Transitioning towards sustainable energy systems often involves optimizing multiple pathways. As the digital revolution shifts the composition of trade globally, not only is diversification required to help reduce dependence on natural resources, but it is also needed to create an innovation ecosystem that enables digital innovations to create exportable high-value business services – beyond traditional resources and manufacturing. This chapter recognizes this. As the energy landscape continues to shift around the world, it is argued that policy incentives and pathways that may help strengthen Africa's adaptive capacity need to be considered. Since differing economic structures and policy thrusts influence energy use and production patterns, the debate on energy system transformation will remain on the front burner of the global energy investment and policy agenda for years to come. Optimal outcomes will depend on how structural, efficiency, and jurisdictional nuances are balanced.
One day soon poor countries may actually benefit from their natural resources.
― The Economist
NATURAL RESOURCES REMAIN A KEY INPUT in the production process – either through direct economic use in satisfying human needs or indirectly by undergoing transformation into other goods and services that can serve the economy and society. To translate natural capital endowments into growth and development in a manner that protects communities, reduces carbon emissions, and provides opportunities for a broad segment of society, the right policies are a necessity. For a very long time, natural resources were considered beneficial to economic growth. The resource-growth nexus attracted a lot of attention after Sachs and Warner (1995) showed that an increase of one standard deviation in natural resource intensity (on average 16 percent of GNP) leads to a reduction of about 1 percent per year in economic growth. This has come to be known as the “resource curse”.
The controversy generated by Sachs and Warner’s results is understandable on a major premise: economic theory predicts that capital (of which natural resources constitute a part) has a positive effect on growth. However, the central question in the modern resource curse literature has gone beyond whether or not natural resources negatively impact economic growth as earlier argued; instead, it is now largely about the conditionality of the curse on some other factors.
The resource curse has two common explanations in the literature: (i) economic and (ii) political-institutional. The pioneering research of Corden and Neary (1982) forms the basis of the Dutch disease theory, a situation that leads to a diminished importance of the manufacturing sector due to the crowding out effect of natural resources – a major economic explanation of the curse. Corden and Neary use a two-factor, two-good model to explain what can cause a decrease in the competitiveness of the trade-exposed manufacturing sector. They assume a small open economy with three sectors – a non-tradable sector (service sector), an import-competing manufacturing sector, and a resource sector – and conclude that the resource boom will affect the rest of the economy through the movement of manufacturing resources and expenditures. This leads to a lagging export sector which suffers through the so-called deindustrialization.
Starting with the famous work of Sachs and Warner, which formally established the resource curse, their results support a dynamic version of the Dutch disease model by showing that on average, resource-abundant countries lag countries with less resources. Using the ratio of natural resource exports to GDP as a proxy for natural resource endowment, and 1971 as the base year, they control for other determinants of economic growth such as initial per capita income, trade policy, government efficiency, and investment rates.
Auty and Mikesell (1998) examine the problems faced by mineral-rich countries in achieving sustainable development, compared to their mineral-deficient neighbors. Focusing on nine countries – Botswana, Chile, Colombia, Indonesia, Jamaica, Namibia, Papua New Guinea, Peru, and Trinidad and Tobago – Auty and Mikesell offer a compelling argument on why nurturing the economic and social conditions that sustain economic growth is more important than the sustainability of mineral production itself.
The second popular explanation of the curse is the political-institutional dimension. This model blames the existence of the curse on rent-seeking behaviour. Robinson et al. (2006) present a formal political-economy framework of the resource curse by arguing that to understand whether or not natural resources are a blessing or a curse, it is imperative to analyze the political incentives that resource endowments generate, through a careful analysis of the interaction between institutions and resources. To fully analyze the effects of temporary and permanent resource booms, they use a two-period probabilistic model to consider some stock of natural resources with an intertemporal path of prices subject to exogenous price variation. This analytical setting captures the operating environment of small developing economies, subject to international commodity price variations. Their analysis reveals a complex relationship between resource extraction and the political environment. Where there are weak political institutions, resource booms will lead, through the political process, to inefficient resource allocation.