by more than 2%.2 The same holds true for other natural resource riches, where:

[i]t has been observed for some decades that the possession of . . . natural gas, or other valuable mineral deposits or natural resources does not necessarily confer economic growth. Many African countries such as Angola, Nigeria, Sudan, and the Congo are rich in oil, diamonds, or other minerals, and yet their people continue to experience low per capita income and low quality of life.3

International efforts to mitigate the resource curse have tended to favor "top-down" approaches that police how governments spend their wealth. During the same period that such approaches have met with mixed results, the developing world has seen a groundswell of microfinance institutions that are sowing the seeds of economic development in a "bottoms-up" direction, by making small loans to entrepreneurs. Such "bottoms-up" approaches allow individuals to broadly "vote" and decide for themselves where capital is deployed in an economy, rather than relying on the allocation decisions of one, or a few, leaders in government or the international community.

This article discusses how a portion of petroleum (or other natural resource) revenues could be dedicated to similar "bottoms-up" lending programs, particularly for small business and educational lending. These two lending programs would mitigate two of the likely causes of the resource curse: (i) entrepreneurial lending would help support economic growth in sectors other than petroleum; and (ii) educational lending would help to counter a lower level of education that has been observed in resource-rich nations. The article proposes a modest royalty of 1% that would be divided in half between microfinance and educational lending. This level seeks to strike a balance between the desire of governments to fill their treasuries and the need to reach a meaningful number of citizens and thereby contribute to diversifying economic and educational activity.

II. THE NATURAL RESOURCE CURSE

Countries rich in natural resources have paradoxically struggled to grow their economies:

Of 65 countries that can be classified as natural-resource rich, only four managed to attain both (a) long-term investment exceeding 25% of GDP on average from 1970 to 1998, equal to that of various successful industrial countries lacking raw materials and (b) per capita GNP growth exceeding 4% per year on average [during] the same period.4

Resource-rich nations "score lower on the U.N. Human Development Index, exhibit greater corruption, have a greater probability of conflict .

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Mitigating the Resource Curse: A Proposal for a Microfinance and Educational Lending Royalty Law
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