The Natural Resource Curse In Sub-Saharan Africa .

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The University of Southern MississippiThe Aquila Digital CommunityDissertations12-2014The Natural Resource Curse in Sub-Saharan Africa:Transparency and International InitiativesMeaza Zerihun DemissieUniversity of Southern MississippiFollow this and additional works at: http://aquila.usm.edu/dissertationsPart of the Other Economics Commons, Other International and Area Studies Commons, andthe Political Science CommonsRecommended CitationDemissie, Meaza Zerihun, "The Natural Resource Curse in Sub-Saharan Africa: Transparency and International Initiatives" (2014).Dissertations. Paper 6.This Dissertation is brought to you for free and open access by The Aquila Digital Community. It has been accepted for inclusion in Dissertations by anauthorized administrator of The Aquila Digital Community. For more information, please contact Joshua.Cromwell@usm.edu.

The University of Southern MississippiTHE NATURAL RESOURCE CURSE IN SUB-SAHARAN AFRICA:TRANSPARENCY AND INTERNATIONAL INITIATIVESbyMeaza Zerihun DemissieAbstract of a DissertationSubmitted to the Graduate Schoolof The University of Southern Mississippiin Partial Fulfillment of the Requirementsfor the Degree of Doctor of PhilosophyDecember 2014

ABSTRACTTHE NATURAL RESOURCE CURSE IN SUB-SAHARAN AFRICA:TRANSPARENCY AND INTERNATIONAL INITIATIVESby Meaza Zerihun DemissieDecember 2014The Sub-Saharan Africa (SSA) region has become a classic case of the resourcecurse phenomenon characterized by the abundance of natural resources, low economicdevelopment, and misuse of natural resources. Economic-development experts debateways to overcome or avoid the resource curse to advance SSA countries into developedcountries. Only one natural resource-rich country in the region, Botswana, has succeededin becoming an upper middle-income country using its natural resources, making thepossibility of replication of this achievement difficult. The literature aligns in the beliefthat the economic and political well-being of resource-rich nations depends highly on theactors involved. National and international policies and regulations must overcome theresource curse. However, the literature falls short of clarifying the types of governancetraits and international interventions required to overcome this phenomenon. TheExtractive Industries Transparency Initiative (EITI)—a global initiative established in2002 that seeks to improve the management of natural-resource wealth in implementingcountries through increased transparency—is one of the international initiatives currentlybeing implemented in many Sub-Saharan resource-rich countries. This study examinesEITI to explore its influence on achieving resource transparency and economic growth.The study finds that EITI, although often acknowledged as one of the best solutions forresource-rich countries around the world, falls short of increasing the economic growth ofii

participating countries. The study also finds that transparency without other governmentreforms appears to be weak in promoting economic growth in resource-rich SSAcountries.iii

COPYRIGHT BYMEAZA ZERIHUN DEMISSIE2014

The University of Southern MississippiTHE NATURAL RESOURCE CURSE IN SUB-SAHARAN AFRICA:TRANSPARENCY AND INTERNATIONAL INITIATIVESbyMeaza Zerihun DemissieA DissertationSubmitted to the Graduate Schoolof The University of Southern Mississippiin Partial Fulfillment of the Requirementsfor the Degree of Doctor of PhilosophyApproved:Dr. Shahdad NaghshpourCommittee ChairDr. Joseph J. St MarieDr. Robert J. PaulyDr. Tom LansfordDr. Karen S. CoatsDean of the Graduate SchoolDecember 2014

DEDICATIONThis work is dedicated to my father, Zerihun Demissie, even in his absence hisstrong belief in my potential remains to be a source of my strength. Memories of ourconversations on the value of education continue to give me energy and pushed me towork hard throughout this PhD endeavor and in life.iv

