In the early nineties, Richard Auty, a British economist, coined the term “resource curse”. This term addresses the phenomenon where resource-rich countries perform worse in terms of economic development than countries with fewer resources. A comparison between resource-rich countries such as Nigeria, Venezuela, or Indonesia to countries like Singapore or Hong Kong is one concrete example of this phenomenon. However, the ‘resource curse’ cannot be generalized to all resource-rich countries: some of them are able to rise as the world’s richest nations. For instance, Norway and Canada have been relatively successful in generating wealth and prosperity through mineral resources exploitation.
Regarding the resource curse, the writer offers the following model to explain how welfare can be achieved thanks to the extractive industry, and how primary stakeholders (the government, company, and society) are involved in the process. The model highlights the different steps of a generic cycle from the extractive industry to welfare creation. Each stages of the cycle are unique, but are all dependent on each other. In this model, involved stakeholders may have different objectives, but they all have a common view: a project should to be carried out properly, and it must produce a fair distribution of value to each party involved.
At this initial stage, governments meet and negotiate with companies. The government aims at capturing a maximum of the potential economic rents, while at the same time safeguarding the State’s sovereignty over the country’s mineral resources. On the other side, companies evaluate the project and certainly desire to generate a proper return on their investment. If involved parties agree on the terms, a contract or concession, which underlies the future activities, is concluded. To ascertain a fair distribution of the project’s benefits, it is very crucial that the contract or concession be balanced.
In extracting minerals or other commodities, companies generally operate under the supervision of government agencies and/or state-owned enterprises. Major works and investments are performed, which sometimes affect community life. As a result, environmental and social aspects are critical issues at this stage. For example, extraction operations must align with health, safety, and environmental regulations, and if expropriation is required, it should be executed in an appropriate manner (with effective communication, fair compensation, and without violence). Particular attention to environmental and social aspects are the potential key to a safe business and political environment, which in turn, contribute to the success of the project by allowing it to generate maximum and fair benefits to stakeholders.
Extracted minerals have economic value and will yield economic rents. The rents will be allocated to governments and companies respectively according to the prevailing legal and fiscal arrangements. Typically, the government can receive royalties, taxes, and in-kind contributions, while companies can obtain financial profit and/or in-kind contributions as well. Most financial benefits that stem from above mentioned projects will occur during this stage.
Having collected economic rent from the projects, the government can transfer it to the national budget. The governments have the authority to disburse the revenue collected from extractive industries through its public expenditures policy (budgetary policy can be a joint-task with the legislative branch). A sound expenditure policy may contribute directly to national development. However, this stage is highly vulnerable to corruption if good governance practices are weak.
Welfare is the final outcome expected by the community from natural resources extraction. When the community enjoys welfare, extractive industries can operate with lower business risks. For instance, greater welfare may lessen social risks, which in turn may lower the risk of labor and political violence issues. Thus, welfare may improve the business climate and encourage investors. On the other hand, with an attractive business climate, governments should be able to negotiate better fiscal terms in future block licensing negotiations. Thus, welfare helps all stakeholders achieve their goals.
The impact of corruption
If corruption occurs at any single stage of the above cycle, it is unlikely welfare can be attained. If welfare does not exist, stakeholders will not be able to gain maximum benefits from extractive industries.
Corruption undermines government functions and impedes societal growth and development opportunities. It undermines the government’s financial resources and its ability to formulate and execute the best policy. Those circumstances will affect the society immediately. Having a government which lacks competence and integrity, the society will have to surrender the chances for a better education, higher living standards, and sufficient infrastructures.
Corruption also forces companies to operate with higher costs and risks. Companies that endure bribes must incur extra costs compared to those that do not. Despite the short-term benefits they might receive thanks to these practices, the setback far exceeds this in terms of value, and at the end of the day, this behaviour leads to further corruption. Corruption will impact companies’ financial positions and in the long run bring forward the possibility of lawsuits.
Corruption is what differentiates “less-successful” from “successful” resource-rich countries. Considering the perception of corruption as a single indicator, Norway and Canada perform much better in the Corruption Perception Index 2015 compared to their peers, such as Indonesia, Nigeria, or Venezuela. To some degree, it is safe and logical to assume that the higher the corruption perception of a resource-rich country, the poorer its performance in terms of economic development.
Governments keep assessing different approaches to the distribution of the benefits of the extractive industry, such as who should manage extractive industries (government agencies vs state-owned enterprises), the choice of fiscal system, and so on. Corruption eradication at every stage of the welfare creation process could be the best solution to bring more benefits and fairer distribution of value to stakeholders.
It is important to keep in mind that stakeholders must commit and participate in corruption eradication to enable welfare to exist. By having welfare, all stakeholders will reap the maximum benefits, and it will be the key to fairer value distribution of the benefits of the extractive industries.
 Economic rent is a payment or monetary return to the owner of a factor of production or to a firm (which controls a bundle of factors of production) that does not alter its economic behavior, see Otto et. Al., Mining Royalty (World Bank) (2006). It is calculated as the margin realized after netting off all the costs of production (recurrent and capital recovery costs) from gross mineral revenue, as well as a minimum return on capital high enough to attract capital and retain it in the project, see Pietro Guj, Mining Royalties and Other Mining-Specific Taxes (International Mining for Development Centre) (2012).
 Corruption Perception Index 2015 by Transparency International, http://www.transparency.org/cpi2015#results-table, accessed 19 March 2016. The Corruption Perceptions Index measures the perceived levels of public sector corruption worldwide.