Resource Curse


Resource Curse

“As mining, oil, and gas profits have soared, living standards and overall economic growth in many resource-rich developing countries have remained flat or have even declined. This ‘resource curse’…” (United States Agency for International Development, 2010, Alliance Industry Guide: Extractives Sector, p. 4)

Video: Earth 104 Module 12 Resource Curse (1:41).

Click here for a video transcript of "Resource Curse".

PRESENTER: This is a redrawn figure from Saxon Warner a famous paper from back in 2001. Each dot here is a country. And what we have at the bottom is how much of the economy of that country was exports of natural resources in the year 1970. So the countries that exported a lot of natural resources are out here. The countries with very little natural resources as a fraction of the total economy are down there. And then what's shown here is how much did that economy grow over the next 20 years.

What you' l notice is that all of the countries that really relied on exporting natural resources in 1970 had very slow or actually negative growth over the next 20 years. Some countries that did not have many natural resources also had slow growth, but all of the countries with fast growth did not rely on natural resources.Now a correlation does not tell you what caused it, but there are enough reasons to believe that when you rely really heavily on unnatural resources there may be a tendency to work hard to control the natural resource rather than to building a wonderful place for everyone to live. And if that's true then there may be some relationship in here that is meaningful and reliance on the natural resources may not be a good thing for having a big healthy economy.

Economic growth plotted against reliance on natural resource exports. The "y" axis (vertical) shows how much a country’s economy grew per person from 1970 to 1989, and the "x" axis (horizontal) shows how much of the country’s economy in 1970 came from export of natural resources. No country that relied heavily on natural resources had an economy that grew rapidly, but many countries that relied very little on natural resources had economies that grew rapidly.
Source: Figure redrafted from Figure 1 in Sachs, J.D. and A.M. Warner, 2001, The curse of natural resources, European Economic Review 45, 827-838.

Video: Earth 104 Module 12 Resource Curse Math (1:56).

Click here for a video transcript of "Resource Curse Math".

PRESENTER: This plot from the OECD is actually fairly similar to the resource curse plot that we showed in the previous figure. High share of rents from natural resources and the national income, these countries out here on the far right, have a lot of oil or, otherwise, are relying on natural resources. So this is not that different from the previous plot.

But shown here, rather than economic growth, is how their students performed on an international test of mathematics competence. And what you'll notice is that for the countries that relied very heavily on natural resources, including the oil, you don't have those countries doing really, really well in this international comparison. Some countries that don't have natural resources also didn't perform well. But the countries that performed really well are fairly low in reliance on their natural resources. They're using something else to make their economy work.

Just like the previous figure, there is no proof in this one, that relying on oil gives you poor students. You could argue about who representative the test is. You can argue about history, whether people are taking it seriously. But in general, we like to see our students do well.

And in general, seeing this sort of behavior in the data makes some people nervous and makes them ask whether there really is a sort of resource curse, that relying very heavily on resources leads to poor societal outcomes. And if there's a chance of that, then some people wonder whether it might be wise long term to try to move your country more in this direction.

Student performance in an international test (8th grade mathematics, "y" axis), plotted against reliance of the student’s country on natural resources ("x" axis; in economics terminology, the money paid to a landowner for oil extracted from beneath that person’s land is called ”rent”, so countries tend to plot in the same place on the "x" axis of this plot and the previous one). Countries that relied very heavily on natural resources had students who performed poorly, but many countries that did not rely heavily on natural resources had students who performed well.

The two graphs here don’t answer questions but ask them. The first, from the well-known 2001 paper by Sachs and Warner (Sachs, J.D. and A.M. Warner, 2001, Natural resources and economic development, European Economic Review 45, 827-838), shows, for a wide range of countries, how much they depended on exporting natural resources (oil, coal, gas, diamonds, iron, etc.) in 1970, and how much their economies grew in the next 20 years. You will see a lot of variability, but no fast-growing countries that relied heavily on natural-resource exports, and many fast-growing countries that exported few natural resources. The second figure, from the Organization for Economic Co-operation and Development, 14 March 2012), compares student performance on a standardized test to their country’s reliance on “rents”; in economic-speak, the money that goes to a property owner for the oil pumped out from under their land is rent, so the horizontal axis in this plot is actually quite similar to the horizontal axis in the previous plot. You will again see much variability, but with the countries that rely most heavily on rents having poor student performance, and the countries with the best student performance having little reliance on rents.

The mere fact that we showed these plots and brought up this topic will make some people mad. A few people may argue that the data are somehow not representative. Many more will argue that correlation is not causation, and that some additional factor that correlates with reliance on natural resources is controlling economic growth and student performance. The extra factor might be a history of colonial oppression, or extreme initial poverty, or something else.

But, consider the possibility that reliance on selling oil or other natural resources does lead to economic difficulties. Turning oil, or diamonds, into money, requires controlling the resource and access to a trade route, and some knowledge and ability to get the valuable thing out of the ground and into the trade system. Extraction of a hard-to-get resource may be expensive and high-tech, requiring many people and great cooperation. However, for the most efficient producers of the easiest oil, the costs of production may be as low as $5 for a barrel of oil that sells for $100. That translates into a need for few people with few jobs, with huge profit (“rent”) available for controlling the resource.

Contrast that with the task of turning sand and red rocks into cell phones, which requires a complex web of technical, economic, social and political interactions, and a vigorous educational system. Selling a readily available, concentrated natural resource is a quicker and easier way to make money than is generating an integrated economy capable of doing a variety of high-tech, artistic, educational and other things. But, the integrated economy might just make a better place to live. And, the effort to control a scarce resource might just lead to the people in control taking actions that don’t make everyone happy.

Suppose that there is at least a little reality in this “resource curse”. A slow, predictable reduction in the concentrated high value of the fossil-fuel resource over a few decades in the regions relying heavily on it just might be the way to shift toward development of integrated economies, with greater economic growth and educational achievement. People looking at the two plots shown above often get a little nervous about betting the future on oil, or gas, or any other single, concentrated natural resource, which would move their region to the right on these plots—that doesn’t prove that their economy or their students will trend downward, but it does raise questions. And with the evidence, that for now, fossil fuels are more subsidized than a diverse portfolio of renewables, that nervousness may motivate more effort now to move away from fossil fuels than in the economically efficient path.