ACKNOWLEDGMENTSWriting this dissertation has been a very long journey and I have received supportfrom a number of people. First and foremost, I am extremely grateful to Dr. ShadhadNaghshpour, not only for his excellent advice, patience, and invaluable guidance, but alsofor introducing me to this dissertation research topic while taking one of his classes.Second, I am very grateful for my committee members Dr. Joseph J. St. Marie,Dr. Tom Lansford, and Dr. Robert J. Pauly for their feedback and accommodation of myrequest to review this work in a short period. I really appreciate their flexibility andwillingness to help their students succeed. Their academic support, input, and personalcheering are greatly appreciated. The many courses I took under Drs. St. Marie and Paulyremain to be the most memorable to this day. Thank you for stimulating my curiosity andconfirming that I made the right decision in joining the IDV program.Third, my dissertation has greatly benefitted from commentary and overwhelmingsupport from Dr. Martha Cruz. I am indebted for her help and friendship. She hasrepeatedly encouraged me to continue this long journey when I felt lost, and guided metoward the right direction. Without her support, motivation, and encouragement, I wouldnot have been able to reach to this stage.Fourth, I am also extremely grateful for many of my friends and colleagues,particularly the sisters of Centro Maria Residence and residents; I am blessed with theirfriendship, prayer, unconditional support, and care. For these reasons and many more, Iam eternally grateful.Last but not least, to all my family—my mother, brothers, sister, aunts, andcousins, too numerous to mention—who constantly inquired about my progressv

throughout this long process, I thank you from the bottom of my heart for your supportand love. I give special gratitude to Liyouwork S. Dinku for paving the way for mygraduate study and for being my biggest fan. Finally, I would like to acknowledge DanielSolomon for his continuous love and encouragement.vi

TABLE OF CONTENTSABSTRACT . iiDEDICATION . ivACKNOWLEDGMENTS .vLIST OF TABLES . ixLIST OF ILLUSTRATIONS .xLIST OF ABBREVIATIONS . xiCHAPTERI.INTRODUCTION .1BackgroundPurpose of the StudyRelevance of the StudyII.THEORETICAL FRAMEWORK .8Institutional TheoryIII.REVIEW OF RELATED LITERATURE .15Dutch-Disease HypothesisCorruption and Rent SeekingGovernment and TransparencyInternational ChallengesDeveloped Countries and International Extractive CompaniesChina in Sub-Saharan AfricaExisting Solutions to the Natural-Resource Curse in SSAExtractive Industries Transparency Initiative (EITI)IV.METHODOLOGY .33OverviewResearch DesignVariables of the StudyData and SourcesData-Analysis ProceduresLimitationsvii

V.FINDINGS AND ANALYSIS .43Data Adjustment and Descriptive StatisticsEvaluation of OLS Regression AssumptionsAnalysis and FindingsVI.CONCLUSION .65DiscussionLimitationsConclusionsImplications for Further ResearchREFERENCES .73viii

LIST OF TABLESTable1.Three Pillars of Institutions.102.Sub-Saharan African EITI Candidate and Compliant Countriesby Year .323.All EITI Countries at Various Stages of Implementation .394.List of Selected Resource-Rich Sub-Saharan Africa Countries(EITI and Non-EITI) .405.Description of Model and Data Source .416.Descriptive Statistics for All Variables Used in the Analyses: AllTwenty Study Countries .497.Descriptive Statistics for All Variables Used in the Analyses:Ten EITI Study Countries .528.Descriptive Statistics for All Variables Used in the Analyses: Ten NonEITI Study Countries .539.Unstandardized Coefficients from the OLS regression of Gross DomesticProduct per Capita on All Independent Variables for All EITI and AllNon-EITI Countries .5710.Unstandardized Coefficients from the Natural log of Gross Domestic ProductPer Capita on the Natural Log of All Independent Variables for All EITIand All Non-EITI Countries .59ix

LIST OF ILLUSTRATIONSFigure1.Institutions and the natural-resource curse theory. .132.Map of selected EITI and non-EITI Sub-Saharan African countries. .283.Normal P-P plot for the OLS regression results contained in Table 6. .544.Mali growth overview from 2003–2012. .62x

LIST OF ABBREVIATIONSCPICorruption Perceptions IndexEITIExtractive Industries Transparency InitiativeGDPGross Domestic ProductOLSOrdinary Least SquarePPPPurchasing-Power ParitySSASub-Saharan AfricaTITransparency InternationalVIFVariance inflation factorxi

