Will the Next Century Belong to Greenland?
By Tom Johansmeyer
The road to riches may be paved with extractive resources, but the “resource curse” has made the cost of wealth and security higher than it looks.
Supply chain vulnerability and natural resource supply have remained pressing topics through waves of global crises over the past three years. The pandemic demonstrated how fragile supply chains can be, and climate change threatens the stability – and even viability – of the equatorial region. The conflict in Ukraine helps demonstrate the potential for volatility in natural resource exports from the Arctic region as a result of the sanctions currently imposed on Russia. The economic security implications of access to resources are profound, particularly extractives, given the broad dependence on them worldwide, from energy to rare earth metals. Extractives industries, in particular, face both near-term and long-term threats resulting from natural and geopolitical conditions, making it crucial for the world to find alternative sources for them, with the political and economic stability of potential exporters crucial to worldwide markets.
Demand for extractives and concerns about future access to supply due to climate change, armed conflict, and other pressing geopolitical threats could turn Greenland into a globally strategic source of extractives, and a key participant in the global economy. A small population on a large amount of land, Greenland’s potential transition to an important supplier of non-renewable natural resources is unlikely to be smooth. The country will face a range of political societal, and economic risks, but the most challenging may be navigating the “resource curse.”
The risk of riches
The resource trap (or curse) is a seductive concept: Simply, it’s the belief that states rich in certain non-renewable natural resources will experience impediments to the maturation of their political, economic, and social institutions. Colloquially, it’s often expressed with the observation that extractives-dependent countries tend to be dysfunctional, because their access to wealth is independent of broader political, economic, and social institutions. Easy wealth has been shown to make infrastructure, institutional, and social investment less attractive to those in power, while indicators of corruption and oligarchy appear to rise. Non-renewable natural resources thus become the lifeblood of an economy and government that would otherwise have to be thinned by experience and investment.
Of course, nothing in the real world is ever that straightforward.
Proponents of the resource trap paradigm tend to take a narrow view of relevant countries, which tends to exclude success stories such as Norway and Canada. What’s left consists of countries with generally more fragile institutions and difficult records on matters such as regulator strength, control of corruption, and openness and transparency, like Botswana and Chad. Self-selecting data down to a predictable conclusion, though, tends to come at the expense of genuine understanding. When in doubt, it’s always best to take a look at the data – all the data, not just a convenient subset.
A review of the 79 countries measured by the Extractive Industries Transparency Initiative’s Extractives Dependency Index (EDI) shows varying rates of negative correlation with the World Bank’s World Governance Indicators (WGI), especially for the voice and accountability measure (41.7%). A weak public voice would suggest a population has little influence over its government, to include how revenues from extractives are used – and thus resource trap susceptibility. The resource trap is a very real risk, but it’s certainly not a foregone conclusion.
Resource trap risk is thus an important concern for countries that either rely on extractives or may in the coming years – with Greenland among the latter. As climate change makes it increasingly harder for people to live in the equatorial region, shifts will have to occur in where non-renewable natural resources are sourced. The Arctic region has long been seen as a potentially crucial contributor to supply, with extraction in some countries (like Russia and Canada) already mature. Greenland, which has resisted some overtures from mining companies recently, may face considerable pressure to open its terrain to worldwide demand for what’s below the surface. In doing so, it will likely face the temptation of the resource trap.
The coming influx of … everything
A potentially destabilizing imbalance in current size and future demand could threaten Greenland in the coming decades. A country of only 56,000 people, Greenland occupies more than 400,000 square kilometers of land. That’s roughly nine times the size of the United Kingdom. For now, most of that land – which includes some of the world’s largest untapped rare earth metal reserves – is inaccessible. After all, 85 percent of the country is “covered by the icecap,” according to the Naalakkersuisut, Greenland’s governing body.
What may such a territorially large and thinly populated country do to prepare for a future in which its currently inaccessible resources could influence the global balance of power? A lot.
