The Rise of the Resource Curse

The Rise of the Resource Curse

In many ways Mongolia is an outlier — an exotic tourist destination filled with windswept deserts, nomads and yurts. It might also be a vision of the world’s future. With a tiny $10 billion economy and less than 3 million people, Mongolia is fantastically resource-rich. And with borders touching China, Russia and Central Asia, the landlocked nation seems to have won a geographic lottery ticket. It doesn’t need to go far to find enthusiastic customers for its immense endowment of copper, gold and other minerals.That also means that Mongolia sits on the precipice of the so-called resources curse, in which citizens in countries such as Nigeria and Indonesia have not prospered from the treasure sitting under their land and seas. As politicians and cronies make millions, there’s little incentive to create other industries to employ the masses.

Mongolia’s challenge will soon be the world’s. That’s the upshot of a new report from Richard Dobbs and his team at McKinsey, in which they predict a $17 trillion investment bonanza by 2030 to keep up with demand for oil, gas and other materials. That’s an amount greater than the annual output of the U.S. economy and more than four times Germany’s. It’s not just the kind of money that changes people or even nations. It’s the kind that changes the world — and probably not for the better.

In 1995, about 58 countries depended on resources for the bulk of their output and wealth. In 2011, that number had risen to 81. By 2030, roughly half of the world’s economies will essentially become giant filling stations for developing superpowers from China to South Africa.

That means that instead of the world moving toward greater transparency, democracy and freer markets, we could see rising corruption levels and even greater income inequality. “Economies with natural-resource endowments have a huge opportunity to transform their prospects, but history suggests that they could all too easily squander the windfall,” says Dobbs, director of the McKinsey Global Institute in London. “To date, resource-driven countries have tended to underperform those without significant resources.”

And how. Per capita income in almost 80 percent of resource-driven economies is below the global average. Since 1995, Dobbs says, more than half of these countries have failed to match the average global growth rate.

The world would be wise to take steps today to break this cycle. McKinsey recommends several. While not terribly original, they include strengthening public institutions and good governance; building decent infrastructure; boosting national competitiveness; promoting sound fiscal policy making; and spending the windfall wisely, while engaging in forward-looking economic and social planning.

The trouble is that political will and integrity is often the first casualty once the minerals start flowing out and the spoils come pouring in. That’s what worries Aung San Suu Kyi, who may be Myanmar’s president come 2015. Last year, the Nobel laureate warned investors against “reckless optimism” about Myanmar’s prospects. “Even the best investment laws would be of no use whatsoever if there are no courts that are clean enough and independent enough to administer those laws justly,” she said.

Mongolia is at that very crossroads today. Investors complain the government is dragging its feet on allowing miners to start digging. But it’s more important to get things right at the early stages of the resources boom. That means acting now to create the institutions and regulatory frameworks needed to ensure revenue transparency — knowing exactly how much money is being dug out the ground and where it’s going. Why not set up a sovereign-wealth fund to save for Mongolia’s future? When the stakes are that high, a little patience can go a long way.

(William Pesek is a Bloomberg View columnist. Follow him on Twitter.)