1CHAPTER IINTRODUCTIONBackgroundThe natural resource curse is a phenomenon where natural resource endowedcountries experience worse economic and political outcomes than countries with nonatural resource endowment (Siegle 2008). This study only addresses hydrocarbons,metals, minerals, and oil.1 Dutch Disease is an economic phenomenon that occurred inThe Netherlands in the 1960s. Following a sizable natural-gas discovery in TheNetherlands, the value of Dutch currency increased, rendering exports from other sectorsuncompetitive. As a result, the real exchange rate appreciated as resource revenuesentered the economy. Exchange rates’ consistent relationship with oil and gas revenuesmake it difficult for countries discovering such resources to accumulate the foreigncurrency required for trade (Korhonen and Juurikkala 2007). The case of the Netherlandsis not unique, as many countries with large endowments, on average, perform worse thanthose that are less significantly endowed (Auty 2001). Some countries, however, haveperformed much better than others and have even succeeded in attaining economicgrowth and development. In contrast to countries performing poorly, like Nigeria and theDemocratic Republic of Congo, counter examples exist, like Botswana, Norway, andMalaysia. Ideally, resources should be a source of wealth and development, and resourcerevenues can be a significant source for escaping the development trap and attaining themajor thrust needed for economic growth and development (Collier 2007). Resource-richHereafter, the term natural resources is used to reference this specific subset ofresources.1

2countries like Malaysia, Botswana, Indonesia, and Thailand have proven that naturalresource-rich countries can sustain economic growth and attain economic development,and that their abundance of natural resources does not necessarily preclude development.The success of these countries shows that reversing or preventing the resource curse ispossible.Rodrik (1999) and Pritchett (2000) state that institutional quality is important forlong-term economic growth. Therefore, it is not surprising that the majority of peoplewho live in resource-rich countries possess poor institutional quality. Instead, thegovernments of these countries are often riddled with corruption, thereby creating acuteinequality for their citizens. Moreover, successful resource-rich countries share commontraits related to institutions for economic growth and development. Sala-i-Martin andSubramanian (2003) argue that it is not the existence of natural resources per se that iscausing resource-abundant countries to fail; instead, it is the quality of the institutions andpublic policies that result in low economic development. Controlling for institutions,these authors find that natural resources are not significantly related to economic growth.Institutions are key to reversing the resource curse and may be part of the solution for theills of resource-rich African countries. The literature on the resource curse is vast,suggesting many ways to overcome it. Yet, overall, few studies analyze countries thatovercame the resource curse.The resource curse is a complicated phenomenon that results from a variety ofreasons, including the Dutch disease, rent seeking, crowding out of human capital, andcrowding out of social capital (Auty 2001). Here I highlight three reasons for poorperformance of resource-rich countries, interlaced with the aforementioned poor

3institutional quality. First, resource revenue tends to corrupt government officials, as itmay be easier for the owners of capital to bribe officials than to invest in industries andprojects affecting long-term development (Barbier 2005). This is particularly true for oilrich countries including Angola, Nigeria, Sudan, and Venezuela, and diamond-richcountries like Sierra Leone, Liberia, and Congo (Mehlum, Moene, and Torvik 2005). Inthese countries, the rent-seeking behaviors of officials, backed by foreign extractivefirms, have lowered the benefits of resource revenues.Second, the prices of natural resources are volatile, making repayment of loansdifficult. As prices of natural resources (not only oil, but also minerals, grain, and coffee)are volatile, countries that specialize in extractive industries and commodities will have adisadvantage in their terms of trade. According to Poelhekke and van der Ploeg (2009)“volatility in natural resource revenues, induced by volatility in primary commodityprices, curbs growth in economies with badly functioning financial systems” (3).Third, abundant natural resources crowd out other economic sectors, includinghuman and social capital. Crowding out refers to a transfer of talent and innovation awayfrom other export-based sectors of the economy. Of the main types of capital (economic,social, and natural), a negative link exists between natural-resource capital and humancapital investment (Birdsall, Pinckney, and Sabot 2000). Natural resources crowd outhuman resources by affecting the allocation of education resources. In doing this,resource-rich countries tend to invest insufficiently in education. All of these cause aresource curse, suggesting a strong case for greater domestic policy change and creationof strong institutions; a recommendation backed by successful historically resource-basedeconomies.

