Since the 1960’s, revenue from the oil industry has secured the Norwegian welfare-state. Norway is the exception that proves the rule. Countries rich in natural resources score poorly on measures of democracy and good governance. In spite of gross national income from oil revenue, wealth is unevenly distributed and poverty widespread in many resource rich countries, for example Angola.

Diversification is claimed to be a strategy that efficiently counteracts the resource curse. So why do not resource rich countries diversify more? In a recently published article in Energy Policy where senior researchers at Chr. Michelsen Institute, Arne Wiig and Ivar Kolstad point to the challenges of diversification, they discuss how diversification can influence a country’s institutions positively.

Creating the right mix of industrial activity
Diversification is regarded as important to democratisation and good governance, but the benefits of diversification are sometimes overstated. A more diversified economy does not necessarily improve the institutions required to address a resource curse. According to Wiig and Kolstad, it is the pattern of industrial activity rather than diversification per se that affects governance and democracy.

For instance, diversification into land intensive sectors, like estate agriculture, does little to facilitate better governance. Land is an immobile resource, and hence easily taxable. A land-owning elite may therefore resist democratisation to avoid tax increase. 

By contrast, diversification into more mobile and human capital intensive sectors is more likely to stimulate democratisation.

-Reciprocal dependence is one of the characteristics of knowledge-based industries. The costs of conflict are high in human capital intensive sectors, too high for the ruling elite to risk discontent and upheaval, says Wiig.

Diversification into more mobile and human capital intensive sectors is unlikely, because it will empower social groups that may challenge the local elite.

-It is not in the interest of the ruling elite to support the development of industrial sectors which could threaten their power base. This makes diversification difficult to attain. Thus relying on domestic policies to create the right mix of economic activity may be ineffective. If the ruling elite is to invest in new sectors, there is a need for international regulations that affect their incentives. A possible solution is to tax international oil trade, whilst giving manufactured products easier market access, says Arne Wiig.

From a curse to a blessing
The paper “If diversification is good, why don’t countries diversify more? The political economy of diversification in resource rich countries” is the first step in a large research project on the strategies of diversification. The objective is to explore how resource rich countries can turn the country’s natural resources into a blessing rather than a curse. The project is part of the CEIC-CMI cooperation agreement in Angola.

Future research projects will include country specific, as well as cross-country studies.

-What is there to learn? How does diversification become a success? The aim of this research project is to give advice on how to diversify in a way that will positively influence the country’s institutions, says Wiig.


Journal Article | 2012

If diversification is good, why don't countries diversify more? The political economy of diversification in resource- rich countries

For resource-rich countries, diversification is claimed to represent a strategy for reducing resource curse problems. This, however, depends on whether diversification has a positive effect on the country’s institutions. While...
Arne Wiig and Ivar Kolstad (2012)
in Energy Policy vol. 40 no. 1 pp. 196-203
Conference Paper / Presentation | 2011

Assessing the importance of human and social capital for poor entrepreneurs in Angola

Ivar Kolstad and Arne Wiig (2011)
Presented at: 33. nasjonale Forskermøtet for økonomer, Norges Handelshøyskole, 6 Januar 2011
Book Chapter | 2012

Assigned corporate social responsibility in a rentier state: The case of Angola

What responsibilities do oil companies in Angola have to improve the situation of the Angolan population? Standard corporate social responsibility (CSR) projects have little effect where the rents from natural...
Arne Wiig and Ivar Kolstad (2012)
in Päivi Lujala and Siri Aas Rustad : High-value natural resources and post-conflict peacebuilding . Oxford: Earthscan pp. 147-154
Journal Article | 2011

Better the devil you know? Chinese foreign direct investment in Africa

What are the dominant motives behind China’s increasing financial presence in Africa in recent years? In this article, the authors present new quantitative evidence on Chinese outward foreign direct investment...
Ivar Kolstad and Arne Wiig (2011)
in Journal of African Business vol. 12 no. 1 pp. 31-50