follow us like us subscribe contact us
Loading, please wait

Why Liberia Has Not Been Able to Break its Resource Curse

By Economywatch | Sun, 25 November 2012 00:00 | 1

Liberia is a nation rich with natural resources including iron ore, gold, diamonds, natural rubber, vast forest for logging and timber harvesting, and vast agriculture land for ensuring food security. Yet like many of their African counterparts, who are equally rich in natural resources; corruption, global volatility and the “Dutch Disease” have left the country under the spell of the Resource Curse – turning Liberia from one of the fastest growing economies in the world, to one of the poorest and underdeveloped.

Back in 2004, The Sunday Standard, a Botswana newspaper, published an article by Professor Joseph Stigliz entitled “Botswana Has Escaped the Resource Curse Phenomenon”. In it, Stiglitz compared and examined several economies who were equally endowed in natural resources such as petroleum products, diamonds, gold and other rich minerals; and explained why some had been affected by the “Resource Curse” phenomenon, whilst others managed to escape.

“Thirty years ago, Indonesia and Nigeria, both dependent on oil, had comparable per capita incomes. However, Indonesia’s per capita income is now four times that of Nigeria,” Stiglitz said. Sierra Leone and Botswana, who are both rich in diamonds, was another comparison. While Botswana managed to escape the resource curse, averaging an 8.7 percent annual economic growth rate over the last thirty years, Sierra Leone was plunged into civil strife in 1991 – lasting until 2002.

The Resource Curse

The Resource Curse is a term coined by economists, to describe how, on average, countries with large endowments of natural resources tend to perform worse than countries that may be less well endowed. Professor Stigliz gave three major reasons for the curse’s ‘spell’:

First, he identified corruption and rent-seeking by public and private officials in these nations as one of the prime causes. “It is the prospect of riches orient officials’ efforts to seizing a larger share of the pie, rather than creating a larger pie that is responsible for the resource curse,” he wrote, adding that the result of this wealth grab could often led to war, as seen in many Sub-Saharan African countries. This reason is also supported by other authors such as Larsen (2006), Auty (2001a), Gylfason (2001a), Sachs and Warner (2001), Torvik (2002), and Stevens (2003).

The second reason he cited is associated with volatility in world prices of natural resources. He averred that many nations in Sub-Saharan Africa heavily relied on the earnings of their primary products and thus failed to diversify their economies. Volatility in the prices of these primary products, as such, greatly harmed economic performance, leaving a serious imprint of social and economic woes on the populations of these countries.

Finally, Stiglitz noted that oil and other natural resources, though a major source of wealth, do not create jobs by themselves. Unfortunately, they often crowd out other economic sectors, a phenomenon he labeled as the “Dutch Disease”.

(The Dutch Disease is a concept that purportedly explains the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector. The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959.)

Brief Historical Look at Liberia

All three factors in Stiglitz’s framework have had relative levels of influence on Liberia’s own experience with the Resource Curse. But before we can prescribe the symptoms, and the subsequent remedies, we must first examine Liberia’s unique history.

Liberia gained its independence in 1847, making it the first and oldest independent African nation. The nation’s founding fathers and first set of leaders unfortunately failed to set a clear vision of inclusive political and economic governance within the new Liberian State, leading to a path of social, political and economic division, where the indigenous population were marginalized for almost a century.

But as history has shown us repeatedly – especially most recently in the Middle East – marginalized societies tend to fight back against the system suppressing them. At the same time, the elite or privileged class are likely to do all they can to maintain the status quo because of the enormous benefits they, and their families and cronies, enjoy. The Liberian State, accordingly, was no exception. As more and more indigenous Liberians and their sympathizers gained enlightenment many years following independence, they revolted against the elite, leading to the 1979 Rice Riot, the 1980 Military Coup d’ tat and the 1989 civil war, which lasted for 14 years, claiming many lives and displacing others both internally and externally in the process.

The administration of Liberia’s 18th President William V.S. Tubman, which lasted for 27 years (1944-1971), though was, at least, delivering impressive economic growth amid the turmoil. During the 1960s and the first half of the 1970s, the important iron ore sector attracted substantial foreign investment; and by 1975, Liberia had become the world’s fifth largest exporter of iron ore. From 1946 to 1960, the Tubman Administration also attracted over US$500 million in foreign investment; while exports rose from US$15.8 million in 1948 to US$82.6 million in 1960, an increase of 422.8 percent. Government revenue during this period also rose from US$32.4 million in 1960 to US$69.9 million in 1971, an increase of 115.7 percent(Tellewoyan, 2006).

This immense economic growth, which was rivaled only by Japan at the time, was considered by some as no less than a miracle. Yet as Clower et. al. (1966) would recognize, this had been“growth without development”. Sadly, the remarkable miraculous economic growth that took place in Liberia was not translated into inclusive economic development, which set the agenda for future political and social instability (and the subsequent 14-year civil war from 1989 to 2003). As successive leaders and governments went on without correcting the wrongs of the past, Liberia went from a period of prosperity to becoming one of the most underdeveloped and poorest nations in the world today.

