Resource Curse

Background

The term “resource curse” refers to the paradox that countries with abundant natural resources, such as oil, minerals, and gas, tend to have less economic growth and worse development outcomes than countries with fewer natural resources. This counterintuitive phenomenon challenges the straightforward assumption that natural resource wealth automatically translates into economic prosperity.

Historical Context

The concept of the resource curse gained prominence in the late 20th century as scholars began to notice that countries rich in natural resources often experienced slower economic growth than resource-poor countries. Notable instances include resource-rich nations in Africa, South America, and the Middle East, which have struggled with economic performance, governance issues, and social inequalities despite their natural riches.

Definitions and Concepts

Core Definition

The resource curse describes the situation in which the presence of large quantities of natural resources paradoxically impedes a country’s overall economic development. Factors commonly associated with the resource curse include increased corruption, income inequality, and political instability.

Alternate Term

The term is often used interchangeably with “Dutch disease,” a specific type of resource curse originally describing the decline of the manufacturing sector in the Netherlands following the discovery of large natural gas fields in the 1960s.

Major Analytical Frameworks

Classical Economics

Classical economists might argue that resource abundance should contribute positively to an economy’s factors of production, thereby promoting economic growth.

Neoclassical Economics

From a neoclassical perspective, the resource curse can be explained by misallocations of resources exacerbated by market distortions, such as government interference or inadequate financial markets.

Keynesian Economics

Keynesians might attribute the resource curse to insufficient absorption capacity of the economy, where resource revenues lead to an overheating economy, inflation, and crowding out of other sectors.

Marxian Economics

Marxian economists could contend that natural resource wealth disproportionately benefits the elite or foreign entities, exacerbating social inequality and perpetuating colonial economic structures.

Institutional Economics

Institutionalists emphasize the role of weak institutions and governance failures, arguing that the mismanagement of natural resources leads to rent-seeking behavior and corruption.

Behavioral Economics

Behavioral economists might study the role of cognitive biases and inherent risk aversion in the mismanagement and poor investment of resource revenues.

Post-Keynesian Economics

Post-Keynesians would scrutinize macroeconomic imbalances and structural rigidities exacerbated by large inflows of foreign currency from resource exports.

Austrian Economics

Austrians might attribute the resource curse to malinvestment and artificial economic booms, followed by inevitable busts, spurred by undervalued resources.

Development Economics

Development economists focus on the broader socioeconomic impacts, studying how dependence on natural resources affects education, health, and infrastructure.

Monetarism

Monetarists could argue that a large inflow of resource wealth distorts the money supply, negatively impacting price stability and economic equilibrium.

Comparative Analysis

Countries like Norway and Botswana are often cited as relative exceptions to the resource curse, having instituted strong governmental and legal frameworks to manage their natural resource endowments effectively. Conversely, nations such as Nigeria and the Democratic Republic of Congo illustrate the more traditional manifestation of the resource curse, showing the complex interplay of economic, political, and social factors that contribute to this phenomenon.

Case Studies

1. Norway: Effective management of oil wealth through mechanisms like the Government Pension Fund.
2. Botswana: Strategic use of diamond revenues for development.
3. Nigeria: Mismanagement of oil wealth has led to economic problems and social strife.
4. Democratic Republic of Congo: Struggles with corruption, conflict, and poor governance despite abundant natural resources.

Suggested Books for Further Studies

1. “The Paradox of Plenty: Oil Booms and Petro-States” by Terry Lynn Karl
2. “Oil Wealth and the Poverty of Politics: Algeria Compared” by Miriam R. Lowi
3. “Escaping the Resource Curse” edited by Macartan Humphreys, Jeffrey D. Sachs, and Joseph E. Stiglitz

Related Terms with Definitions

• Dutch Disease: A phenomenon where a country’s surge in natural resource exports leads to currency appreciation, making other sectors less competitive and harming the overall economy.
• Rent-Seeking: The effort to increase one’s share of existing wealth without creating new wealth, often through manipulative or corrupt means.
• Extractive Industries: Industries that involve extracting natural resources from the Earth, such as mining, oil extraction, and gas drilling.
• Sovereign Wealth Fund: State-owned investment funds commonly funded by revenue generated from natural resources, used to manage economic volatility and long-term savings.