A new paper finds that while natural resources may provide low-income countries with a significant development opportunity, the prevailing extractives-led growth agenda is in urgent need of re-evaluation.

This paper challenges the view that the ‘resource curse’ – for which so many academics found evidence in previous decades – has now been laid to rest.

During the commodities boom of the past decade, a number of influential policy and corporate institutions have encouraged poor countries to capitalize on below-ground resources for economic growth and development. The key assumption is that improved management of the extractives sector will enable it to spearhead positive national development and avoid resource curse effects such as declining global competitiveness in the rest of the economy and a widening wealth gap. This assumption continues to influence governance advice and country investment choices.

The extractives-led growth agenda promoted by donors and international advisers in multilateral banks, consultancies and some development agencies has tended to reinforce domestic, government and investor pressures to pursue a ‘fast-track’ approach to extractives projects. This appears logical, given the obvious benefits of foreign-investment inflows and export revenues for countries suffering from poverty, lack of infrastructure and high levels of indebtedness.

However, there is an urgent need to re-evaluate whether the policy advice stemming from this agenda can serve as an antidote to the negative effects identified in the resource-curse literature. First, there is often a mismatch between governance advice given and the capacity of countries to follow it. Second, the global context has changed: exporters are suffering as a result of the current downturn in commodity prices, while reliance on the sale of high-carbon fuels is challenged by the global shift to lower-carbon technologies and energy efficiency.

Extractive revenues should not be viewed as income to be consumed, but as representing a reshuffling of the national portfolio of assets. Converting extractive resources below ground into cash above ground raises key questions about how this cash can be deployed to create productive assets for the future which do not rely on depletable resources.

Diversification of the economy away from the resource sector over an appropriate timeframe remains a key priority. In many cases, this will require slower development of projects to allow time for institutional capacity in government and the private sector to develop.

More economic and governance capacity needs to be in place before investment begins in a project, to enable investment and eventual revenues to generate real benefits to the rest of the economy, as well as appropriate, sustainable diversification.