Why Extractive-Based Nations Fail: Between Resource and Knowledge-Based Economies

Author ~ Bekeme Masade

In their famous book ‘Why Nations Fail’, Daron Acemoglu and James A. Robinson highlight the reason behind the economic woes of extractive or natural resources-based countries such as Nigeria, Venezuela, Peru and others, despite their remarkable history of huge revenue generation from crude oil and other mineral resources. They argue that “Inclusive economic institutions that …encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions …” Their core point is that “countries thrive when they build economic institutions that unleash, empower and protect the full potential of each citizen to innovate, invest and develop”.

My previous article ‘The Reality of Nigeria’s Recession Exit: Between GDP Growth and Sustainable Development’, describes how the economic growth experienced in the era of the oil boom has been unable to improve the quality of life of 53.5% Nigerians living below the poverty line today.

Nigeria’s Extractive-based Economy

An “extractive-based economy” is a natural resource-based economy, where countries depend on extracting natural resources for sale or exporting with little or no processing. Although, natural resources such as crude oil and other minerals can contribute significantly to a country’s economic development by generating employment, foreign exchange, and government revenues; it is also relatively unstable owing to its susceptibility to external shocks such as fluctuating commodity prices, the impact of global competition, and the depletion of deposits. When this happens, it triggers a decline in government revenues and the government is forced to seek foreign loans.

Why Do Extractive-based Economies Fail?

To buttress his point in Why Nations Fail, Acemoglu explains that although “…China is experiencing growth under extractive institutions…it’s not sustainable because it doesn’t foster the degree of “creative destruction”- product and process innovation mechanism that replaces the old with the new – that is so vital for innovation and higher incomes”.  He argued that unlike the United State’s knowledge-based and sustainable economy, “a 20-year-old college dropout in China [cannot be] allowed to start a company that challenges a whole sector of state-owned Chinese companies funded by state-owned banks”.

Empirical evidence suggests that on average resource-abundant economies have not performed well relative to those countries that are resource-deficient, as increased dependence on mineral export commodities has also set limitations on opportunities for technological innovation. Excessive reliance on these resources have always drove countries into economic woes or “Dutch disease” – which describes the paradoxical situation where seemingly good news of large oil reserve discovery, turns out to have a negative impact on a country’s broader economy.

Why Netherland’s Extractive-based Economy Failed

The term “Dutch disease” was coined by The Economist magazine in 1977, to describe the woes of Netherland’s economy, following the discoveries of vast natural gas deposits in the North Sea in 1959. The newfound wealth and massive exports of oil caused the Dutch currency – guilder – to rise sharply. Sadly, exports of all the nation’s non-oil products became less competitive on the world market. By the year 1970 to 1977, unemployment rose from 1.1% to 5.1%, and capital investment in the country dropped.

Why Extractives Cannot Save Congo

Extractive-based economies fail because their growths are not generated by the creative destructive power of the people, but are hinged on political elite who have shown strong propensity for corruption and misappropriation of public funds. For instance, while other nations are currently developing skills and engaging in research to create more jobs and grow their economies with the current boom of electric cars, the Democratic Republic of Congo which has experienced 100% annual increase in revenue generated from cobalt – a critical element in lithium-ion batteries used in the production of the current global booming electric cars – is yet to strategically position its economy with innovation, skills, and research needed to engage not only in the mining of cobalt but in the industrial transformation of the mineral as finished goods – a process that creates more jobs and foreign exchange benefits. Instead, the political elite that seize power use its control of resources to prevent social change. Such economic growth can last for a while, but will never escape the looming Dutch disease malaise.

Why Oil Could Not Save Venezuela

Imagine the oil-rich but cash-poor Venezuela, a country with over 300 billion barrels of proven oil reserves that is recognised as the largest in the world, according to OPEC’s 2015 figures. Yet, lack of economic diversification has made Venezuela the world’s worst economic performer! If an oil-based economy is a messiah, Venezuela would have been saved! According to International Monetary Fund (IMF) figures, in 2016, the country had a negative growth rate of minus 8 percent, an inflation rate of 481 percent and an unemployment rate of 17%, that is expected to climb to 20% this year.

