EBF 200
Introduction to Energy and Earth Sciences Economics

 

What is the Resource Curse?

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The term resource curse represents an economic phenomenon associated with the abundance of natural resources in certain countries. The term summarizes a paradox that those naturally gifted resource countries do not always develop and grow their economies.

It should be understood that if a country has a significant resource allocation, it should use them to their advantage. However, this has not always been the case in many countries with large reserves of resources. In fact, some studies reveal that such resource abundance has been pernicious to countries who own them. It is the meaning of what is termed the “resource curse.”

The term might seem to indicate that the resources themselves are generating the curse, for example, that the goods were not of good quality, or that using them inherently creates harm. However, studies show that the curse comes not in the good as such, but in the use made of them and the conditions of the country, its people, institutions, and authorities that have received plenty of resources.

Following are two use definitions of the phrase "resource curse.”

Karabegovic (2010), states, “In the past, natural resources were thought to create economic growth and prosperity. However, in recent years, debate has flared over whether natural resources, such as minerals and metals, oil, agricultural resources, and so on, stimulate economic growth or act as a hindrance to growth. The idea that natural resources actually hinder growth is known as the “curse” of natural resources.”

Kronenberg (2004) indicates, “The curse of natural resources is a well-documented phenomenon for developing countries. Economies that are richly endowed with natural resources tend to grow slowly. Numerous researchers have found a significant negative correlation between natural resource abundance and economic growth. This finding seemed puzzling at first, because classical economic theory would predict that abundant natural resources should be good for the economy.”

Evidence accumulated over the last 15 years leaves little room for doubting the existence of a ‘resource curse’. Countries heavily dependent on natural resources – geographically concentrated resources like hard-rock minerals, oil, and gas – have performed worse, in both economic and political terms, than countries without the apparent ‘benefit’ of such natural endowments. (Arellano-Yanguas, 2008).

Interesting Examples

Empirical studies have revealed an apparent paradox: despite a few notable exceptions like the US, the richest countries today are, in general, rather poorly endowed with natural resources. (The word ‘today’ is important here. During the time of the Industrial Revolution and well into the 19th century, natural resources – especially energy sources like running water and coal – were in fact necessary requirements for growth. Apparently, the paradox emerged only in the 20th century. One reason may be that falling transport costs reduces dependence on domestic energy sources.) Most Western European countries, whose economies are based on manufacturing and services, have few natural resources.

Another example is the experience of several Asian “tiger” economies. None of South Korea, Hong Kong, Singapore, and Taiwan, the Asian tiger economies, possesses significant natural resource endowments, but their average growth rates during the second half of the twentieth century have been higher than anywhere else in the world. South Korea and Taiwan achieved this even with difficult political circumstances (Kronenberg, 2004).

One important finding in development economics is that natural resource abundant economies often grow more slowly than economies without substantial resources. For instance, growth losers, such as Nigeria, Zambia, Sierra Leone, Angola, Saudi Arabia, and Venezuela, are all resource-rich, while the Asian tigers: Korea, Taiwan, Hong Kong, and Singapore, are all resource-poor. On average resource, abundant countries lag behind countries with fewer resources. Yet we should not jump to the conclusion that all resource rich countries are cursed. Many “growth winners” such as Botswana, Canada, Australia, and Norway are rich in resources. Moreover, of the 82 countries included in a World Bank study, five countries belong both to the top eight nations according to their natural capital wealth and to the top 15 nations according to per capita income. (World Bank, 1994). (Mehlum, Moene, & Torvik, Intitutions and the Resource Curse, 2006)

We discuss two contrasting examples of “resource curse” below.

Venezuela

Venezuela is blessed with oil in abundance. According to the World Factbook, Venezuela is the first of a list of countries with crude oil - proved reserves, and is one of the top producers and exporters of oil in the world. Oil exports account for over 95% of Venezuela’s exports, 50% of government revenue, and 30% of GDP (Rossi, 2011). Clearly, the oil represents the sustenance of life in Venezuela. The government, politics and economy revolve around this natural resource Yet, as of this writing (summer 2014), Venezuela is living through perhaps its most difficult period since its independence.

In the mid-2010’s, challenges in Venezuela are characterized by a poor economic performance, the worst in South America, combined with a lack of stable political institutions, and crisis of authority.

With respect to political institution, while there is a democratic government, this has not meant the renewal or change in the political party that governs the country. Both the deceased President Hugo Chavez and Nicolas Maduro, Chavez’ successor, represent continuity in power which has lasted fifteen years.

“Dutch disease” took place in Venezuela in the 1970s when the government, using the money coming from oil exports, made the decision to cancel all agriculture related debt with the hope of eliminating this financial burden and increasing agricultural production. However, the opposite effect took place; most landowners of large farms sold or closed their latifundios (large farm estates) and moved to urban environments where they established other businesses not related to agriculture. Consequently Venezuela (like Nigeria) lost much of its agricultural sector due to its resource wealth. The fall of the agricultural sector and the rise of the oil industry and other service sectors have created high levels of immigration and internal migrations from rural zones to principle cities. These influxes of new arrivals over the years have created high levels of crime, violence, unemployment and poverty in these cities. (Egoávil, 2011)

Chile

The country of Chile has had outstanding economic performance, taking advantage of the natural resources it possesses.

Chile produces a third of the copper used in the world. In the past 40 years, Chile has ably handled and channeled revenues from the sale of copper. With the income from the export of copper Chile has prompted the development of other economic activities.

Similarly, decisions that authorities have taken over this time have allowed Chile to successfully lead the transition from poverty to development. In addition, these same decisions have prevented Chile from being affected by the resource curse

At first, given that the mining sector was critical for Chile, the government passed measures to strengthen the sector. The measures sought to create an attractive environment for investment in mining in particular for capital coming from abroad. However, they were not the only measures that were taken. The government of Chile adopted an economic structure with four pillars. The first was the adoption of a predictable and responsible fiscal policy, balancing tax revenues and government spending. The second pillar was the adoption of a monetary policy guided by an explicit inflation target. The third reason was the gradual opening up of financial and trade sectors. Finally, the fourth pillar was to create a solid financial system, private banks and appropriate regulatory policies.

Why the resources curse?

Experience shows that economies with low supply of natural resources have had to deal with limited resources and this situation has pushed them to seek alternative development paths. Those routes to growth and development were based in productive activities rather than in extractive activities. So, having witnessed those experiences, is it possible that economies blessed with resources can use this source as element of leveraging their growth and development? (i.e., can resources be used for growth?) In addition, while the answer must be yes, such a path is likely to be more complex and difficult than one might expect. The complexity and difficulties are due to the many undesirables effects that are involved where there is abundance of resource.

Perhaps one reason is that where there are plenty of resources and things seem to be go well for a country, authorities, population, institutions, etc., become complacent. So, a country’s society does not think it needs to consider more than the extraction and export of the resources. They do not need to think in terms of the long-run, of a goal of creating more sophisticated economy activities,

Therefore, the resource curse is not a path economies must follow. A society can take full advantage of a resource wealth. Taking this path, however, may be difficult and take decades to travel. The path, however, depends on the choices a society makes.