Liberia’s Experience With The Resource Curse

Related Articles: China Energy Outlook: China's Energy Strategy for the Future

The reverse in the nation’s fortunes can be further analysed by applying Professor Stiglitz’s framework for the Resource Curse. The mere fact that Liberia’s remarkable economic growth experienced in the 1960s and early half of the 1970s was not translated into inclusive development for the population would suggest that the economy had been grossly mismanaged, but Stiglitz’s framework also allows us to break down the curse’s effects into specific symptoms; and examine the various degrees to which each symptom has resulted in the nation’s poor economic performance.

1. Corruption & Rent-Seeking By Officials

Firstly, Liberia has had a long history of public officials diverting public funds into personal use. Moreover, these officials, aided and abetted by unscrupulous investors and businessmen, engaged in rent-seeking behaviour to deny the nation and its citizens the most needed basic social services and infrastructure. These social ills have become systemic and institutionalized in most public and private mindsets as means of acquiring easy wealth. In large part as such, corruption and rent-seeking behaviour has been the major contributing factor of why Liberia has failed to escape the resource curse phenomenon since 1847.

The problem is further compounded by a misconception in the country that corruption, in the past, has had positive effects on the nation and its people. Liberians must realise that corruption has caused uncertainty in the economy, prevented foreign and domestic investments, and undermined the nation’s legitimacy. But to de-institutionalize corruption and rent-seeking as a way of life – and means of acquiring wealth – will definitely need strong political will and commitment and strong leadership under a robust governance system, in which merit and hard work are heavily rewarded over patronage, nepotism, opportunism, and vested interests.

2. Volatility In World Prices

The historical facts outlined earlier tell us that Liberia DID earn enough revenue from the sales of its natural resources in the 1960s and early half of the 1970s – especially with the advent of the Open Door Policy ushered in by President Tubman. However, the revenues earned during those years were not translated into transformational development to improve the lives of Liberians. Instead, Liberia slipped into over a quarter century of political instability and eventually the 14 years civil conflict, the aftermaths of poor governance and gross economic mismanagement of the economy. 
Therefore, the decline in the prices of and demand for natural resources in the 1980s cannot be considered as prime reason why Liberia failed to escape the resource curse. This does not in any way suggest that there was no adverse impacts on the Liberian economy when global prices and demand for these resources declined, as there was serious decline in government revenue and massive unemployment in these sectors when there was a virtual halt in production.  The point here is even if the prices and demand of these products had not declined at the time, the evidence shows that the Liberian economy and its people would have still not benefited, due mainly to the reasons cited above.

3. The Dutch Disease

Even today, Liberia’s economy still remains highly dependent on imported manufactured products, agricultural commodities, and earnings from exported primary products. Over the years, concentration on the iron ore and natural rubber sectors - exported as primary products – left other important sectors, such as the manufacturing and agriculture sectors, severely underdeveloped. Successive governments also failed to diversify the economy by investing more in the manufacturing sector (import-substituting industries) and mechanized farming for creating jobs and ensuring food security. Furthermore, they failed to invest in a knowledge-based economy to ensure sustainable economic growth and development. The conclusion one can therefore draw from this analysis is that Liberia did suffer the Dutch Disease, as other sectors of the economy were suppressed and neglected from growing and developing to create jobs and alleviate poverty within the nation.

Liberia’s perennial problem is that there has never been the political will and commitment to diversify and industrialize the economy, thus justifying why the nation failed to escape the resource curse unlike Malaysia and Singapore and other successful East Asian nations which today have diversified economies and major industries like electrical and electronics, chemicals, financial services, aircraft, etc.

Past governments were always complacent and highly dependent on the earnings from primary products, while at the same time diverting said earnings into personal use at the expense of the nation and the majority of its population. This should serve as a lesson for the country’s present and future political leaderships if Liberia is to achieve any transformational development in the years ahead.

Related Article: How Will US Shale Oil Change the Global Energy Market?

Breaking The Resource Curse In Liberia

For Liberia to break the spell of the resource curse, the following measures, which are not exhaustive, are being advanced. These measures, we presume, are likely to have significant positive impact on the Liberian State if prioritized and mainstreamed into policy decision making.

First and foremost, the culture of wealth grabs and rent seeking must be discouraged in the Liberian society at all levels, since these are potential indicators for conflict and high determinants of poverty. To make this a reality, wealth grabbers and rent seekers must not be allowed to go with impunity to enjoy their loots. They must be brought to book and held accountable for their actions under a transparent and accountable governance system. This means the judicial system and rule of law enforcement mechanisms through statutory institutions established to fight against corruption and rent-seeking (like the Anti-Corruption Commission, General Auditing Commission, etc.) must be strengthened. As part of the reform initiative to eradicate corruption and rent-seeking, the commercial court established most recently in the nation should be strengthened as well to expeditiously adjudicate matters on all commercial transactions. Along this path, investors must be compelled to follow all investment terms enshrined in all signed agreements, including payment of taxes and royalties and corporate social responsibilities to beneficiary communities and residents.
Furthermore, the code of conduct submitted to the Legislature by the Executive must be passed into law, to ensure certain standards for all public and private officials. In addition, a performance management system must be introduced in the public sector with well defined job descriptions for all public servants who must be assessed on a yearly basis against their performance and results achieved. Moreover, the acts of opportunism, nepotism, patronage, and vested interests must be discouraged and detested at all levels of governance, while at the same time institutionalizing a robust merit-based system of recruitment in the public sector. 

