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The Paradox of Plenty

Published in Lethbridge Herald as, 
'Tale of the Resource Curse'

21 November 2019

 

The ‘paradox of plenty’ (or the ‘resource curse’) has been observed in regions that have an abundance of a non-renewable resource. The argument is that resource-rich regions are more likely to experience low economic growth in the long term. The International Monetary Fund considers a region ‘resource-rich’ when 20% of the fiscal revenue is derived from non-renewable resources.

The cycle goes like this: A resource is discovered and the demand for this resource is established. This draws private investment from early entrants into the industry. As the industry expands and the return on investments remains lucrative, more money is invested. Governments invest in infrastructure that benefits the dynamic industry. Both public and private investments are made at the expense of other potentially profitable industries seeking capital. In plain words, the eggs are placed in a single basket.

This is where the curse comes in. At some point in the resource cycle, the profits to industry begin to decline. This may be because the easily-extracted resources are diminished, and the resources that are more difficult to access or refine are needed to fill the gap. The government that relies on a single resource industry for revenue and for employing its workers responds by supporting the struggling and influential industry in the form of improved infrastructure, tax incentives, support for research & development, and reductions in royalty expectations. This is usually an honest attempt to sustain the industry (already vulnerable to boom/bust cycles in commodity markets), hoping that it will recover in the short term or within the next election cycle.

The ‘resource curse’ suggests that there will be a time when this recovery is weak, or simply non-existent. Nonetheless, out of desperation, even more money will be invested to prop up the industry – money that will never be recovered in revenues.

Since most of the available money has flowed to a single industry at the expense of other industries, the resource-rich region has not adequately diversified and it is unprepared for the loss in revenues and employment opportunities. It is not uncommon that the failing industries leave behind a legacy of obsolete infrastructure and environmental damage that become public liabilities. In many countries where this cycle has been observed, the results have included instability in democratic institutions and the rise of populism and demagoguery, a drastic reduction in public services, an increase in human desperation and a deficit of political leadership as manifested in growing corruption, violence, crime, scapegoating, and human rights violations.

The Paradox of Plenty is a cautionary tale. Indicators might include rising liabilities (like orphan wells and mining tailing ponds), increased public investments in infrastructure for the once-lucrative industry (often accompanied by declining private investment), lower transparency in government finances, and less civil and open public discussion. Good government leadership can mitigate many of the worst effects – by encouraging economic diversification, by adopting a long-term view in decision-making, by not relying on royalty revenues for core public services, or by saving revenues from this non-renewable inheritance for future needs.

It takes courage and foresight to recognize a faltering or uneconomic industry, and it takes wise leadership that seeks thoughtful input to avoid the worst consequences of the ‘paradox of plenty’.





For an expanded edition with graphs & links, See our Issues & Projects Page.










 
We are pleased to actively participate in the Alberta Narratives Project.






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The Project conducted 55 province-wide roundtable discussions with 482 Albertans run by 75 organizations and supported by 19 partners. 

Download the Alberta Narratives Project reports I & II:

Alberta Narratives Project




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SAGE supports: 
Expansion of the Twin River Heritage Rangeland on the Milk River Ridge.
See our letter @ Letters to Government   

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SAGE commends the City of Lethbrige for leadership & commitment to managing municipal solid waste diversion & welcomes Community Curbside Recycling.

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SAGE supports:
BILL C - 202 Canadian Environmental Bill Of Rights

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