Financial Transparency Coalition

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The resource curse is a tragic phenomenon that countries well-endowed with natural resources tend to have slower economic growth and poorer development than those without. This theory has been demonstrated very strongly in quantitative terms. According to an analysis of developing countries by Jeffrey Sachs and Andrew Warner, the more an economy relies on mineral wealth, the lower its growth rate. Countries with significant natural resource endowments also tend to have an increased likelihood of experiencing war and violence and a decreased likelihood of having a democratic system of governance.

In January of 2011 the people of Southern Sudan—this also included expatriates and those living in the north—voted overwhelmingly in favor of independence from their northern neighbors. Their vote led to formal independence on July 9^th, 2011, when South Sudan became the world’s newest nation. Given its declaration of independence has followed decades of conflict with the north—in which an estimated 1.5 million people have been killed—the secession itself was relatively painless. In a move emblematic of this relative ease, Sudan was the first nation to officially recognize its new Southern neighbor.

But now that South Sudan has officially asserted its independence, it faces numerous other obstacles. One of the most poignant is its vulnerability to the resource curse, which Secretary of State Hilary Clinton has already strongly cautioned the new nation to beware. South Sudan holds over 75% of what was the united country’s 500,000 barrels per day of oil output. Of the oil, Clinton noted: “We know that it will either help your country finance its own path out of poverty or you will fall prey to the natural resource curse which will enrich a small elite, outside interests, corporations and countries and leave your people hardly better off than when you started.”

As Clinton suggests, there are several external factors which drive this phenomenon: a resource endowment alone is not enough to reduce economic growth. South Sudan faces many of these predispositions. The resource curse is often the result of the decline in the competitiveness of other sectors precipitated and volatility of revenues caused by natural market fluctuations in the prices of these goods. Oil prices face impressive magnitudes of fluctuations most as a result of supply and demand, but also of speculation and South Sudan has few other mature economic industries. As a new nation coming from 50 years of conflict and marginalization, South Sudan is exposed to a variety of other exacerbating factors, including weak, ineffectual institutions and government inefficiency and mismanagement. The country derives nearly 98% of its budget from oil, which is another red flag. A government which is dependent on oil revenue has little accountability to its citizens through taxation.

The consequences of the resource curse are grave. As we see in countries like Angola and Sierra Leona, endowments in natural resources like oil and diamonds can lead to decades of conflict as different groups fight for their share. In other countries—Libya is an example—a leader (or, at times, leaders) uses profits from the resource to govern and so do not need to be held accountable to the population through taxation. Other countries fall victim to excessive borrowing internationally, corruption, revenue volatility, and a tug-of-war between the people and the government. The list goes on.

But the resource curse is not inevitable. There are tools governments can use to reduce their exposure to the damaging effects of mineral extraction. One of the most useful is transparency.

To this end, South Sudan has joined the Extractive Industries Transparency Initiative (EITI), a voluntary framework under which governments publicly disclose their revenues from oil, gas, and mining assets. Likewise companies make parallel disclosures regarding payments they are making to obtain access to these resources. This data provides an important point of comparison and fosters integrity and accountability. The head of the United Nations Mission in South Sudan welcomed the commitment, noting “This step is one of the important measures to improve governance announced by the government.”

While this step is certainly not sufficient to avoid the resource curse, it certainly is necessary. I am heartened both this action and by South Sudan President Salva Kiir’s pledge to improve transparency and accountability, particularly in the oil sector. Of course, as Clinton has said, “the proof is in the pudding.” But the nation has taken one important step forward in proving a good-intentioned government can change the fate of a nation predisposed to the resource curse. And maybe South Sudan will be just that nation.

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