Secondly, it is a known fact that high dependence on earnings from primary products is not sustainable. Sustainability is only ensured if the economy is diversified and investment is made in other sectors such as the agricultural sector (where modern methods of farming will ensure food security) and the manufacturing sector, with a focus on imports-substituting industries. In addition, efforts must be made to create a value chain with primary products, where more benefits to the nation and its people will be maximized. This would entail moving away from exporting products in their primary forms in favour of secondary/tertiary products. As a way of buttressing these efforts, government should endeavour to invest substantially in a knowledge-based economy, tapping from the nation’s best talents to ensure and guarantee sustainable development in Liberia.

Last but not least, efforts should be made to put in place systems and institutions to facilitate migration from obsolete ways of doing business in the public sector. This will largely minimize and/or eradicate malpractices in the public sector. However, this will highly depend on strong political will, commitment and robust leadership at the highest political level. In addition, in order to break the spell of the resource curse on Liberia should also include the right combination of committed politicians and bureaucrats (saints); appropriate policy analysts with available and reliable information (wizards); management of hostile and apathetic groups (demons); and insulation of the policy environment from the vagaries of implementation (systems), says Ayee (2000). This definitely suggests a good governance approach as the prerequisite for Liberia to escape the spell of the resource curse phenomenon.

Conclusion

The main theme of this article has been to highlight the experience of Liberia relative to the spell of the resource curse phenomenon, using the three reasons advanced by Prof. Stigliz on why some countries that are heavily endowed with natural resources have managed to escape the resource curse while others were unable to do so. The conclusion drawn from our analysis is that Liberia did not escape the resource curse due to its perennial problems of lack of political will and commitment, corruption and rent-seeking in the public and private sectors, poor governance system, and gross economic mismanagement. As remedies for breaking the resource curse on Liberia, it has been argued that a different approach to governance must be adopted including putting in place high ethical standards for public and private officials, diversification of the economy and investing highly in a knowledge-based economy, and building systems and institutions with the primary aim of enhancing service delivery in the public sector, while at the time eradicating malpractices.

Furthermore, the culture of people getting rich without working hard, while hard workers are frustrated and do not rise out of poverty must be discouraged at all levels. With strong political will and commitment, hard work, and with the proper systems and institutions, Liberia will be able to rise up to the challenge of meeting head on the fight against corruption and rent-seeking to break away from the resource curse phenomenon.

By Wilmot A. Reeves

Wilmot A. Reeves is a development practitioner working on macroeconomic issues linked to pro-poor policy analysis and the Millennium Development Goals (MDGs). He also works on capacity development, human development, project management, and gender issues. Presently, he serves as Economics Advisor with the United Nation Development Programme (UNDP) Eritrea County Office. The views expressed in this paper do not in any way reflect that of UNDP.

Leave a comment

  • Egoigwe on November 26 2012 said:
    These observations may have currency to some extent but the role Western governments and institutions play in influencing African economies negatively cannot be ignored. The effects of Western interference on these African nations are humongous. Their installation of puppet regimes, the instigation of internal strive and rebellion to their outright plunder of these societies simply cannot be wished away. The Shylock grip of International bankers and institutions are all sewn into that fabric of national impoverishment and degradation.

    It is multinational corporations that own the lecherous and leprous fingers that corrupt these societies. It is also their campaigns and political influence in their home countries that ensure their puppets are supported by these Western governments, which in turn offer these stooges the tools for suppressing and riding roughshod over their citizenry.

    We should all worry that Firestone and Dunlop own almost, if not all, of Liberia's substantial rubber farms. Theirs is not an investment but a land grab and the vicious seizure of a people's resource. Tubman was installed in power by the Americans from behind whom they found easy access to plunder the country. Ditto Taylor, till the feast went stale and ditto the Iron Lady of Liberia who sits in contrived power today.

    It's all so easy to gloss over Africa's non-development and issues with economic camouflage and theories but the truth will always remain that Libya tells us all a different story, ditto the Ivory Coast, Angola and the Democratic Republic of Congo, if you wish, Eygpt, Algeria, Tunisia, Sudan, Somalia, Ethiopia and Morocco too. Through them, we have come to see these International machinations for what they really are, rape and plunder.

    Economic recitals and their dubious application cannot obscure the fact that these Western governments and institutions make it impossible for Africa to flourish because of the stranglehold they collectively exert on its political and economic growth. In them, lie the true definition of resource curse and the Dutch disease.

Leave a comment