Given how little of the country is occupied, it may not come as a surprise that there is less than 100 miles of road in Greenland, with less than 40 percent of it paved. Imagine driving from London almost to Bournemouth, with the paved bits stopping somewhere short of Basingstoke. That’s the entirety of Greenland’s road system. And laying down some more is just the tip of the proverbial, melting, iceberg.
Greenland’s institutions are stable and open, as indicated by a WGI score for “voice and accountability” of 92.75 and an aggregate WGI score of 536, which helps. (For reference, the United Kingdom has a score of 89.37 for voice and accountability and an aggregate of 517.) However, it is small, with a gross domestic product (GDP) just a hair over US$3 billion. Imports are just under US$1 billion, and exports are just over that threshold.
Culturally and societally, Greenland is likely to face considerable risks regarding the prospect of rising to meet the future need for Arctic-sourced rare earth metals. An influx of people would be vital and integrating them a challenge. Further, the cost and effort associated with accessing rare earth metal reserves means either cutting through ice now or waiting for further Arctic ice melt, which costs time relative to coming equatorial uninhabitability. In either case, Greenland would need outside investment and other support, for extractives industries and the wide range of additional activity needed to support it – from homes to banking to schools.
What’s at stake makes the contemplation of these issues important. Demand for rare earth metals is only increasing, and economic categories such as high-end electronics seem likely to exacerbate the trend. Some of the world’s largest rare earth metal reserves are in countries in or close to the equatorial region, suggesting a high rate of climate change-related risk, and many of the rest show characteristics indicative of political risk. Aggregating the WGI scores for each shows the top five countries by rare earth metal reserves posting results under 300. Australia, sixth on the list by reserves, has an aggregate WGI twice double that of China (#1) and triple that of Russia (#4).
Greenland has approximately 1.25 percent of global rare earth metal reserves. While that may not seem like much, it ranks the country seventh worldwide, a position it shares with the United States. And that’s within the context of 96 percent of all rare earth metal reserves concentrated in only 11 countries. Further, Greenland is home to the biggest undeveloped deposits of rare earth metals in the world, offering fresh potential and thus possible additional global strategic significance.
How to avoid the resource trap
While small and perhaps under-prepared to handle a globally significant influx of people, resource demand, and rapid economic expansion, Greenland currently shows some characteristics indicative of reduced resource trap risk. Its WGI scores are among the highest in the world, particularly for voice and accountability. Additionally, Greenland does benefit from at least some institutional support from Denmark, which itself has many of the WGI scores indicative of a strong, stable, and open liberal democracy. However, the fact that Greenland is small leaves the concern that worldwide pressure over only a few decades could overwhelm its existing institutions.
Among the greatest priorities for Greenland may be monetary, where its relationship to Denmark may not be sufficient protection. The Danish Krone serves a small population, and increased use of the currency could expose both Greenland and Denmark to “Dutch Disease,” a resource trap condition in which real exchange rate volatility could result in a decline in investments in both physical capital and experiential learning, which ultimately strains productivity growth. Time may help, but more aggressive changes, such as pegging the local currency to one that is more broadly used, such as the U.S. Dollar or the Euro, could also be effective.
Additionally, construction and development could be disproportionately risky in Greenland relative to other economies because of how little currently exists and how much may be necessary. In addition to reliance on outside financing, which could lead to concerns about “outsiders” owning the country, the speed of development necessary to make Greenland a relevant non-renewable natural resource exporter by 2070 could result in unexpected expense, labor shortages, and other project risks. The sheer scale involved may leave open opportunities for corruption and oligarchy, which will need to be monitored closely.
Ultimately, Greenland may be able to avoid the resource trap by focusing on its existing positive characteristics (e.g., voice and accountability) while attempting to ensure that the vast development efforts necessary don’t temp the country into the curse of easy wealth. The next century may belong to Greenland, but everyone will have something at stake in its success.
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