The ‘resource curse’, or “Dutch disease“, describes when countries rich in natural resources face reduced domestic growth rates in other sectors due an influx of foreign currency or investment, mixed with market volatility.
The Tao of Finance initiative from the World Academy of Arts and Sciences examines the link between this ‘disease’ and the 17 UN-Sustainability Development Goals, and identifies an upgraded monetary system to make the resource curse history.
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Hello, and welcome to ResearchPod. Today, we’re talking about a spin-off from an initiative of the World Academy of Art and Science called the ‘TAO of Finance’.
An academy international and interdisciplinary expert group headed by Stefan Brunnhuber, tried to answer the question: How can we really finance the 17 UN-Sustainability-Development Goals within the next 15 years?
In this fourth episode, we elaborate upon the specific challenges that nations rich in natural commodities have to deal with; a set of conditions informally known as the ‘resource curse’, sometimes also called the „Dutch disease“. And we examine the link between this ‘disease’ and the 17 UN-Sustainability Development Goals, because this ‘disease’ could threaten our shared future.
Or, in more technical terms: How should a country rich in natural reserves like fossil energy or rare materials manage its financial future without risking an appreciating currency, an economic downturn, the dwindling welfare, wealth and wellbeing of its citizens, and fewer of the 17 UN-Sustainability-Developments Goals?
It may seem paradoxical, but most countries that are rich in natural commodities perform poorly regarding human development. In general, except for the Scandinavian states, countries with access to abundant natural commodities, such as fossil fuels or rare materials, tend to have lower economic growth and higher rates of poverty, crime and domestic violence than comparable countries. They also spend more on their military and perform worse on democratic indices and human rights such as press freedom, private property rights, free speech, free movement and gender equality. In addition, they generate higher income and wealth gaps, participate in fewer multilateral agreements and produce more oligarchs and a diminished or unstable middle class.
Even more surprising is that the mechanism is always the same: exporting these natural commodities causes appreciation of the domestic currency, making it harder for the domestic manufacturing industry to compete on an international playing field.
Human capital is crowded out by the booming sector that exports these commodities. At the same time, the service industry expands, providing non-tradable domestic goods (sometimes called “indirect deindustrialisation”). These two actions ultimately result in lower international competitiveness, a lower domestic growth rate, structural unemployment, and economic recession. On top of this, these natural commodities are subject to higher price volatility on the international markets, so additional knowledge, skills and funding are needed to hedge the risks.
Historically, this was known as the ‘Dutch disease’, a term used in the 1970s and 80s to describe these problems, suffered by the Netherlands in the 1960s. Countries rich in resources and natural commodities that other countries don’t have access to, don’t really benefit from this kind of ‘resource rent’ – the gap between the value of their resources at the point of extraction, and when sold on . There are over 50 such countries on the planet suffering the effects of the Dutch disease, or the ‘resource curse’. These countries include Venezuela, Congo, and Saudi Arabia
From a sustainability perspective, there is another, even more complex layer to this scenario. Shifting from fossil fuels to renewables doesn’t eliminate the ‘resource curse’ but simply relocates it, sometimes to other countries. Over 50% of the resources required for renewable energy – in particular, copper, zinc, aluminium, cobalt and nickel – are located in non-democratic countries, where child labour, misuse of power and oligarchic structures are rife.
If we view this through a geopolitical lens, the free Western world risks choosing the greater of the two evils. On the one hand, the shift to renewables requires substantial investment in the supply and production of these rare materials – an estimated two trillion US dollars by 2040. On the other hand, Western countries depend on these renewable energy resources to build a green marketplace. Therefore, there is a risk of repeating history by investing in, and depending on, political regimes that do not meet the West’s democratic standards.
At this point we introduce sovereign wealth funds and explain how they work and what they’re used for. Sovereign Wealth Funds are state funds in which budget surpluses, usually from fossil resource extraction, stabilise a domestic economy, serve as a basis for intergenerational pension funds, or finance socio-economic transitions. The Sovereign Wealth Funds market is worth eight trillion US dollars. However, less than 5% of that is invested in green assets.
The size and revenues of Sovereign Wealth Funds are usually measured by what is known as the fiscal breakeven oil price. This benchmark represents the price of oil at the point where the state budget for the oil is balanced, and reserves start to accumulate. The lower this breakeven, the higher the potential revenues. Sovereign Wealth Funds must increasingly deal with the challenge of stranded assets and oil price volatility. As Sovereign Wealth Funds are a substantial player in the global market, it is in the funds’ self-interest to consider out-of-the-box financial engineering approaches to facilitate any required changes.
The great advantage of Sovereign Wealth Funds is that they represent a public fund, and therefore reflect public interests, public goods, and public ownership and should consequently shift from a traditional towards a more resilient and greener strategy.
So, what are the solutions? The only way to overcome the resource curse is by lowering a currency’s face value, and investing in domestic healthcare, education, and a stable, long-term collective pension fund. This investment needs support from sophisticated and complex financial engineering and risk hedging instruments that dampen price volatility and the high face value of the domestic currency. However, this will not happen without a certain degree of pain…
Let’s take a moment to focus on a case study: Aramco, the world’s largest oil company. Aramco is owned by the Saudi Arabian government. In 2021, Aramco generated net revenues of almost 200 billion US dollars, and was Saudi Arabia’s primary source of income.
But Aramco is a significant contributor to something else. Over the last 50 years, it has generated over 4.3% of global CO2 emissions, by far the most of any single company. Aramco extracts over ten million barrels of oil a day but has access to over 260 billion barrels of underground oil reserves. It is currently trying to upgrade its activities by providing not only crude oil but also fossil-based manufactured commodities, such as chemicals and liquefied natural gas. It looks like Saudi Arabia may be on track to suffer the resource curse. So, how can the Saudis avoid it?
