Easily earned commodity money is more of a curse than a blessing. It helps autocratic regimes stay in power and cater to the people. But wars happen more often. But there are interesting exceptions.
Iran fires rockets into Israel and supports militias and terrorist organizations that want to destroy the Israeli state. Russia wants to wipe Ukraine off the world map as an independent state. To do this, it has launched an invasion and has been inflicting death and destruction on its neighboring country for more than two years.
The sad similarities don’t end there. In both countries, a relatively small elite is firmly in power under dictatorial leadership, although large parts of the population would like to get rid of this type of ruler. In Russia this is the circle around the Kremlin ruler Vladimir Putin, which is characterized by old KGB networks; in Iran it is the Revolutionary Guards operating under the revolutionary leader Ayatollah Ali Khamenei and President Ebrahim Raisi.
Both states are subject to international sanctions. Russia’s president is openly threatening to use his nuclear arsenal, and Iran is striving to become a nuclear power itself. In both countries, economic development remains far below its potential. The gap between the rich elite and the poor people is huge.
Raw material wealth for maintaining power instead of growth
Is it all just a coincidence?
No, say economics and political science. Russia and Iran are, although quite extreme, typical victims of the so-called resource curse. They extract natural resources and can sell them internationally well above their relatively low production costs.
According to World Bank calculations, countries made large profits (so-called resource rents) from the sale of oil, natural gas, coal and metals. In the case of Russia, these accounted for 19 percent of total economic output before the war, and in Iran as much as 30 percent. If we only look at exports, the share of raw materials in Russia was 78 percent and in Iran 70 percent.
Iran and Russia are not alone. Easy-earned commodity money also dominates Central Asia, the Middle East and large parts of Africa. In many of these countries, it is primarily a small elite that benefits from the great wealth of raw materials, while the general population is not doing well, in many African countries or in Mongolia it is even extremely bad.
The countries with the greatest dependence on raw materials are usually autocracies in which the people have little say. That’s not surprising. If the political elite in autocratically ruled systems such as Russia or Iran control easy commodity money, they have to worry less about the favor of the general public. Whether the country is economically successful and generates tax revenue is secondary for the elite.
The ruler can buy the loyalty of his elite and the civil service and security apparatus by distributing the raw material blessings.
Because the political leadership cares little about a good investment climate and a high location attractiveness, many countries rich in raw materials have low economic growth. Their raw materials are more of a curse than a blessing.
The mechanism takes place in Russia, where, in addition to the police, the feared special units of the Interior Ministry and the secret services, the presidential security apparatus specially set up by Putin and a compliant judiciary protect the elite from the people.
They are all kept happy with income that they extort from the people or that they receive through opaque connections to state-owned companies in the raw materials sector. The system has mafia-like characteristics; Beyond the raw materials sector and the armaments sector, the economy is hardly developing.
In Iran, on the other hand, the Revolutionary Guards not only control customs and national borders, but also the most profitable areas of the economy. Without the oil revenues, the regime of the mullahs and moral guardians would probably have collapsed long ago.
In the Middle East or in Kazakhstan, the rulers have allowed the large amount of raw material money to diffuse more widely into the small population. Rulers such as the Emir of Qatar or Crown Prince Mohammed bin Salman in Saudi Arabia invest the raw material revenues in diversifying the economy, which should ensure the countries’ prosperity beyond the fossil fuel age. What all oil states in the region have in common is that they are governed autocratically.
Raw materials make you vulnerable and aggressive
However, regimes that are heavily dependent on raw material revenues are often vulnerable. Commodity price shocks can lead to suddenly much less money being available than planned and a lot of capital leaving the country. As long as there is a lack of reliable institutions and legal certainty, the local elite usually prefer to keep their wealth safe abroad instead of investing in future growth at home. This results in strong exchange rate fluctuations, which put the official government budget under particular pressure if it has incurred debts in foreign currencies.
Autocratic regimes in countries that are heavily dependent on raw materials are also vulnerable because other groups are also looking for easy money; A loss of power is usually associated with a loss of personal prosperity and wealth.
It is therefore no coincidence that in resource-dependent countries like Russia the system is becoming increasingly repressive. Wars and internal conflicts are also increasing in resource-rich countries. The aim is to defend regional dominance or assert oneself against competing groups. In Africa, oil countries such as Libya, Angola and Sudan, where devastating civil wars have raged for years, are sad examples of this.
Russia and Iran also illustrate that, from the ruler’s point of view, external enemies or even a war can legitimize internal repression and close the fronts.
This is probably one of the reasons why countries rich in raw materials often spend a high proportion of their gross domestic product on the military. In Russia, according to data from the Stockholm International Peace Research Institute (Sipri) in 2021, this was 3.7 percent. Azerbaijan, which is autocratically run by the Aliyev clan, has spent 5.3 percent of its economic output on the military – and last year took over Armenian Nagorno-Karabakh militarily.
The Saudi ruler, who had 7.6 percent spent on the army, obviously wants to play it safe. The Emir of Qatar doubled with 6.5 percent. Iran appears to be downright moderate, with military spending amounting to 2.2 percent of its gross domestic product.
There is another way
Fortunately, the connection between raw material wealth, dictatorship, unused economic potential, inequality, wars and conflicts is not as clear as it seems theoretically. Anyone who looks at the data (and the maps shown) can discover interesting counterexamples.
Norway, Australia, Canada, Chile and Botswana are countries with well-functioning democracies whose exports are relatively dependent on raw material revenues. The diamond country Botswana and Chile with their mining demonstrate that resource wealth can be a blessing over time, allowing poor countries to develop, modernize and thereby achieve relatively broad prosperity and a functioning democracy.
But what makes the difference?
From an economic point of view, it depends, firstly, on whether the raw material wealth is primarily consumed by the ruling elite in order to secure power and wealth, or whether it is invested in the development of the country and thus in broad economic growth.
Secondly, to ensure that raw material revenues are not just shared among the elite and largely flow abroad, functioning institutions such as a legal system that guarantee property rights are needed.
Thirdly, to prevent these institutions from being hijacked sooner or later by less benevolent dictators, a functioning democracy with orderly changes of power helps.
Fourthly, it must be possible to divert raw material revenues from the immediate desires of politicians – and instead invest them in future prosperity. Norway is a prime example of this with its state pension fund.
The big question is how it can be possible to make the exceptions the rule. How can Russia, Iran, Libya, Azerbaijan or even Sudan escape the raw materials crisis? What needs to happen so that they can use the income for prosperity in order to prosper more broadly without wars and conflicts?
The key lies in politics and its institutions as well as in a civil society that – as in Ukraine – is no longer willing to live in a self-serving, corrupt system.