Rents to Riches? Factoring in the Political Economy of Natural Resource-Led Development

Subsoil natural resource endowments and associated rents—if well harnessed and managed—can serve as a boon to developing countries. Yet, too often, the extractive industries of oil, gas, and mining have been associated with the ―resource curse ‖ whereby nations that are more dependent on nonrenewable natural resources grow more slowly than resource-poor countries and often suffer from weaker governance and institutional quality. i In many developing countries, natural resources are the main game in town—and the extractive industries sector is both shaped by and, in turn, influences political, economic, societal, and institutional dynamics. Understanding the political economy of resource rents is therefore crucial to achieving sustainable development built on resource riches. As global demand for natural resources grows—and in response to historically high commodity prices— the push for new discovery and intensified extraction has increasingly moved into ―frontier areas ‖ in the developing world. Although the bulk of resource rents are currently generated in higher income settings, almost a quarter of global extractive industries rents accrue to low-income and lower middle-income settings (Figure 1). A breakdown of rent flows by region (Figure 2) shows the increasing significance of the developing world‘s participation in the extractive industries. Although the Middle East has maintained its leading position in terms of rents derived from petroleum, its share of global extractive industry rents has decreased since 2000. Conversely, East Asia and the Pacific‘s share grew from 9 to 17 percent of total natural resource rents; and between 2000 and 2008, Sub-Saharan Africa‘s natural resource rents increased sixfold, with oil rents representing more than two-thirds of the total. ii In short, rents from natural resources are becoming more important in the developing world, where poor governance and weak institutional quality makes countries vulnerable to the resource curse