Can Abundant Resources be a Curse Rather Than a Blessing?

Professor Hossein Askari
Professor Abbas Mirakhor
Dr Liza Mydin

 

Countries that do not attain satisfactory economic performance, despite being endowed with natural resources, could be suffering from a ‘resource curse’, a condition where a country’s economic growth is inversely related with natural resource wealth.  Out of 57 member countries of the Islamic Cooperation Countries (OIC) several are resource rich in oil and natural gas. At 22.8% of the world’s population, the member countries of the OIC contribute only a little over 9% of the world’s total GDP and yet 17% of world oil production is contributed by Saudi Arabia and United Arab Emirates alone. Their wealth of natural resources should position the oil-rich OIC countries at the forefront of economic performance and growth.

However, a study to compare the performance of these countries with non-resource rich countries found that the former did not outperform the latter in economic performance. The study selected oil-rich OIC countries such as Brunei, Bahrain, Oman, Kuwait, Nigeria and Saudi Arabia based on a 25% resource rents contribution to their GDP. Non-resource rich countries are those with less than 10% of resource rents GDP contribution such as Spain, France, Hong Kong, Japan, Sweden and Singapore. The abysmal performance of oil-rich OIC countries indicates that they could be suffering from the resource curse phenomenon.

 

Economic Puzzle

There are innumerous studies dedicated to decipher the cause of the resource curse economic puzzle, however, research looking at quality of institutions as a reason for the curse have gained momentum and become more prominent in recent years. This implies that countries with poor institutional quality often do not achieve satisfactory economic performance even with all of its country’s natural resource wealth. Instead, the wealth from natural resources impedes a country’s ability to prosper. The presence of ineffective institutions seem to provide the incentive and environment for unscrupulous practices such as rent seeking, corruption and misappropriation of resources.

In most cases, those holding power and their cronies would not have any incentive to improve institutional quality and their effectiveness because channeling efforts to monitor corruption would impede their ability to amass vast fortunes. This vicious cycle continues, until a benevolent ruler emerges, or resources become depleted altogether. As institutional degradation seems to be the heart of the resource curse problem some studies postulate that in order to make resources more of ‘blessing’ rather than a curse, efforts should be targeted towards improving institutional quality.

 

Adopting an Islamic Framework

To improve institutional quality, Muslim countries need look no further than the guidance from the Qur’an. This divine source provides the framework of state governance for all relevant conceptions of reality. It defines the complete set of rules of behavior for all societies. The adoption of an Islamic based framework would also mean that resources should be treated according to the rules of the Qur’an. Firstly, Allah is known as the ultimate Sustainer and Provider of all resources and He has endowed these bountiful resources to mankind for the fulfillment of their daily needs as a grand favor.

The treatment of these resources should be akin to a trustee where the resources are handled with such care, treated as manna from heaven and its usage employed without violation to the rules of the Creator. Secondly in contrast to conventional understanding and practices, Islam provides a different paradigm altogether to the notion of scarcity. Scarcity is viewed, as non-existent at the macro level as it is in violation to the Supremacy and powers of the Creator’s to provide in equal and just measures. If it does exist, it generally is caused by manipulation at the local level, through unjust practices such as hoarding of wealth and opulent spending. Consequently, some members of the society are left behind and excluded from sharing the benefit of wealth from resources.

In order to achieve social economic justice, Islam places importance in its distribution and redistribution mechanisms. In the accumulation of wealth, the Qur’an imposes limits on consumption through the rules of over-spending (israf), waste (itlaf), and ostentation and opulent spending (itraf) so that wealth may get distributed across all members of society. Through moderation of spending for a modest standard of living, any net surplus gained must be returned to members of society who are unable to work. In this regard, the abled members of society along with the less abled are trustee-agents for one another, with the former supporting the latter. The mechanism to do so employs the redistribution mechanism in Islam covering mandatory and voluntary payments such as 2.5% of wealth through zakat, 20% of income through khums and any amount of voluntary payments referred to as sadaqat. Herein lies the stark contrast to conventional and capitalistic models rules of property rights, which advocates the rights of physical property over the rights of each member of society.

 

Enter the Islamicity Index

The discussion put forward so far establishes that if oil-producing OIC countries had effective Islamic rule compliant institutions at the time when oil was produced or effective institutions were in place after the discovery of oil (a difficult feat considering significant oil deposits are mostly under government control) – oil would in all likelihood be more of a blessing rather than a curse for the countries. Consequently it would pave the way to achieving just and thriving societies. The inability of these countries to achieve strong economic performance begs the question of how far are the countries from achieving the ideals of an Islamic economic framework? The Islamicity Index benchmarks the performance of countries against rules of Islam in areas of Islamic economics, legal & governance, human and political rights and international relations. It is not surprising that the index found several OIC oil-producing countries faring poorly in the overall Islamicity score (see Tables 1 and 2 below) and generally underdeveloped in institution building.

 

Table 1: Islamicity Index Ranking for Selected Oil-Producing Countries

 

 

Ranking

Selected Oil-Producing OIC Countries

 
   
    o

  1. Malaysia

43

    o

  1. Bahrain

63

    o

  1. Saudi Arabia

59

    o

  1. Oman

60

    o

  1. Indonesia

88

    o

  1. Algeria

113

    o

  1. Nigeria

129

    o

  1. Cameroon

134

    o

  1. Cote D’Ivoire

135

    o

  1. Egypt

137

   

 

Table 2: Top 20 overall Islamicity Ranking

 

Countries

Ranking

   
   

Netherlands

1

Sweden

2

Switzerland

3

New Zealand

4

Denmark

5

Finland

6

Norway

7

Luxembourg

8

Australia

9

Canada

10

Germany

11

Austria

12

Iceland

13

Ireland

14

United Kingdom

15

Belgium

16

Singapore

17

France

18

United States

19

Malta

20

   
   

Source: (Askari, Mohammadkhan, and Mydin, 2016)

In summary, resource abundance will remain a curse for as long as the oil-producing OIC countries operate within scaffolds of weak institutions. Ineffective distribution of resources has long-term repercussions and effects on future generations. The inability of governments to engage in productive investments and save severely damages a country’s ability to ensure sustainable income and commensurate benefits from resources for future generations. This becomes especially true for economies that are not as oil rich and runs the risk of depletion earlier than others.

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