4While the resource curse seems to impact many countries, they are accompaniedby proposed solutions to reverse this phenomenon. For example, Barbier (2005)recommends diversifying economies and avoiding currency appreciation to reverse orslow the resource curse. The second solution, avoiding currency appreciation, allowscountries to export natural resources to the global market at a low price. First, resourcerich countries should not initially set the export value of their natural resources at ahigher cost value because a rapid influx of foreign currency causes a devaluing of localcurrency. Moreover, when the currency of a given country rises significantly, the riseimpacts the country’s international economic activity. The influx of foreign currencycauses appreciation in the value of the domestic currency. Yet, setting the export value atlower levels should be monitored closely because the set lower price value is not a viablelong-term solution.Additionally, one common recommendation for resource-rich countries to achieveeconomic growth is to adopt transparency-related policies. An international initiativewith a central focus to reinforce transparency is the Extractive Industries TransparencyInitiative (EITI). In 2003, EITI was created to fill the gap in international law to enforcetransparency in extractive industries of resource-abundant countries. This initiativerequires participating countries to publish all data on revenues from mining and oiloperations. EITI is an international voluntary regulatory initiative supported byinternational organizations including the World Bank, the International Monetary Fund,the African Development Bank, the Asian Development Bank, the European Bank forReconstruction and Development, and the European Investment Bank. As of August2014, twenty-one African countries have signaled their intent to implement the EITI to

5increase transparency. The plans for this initiative include reversing the current misuse ofnatural-resource revenues (World Bank and Global Witness 2008). However, theeffectiveness of the EITI has not yet been tested.Purpose of the StudyThis study investigates ways to overcome the resource curse, particularly the roleof transparency in the economic growth of Sub-Saharan Africa (SSA) countries. Theliterature on economic growth frequently does not consider the impact of governmenttransparency and international transparency enforcement. This study examines therelationship between economic growth and transparency for resource-rich SSA countries.In the study, I will emphasize the effect the EITI initiative may have on the growth pathof these countries. Thus, the study seeks to answer the following questions:1. Does transparency affect the economic success of resource-rich SSAcountries?2. Is there a difference between the economic performance of resource-rich SSAcountries that participate in EITI and those not participating in EITI?To investigate these research questions, I put forward the following hypotheses:Hypothesis 1H0: There is no relationship between transparency and economic growth inresource-rich SSA countries.H1: There is a direct relationship between transparency and economic growth inresource-rich SSA countries.

6Hypothesis 2H0: There is no difference in economic growth between EITI countries and nonEITI participants.H1: There is a direct relationship between economic growth and EITIparticipation.Relevance of the StudyMalawi’s President Bingu Wa Mutharika is known for his statement that “Africais not a poor continent; but the people of Africa are poor” (Mutharika 2010, 3), summingthe core relevance of this study. Africans who live in resource-rich countries oftenwonder why their lives do not improve while their countries export thousands of barrelsof oil and tons of minerals per day, generating large resource revenues. Natural resourcesare owned by the people and should benefit the people. The United Nations’ Declarationaffirms this: “The right of peoples and nations to permanent sovereignty over theirnatural wealth and resources must be exercised in the interest of their nationaldevelopment and of the well-being of the people of the State concerned” (GeneralAssembly Resolution 1962, 2).This study is significant for many reasons. First, compared to other regions,Africa has a smaller population benefiting from these resources (Gelb and Grasmann2008). Further, Ross (2

The natural resource curse is a phenomenon where natural resource endowed countries experience worse economic and political outcomes than countries with no natural resource endowment (Siegle 2008). This study only addresses hydrocarbons, metals, minerals, and oil.1 Dutch Disease is an econom

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