Venezuela, like most of these extractive-based economies, underperform because it’s government fails to steer the economy along a pragmatic and strategic development path, does not have clear plans or is unable to implement one. They tolerate corruption, do not create environments that are conducive for investment, and devote little attention to developing endogenous technological capacity.

Knowledge-based Economy

The global economy is in transition to a “knowledge-based economy” – a term that resulted from a fuller recognition of knowledge as a driver of productivity and economic growth, leading to a new focus on the role of information, technology and learning in economic performance. This is reflected in the trend in modern OECD (Organisation for Economic Co-operation and Development) member countries focus on growth in high-technology investment and highly-skilled labour, with associated productivity gains.

While in past centuries, raw materials constituted about 30% of the world’s total output and source of wealth, today it is only 4%. This implies that raw materials are no longer a guarantee to economic progress, and that the wealth of nations come mainly from ideas embedded in new technologies, services and manufacturing.

Unlike the extractive-based economy, a knowledge-based economy relies greatly on intellectual capabilities instead of natural resources such as crude oil, gold, and other minerals, and provides rapid acceleration in the technical and scientific fields, making way for more innovation in the economy as a whole, and positively impacting on the financial wherewithal of the wider population. The embodied human capital and technology is in today’s world central to economic development.

How a Knowledge-based Economy Helped South Korea

South Korea belongs to the group of knowledge-based economies that have achieved spectacular success in expanding manufactured exports since the 1960s. Explanation for South Korea’s success lies mainly on the adoption of a coherent strategy for promoting growth in various industries, economic and technological planning, strong support for education, investment incentives, industrial restructuring, and the strong push for manufactured exports. With greater technological strength and availability of skilled labour, the industrial sector gained competitive strength that spearheaded rapid industrialisation in Korea.

Why a Knowledge-Based Economy is Good for Nigeria

While effectively controlling a God-given resource is a strong benefit, it is common knowledge that natural resources are finite, and that to get the most out of natural resources is to create a systemic value chain for maximum extraction of value. To leapfrog Nigeria’s economy to a knowledge-based economic system, investment in research and development, enhancing the skills and education of the labor force, improving management and organisational techniques, upgrading the domestic technological capability, and continuous learning by individuals and firms, are key. An important economic determinant to achievement of this development trajectory is the configuration of national innovation systems, which should consist of the flow and relationships among industries, government and academia in the development of science and technology.

If an oil-based economy is the messiah, Nigeria would have long have been saved; why do we not then push forcefully and quickly towards a knowledge-based economy?

Retrospect

  1. Mainstreaming Street Hawking in a Formal Economy: An Inclusive Approach to Development, Bekeme Masade (August 26, 2017)
  2. Sand Dredging in Nigeria’s Waterways: Between the Economic Boom and Environmental Doom (Sep 2nd, 2017)
  3. Towards the Bleak Future of Crude Oil: What Nigeria Should Do Now, Bekeme Masade (Aug 12th, 2017)

Reference

  1. An Extractive Economy and an Industrial Economy. Penobscot Marine Museum Education
  2. Extractive Versus Productive Economy: A Case Study Comparison of Peru and South Korea. Rubén Berríos, ” Journal of Global Initiatives: Policy, Pedagogy, Perspective: Vol. 7: No. 2, Article 9
  3. Dutch Disease. Investopedia
  4. If Oil Can’t Save Venezuela, It Sure Can’t Save Nigeria! Ben Murray Bruce, Thisday, August 14, 2017
  5. Knowledge Economy. Investopedia
  6. The Knowledge-Based Economy. OECD Paris 1996
  7. What Dutch disease is, and why it’s bad. The Economist, Nov 5th 2014, W. and KIEV
  8. The question of extractive elites. Buttonwood , The Economist, Apr 14th 2012
  9. Uncertainty over future of manufacturing in Nigeria, others. Femi Adekoya, Guardian Newspapers, 20 September 2017
  10. Venezuela’s worst economic crisis: What went wrong? Al Jazeera News, 3 MAY 2017
  11. Why Nations Fail. Thomas L. Friedman, The New York Times, MARCH 31, 2012
  12. Why Nations Fail: The Origins of Power, Prosperity and Poverty. Acemoglu, D., & Robinson, J. A. (2012), NY: Crown Business.



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