From an ecological and planetary perspective, almost all the 260 billion barrels of oil reserves should stay in the ground. But then, the government of Saudi Arabia would miss out on 200 billion US dollars in annual revenues to fund and manage their wealth. At the same time, protecting the planet from overheating is in everyone’s interest, and reversing climate change is not something for a single country, or company, to deal with. Nor can the blame be pinned solely on Aramco – other countries have bought the oil and built their wealth and citizens’ wellbeing upon it.
Therefore, what policies could maximise resilience and establish a long-term green future in the region? Could Saudi Arabia even become a planetary leader for the UN Sustainability Development Goals?
Firstly, countries rich in natural, but harmful, commodities need to increase their domestic savings. Secondly, these countries should each create a Sovereign Wealth Fund to cover pension entitlements; such a fund would help make long-term investments in foreign assets. Thirdly, they could establish high-quality domestic service industries – particularly within education, healthcare and public administration – to increase international competitiveness in all sectors.
But all this is easier said than done: As the saying goes, the devil is in the detail. All three so-called ‘S’ remedies – savings, a Sovereign Wealth Fund, and high-quality service industries – still have to reconcile the trade-off between leaving the fossil reserves untouched to prevent damage to our planet and our future, and the lost revenue that results from not extracting those resources.
The ‘TAO of Finance‘ Initiative of the World Academy of Arts And Science proposes implementing a new monetary mechanism. We explored it in detail in the previous episode, ‘Financing our Anthropocene ‘. But here is the argument in brief again and applied to the so-called resource curse.
Addressing climate change is a common good, and fossil-based commodities should, mostly, remain in the ground and become stranded assets. At the same time, we must respect the property rights and entitlements associated with those commodities.
The IMF, World Bank, and other public development and investment banks could generate additional liquidity through a quantitative easing programme nominated in so-called Central Bank Digital Currencies, or CBDCs. This money could then be offered to countries rich in natural commodities to pay them to leave those commodities in the ground, (partly) compensate them for their future losses, and, fund investment in the three ‘S’ remedies of higher savings, long-term Sovereign Wealth Fund, and domestic service industries.
In this way, we can lift the resource curse and save the planet at the same time.
Technically speaking, the additional funds would remain digital. They would operate based on distributive ledger technology, with a smart contract algorithm earmarking the investments and allowing full traceability, trust and transparency throughout the entire transaction. In short, the balance sheets of public financial institutions would grow, but the Dutch disease would be cured, and the UN Sustainability-Development Goals would be funded. It could also see something remarkable happen in the Middle East…
Between 750–1250 AD, while Europe and the rest of the world were still stuck in the darkness of the Middle Ages, the Middle East provided the brightest thinkers, physicians and scholars. This period was known as the golden age of Islam.
During this time, the Islamic world was at the forefront of advances in mathematics and medicine, administration and astronomy, geography, politics, arts, culture, chemistry and literature. Today, we have a chance to revisit the significant advances of that era. An upgraded monetary system could allow investment to reforest the Sahara, providing jobs for millions of people while also protecting the climate. Huge geothermal sites and solar arrays could compensate for the loss of energy from fossil resources. Lifelong education could unlock the full potential and creativity of everyone. Research and development could offer cutting-edge technology for the good of humanity. Everyone would have access to an amazing variety of food produced in a way that respects all living beings and the natural world and draw on an integrated healthcare system that harnesses all the medical knowledge available to us. And music, arts and culture would be able to flourish to their full potential, allowing each society to represent and critically reflect on itself.
If we are imagining such a future, why don’t we take it two steps further?
Firstly, let’s aim to introduce a new monetary regime that makes these new investments conditional on pursuing a sustainability agenda. Instead of getting entangled in a power game between Western democratic standards and other political regimes, we should be developing a new shared monetary system that creates common ground for green investments and consumption between liberal democratic and non-democratic societies. The mechanism and the financial engineering underpinning it – the dual, parallel and digital currency system we have been describing here – bridge these troubled waters. They also acknowledge that different political agendas are still built upon the same monetary mechanism, that they are facing the same environmental challenges, and, in some sense, share a common future.
Secondly, from a history of philosophy perspective, we could argue that communism emphasised collective goods, but had no understanding of free competitive market allocation and the value of a price signal. Capitalism, in contrast, promoted maximising profit through competitive markets, private property and their prize signals, but money making and earnings became a means in and of itself.
If we want to integrate these two mega-trends, we must honour both the commons and the market allocation concurrently. When the monetary system has become a purpose for a greater whole, we end up integrating both – communism and capitalism – and transcending them towards the evolutionary step. Or, in other words: we are shifting from an ethno-centric to an ego-centric and then to an eco-centric worldview, and accordingly putting economics to work for our collective benefit.
In summary, the resource curse is not incurable – we have a powerful remedy at hand. The three necessary interventions are: increased savings, a Sovereign Wealth Fund and a service industry. An upgraded monetary system with a dual digital component allows us to channel, shift, and target these remedies and make the resource curse history. This same monetary mechanism could be applied not just to oil sites in the Middle East, but also to saving the Amazon rainforest in Brazil, preserving rare materials in the Congo, or eliminating coal extraction in Australia. So, let’s lift the resource curses all over the world.
To read more about the initiatives of the World Academy of Art and Sciences, visit their website, which we linked to in this episode’s description, or read the book ‘Financing Our Future’, available online and through all good bookstores.
That’s all for this episode – thanks for listening, and stay subscribed to Researchpod for more of the latest science. See you again soon.