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Natural Resources: A Curse in Disguise?
Vivian Zhan explains how rich soils have poor yields

August 2017

Prof. Vivian Zhan: "Resource endowment often affects the mode of local governance."

There’s a tendency to think of natural resources as a universal boonthe oil-rich nations of the Middle East are some of the wealthiest on earth. But with mineral and mining wealth, too often a blessing can be a curse.

The ‘resource curse’ refers to the widely recorded phenomenon wherein parts of the earth that are particularly blessed with natural resources such as fuels and minerals generally suffer terrible socioeconomic problems such as underdevelopment, corruption, social conflict and totalitarian governments.

Prof. Vivian Zhan at CUHK found her interest in the topic piqued by two neighbouring counties in Guizhou Province. The pair share very similar demographics and levels of development. But one county happened to uncover that it was blessed with substantial mineral resources, phosphorous in particular.

Soon after the discovery, that county’s development diverged dramatically, and for the worse, from its peer. It began encountering multiple socioeconomic problems, with damage to the environment, a proliferation of gangsters, and a decline in personal safety.

Members of the community shared multiple grievances that culminated in a large-scale protest in 2008. More than 20,000 people took to the street, burning down the local government offices. They also attacked the police station and burned that to the ground.

Professor Zhan of the Department of Government & Public Administration, began to analyze how such situations arise. Her findings suggest that areas that have particularly rich mining wealth rely too much on that specific industry.

Since mining and resource extraction often requires only semi-skilled or manual labour, Professor Zhan established, the governments overseeing those areas invest less in education, public health and ‘human capital’ in general. This short-termism may work for the mining industry, but eventually is bad for the local government, which does not see its economy or its workforce progress in any meaningful way.

Resource industries are also heavily regulated. This creates the opportunity, often exploited by local officials, for corruption. The apparatchiks granting the necessary permits and approvals for mining engage in ‘rent-seeking,’ in economic terms, which to a layman means demanding kickbacks for sitting in a role that adds any value. Like a game of Monopoly, the officials simply demand their ‘rent’ for your business and paperwork to move through their department.

The work of the CUHK-based scholar has taken her to six provinces in China

Professor Zhan has come by her findings through analysis of global statistics and through personal fieldwork in China. She hopes that her findings can help generate lessons for local and national governments to apply when setting policy in resource-rich areas.

Over the course of the past five years, she has visited mining areas in the provinces of Jiangxi, Shanxi, Henan, Ningxia, Inner Mongolia and Xinjiang. The trips have involved interviews with more than 100 government officials, village cadres, local citizens, and the owners and managers of mining businesses.

‘I want to tell not just an economic story but also a political story,’ Professor Zhan says. ‘Resource endowment affects the mode of local governance.’

Her aim has been to understand how mining fits into local communities as an industry, as well as how governments, officials and citizens interact with resource companies. Mainstream science has so far examined the resource curse at a national level. But Professor Zhan is the first expert examining the impact of raw-material wealth at the province and local level. This ‘micro’ look is particularly interesting, she feels, from a political perspective. 

Professor Zhan says it is both challenging and fun to uncover reliable figures demarcating the problem and to understand the logic behind China's complicated political and economic situation. Shanxi, a major coal producer, proved to have particularly severe political problems, with the vast majority of local officials linked to a corrupt provincial chief.

Seeking bribes is the commonest form of corruption at the local level, but officials may also expropriate goods, companies and material, or obviate their duties such as by failing to conduct work-safety inspections. Such dereliction of duty ultimately results in fatal mining-industry accidents.

Professor Zhan has also conducted large-scale ‘N-statistical analysis’ to map, systemically, how the pattern of resource extraction affects local government and economic development over time. That form of ‘longitudinal’ analysis looks at multiple forms of data, running regression studies to determine whether the resource extraction is directly correlated to the social problems Professor Zhan identified in her fieldwork. Her work takes her examination as far back as reliable statistics allow, typically back to 1999 in China.

The combination of fieldwork and statistical analysis provides both qualitative case studies and quantitative data findings to explain the ‘resource-trap’ phenomenon. The data confirmed most of her hypotheses, that social problems and corruption worsen when resource prices rise, and that corruption is particularly severe the stricter the regulation of an industry or region.

‘The mining industry will create social conflicts, so governments should plan for that,’ Professor Zhan says. ‘The provincial government should spend money on the local citizens, who suffer, and the central government should be careful about rent seeking and corruption in local areas.’

Professor Zhan believes it is better to allow the free transaction of mining rights that can be sold among companies than to leave the industry entirely under government control. The heavier the government intervention, the more the opportunity for corruption.

‘It is the regulation that causes the corruption,’ Professor Zhan says. That poses the question of who watches the watchmen. ‘There needs to be more regulation over the regulatory departments,’ she concludes.

By Alex Frew McMillan