Resource curse
The resource curse, also known as the paradox of plenty or the poverty paradox, is the hypothesis that countries with an abundance of natural resources have lower economic growth, lower rates of democracy, or poorer development outcomes than countries with fewer natural resources. There are many theories and much academic debate about the reasons for and exceptions to the adverse outcomes. Most experts believe the resource curse is not universal or inevitable but affects certain types of countries or regions under certain conditions. As of at least 2023, there is no academic consensus on the effect of resource abundance on economic development.
Thesis
The idea that resources might be more of an economic curse than a blessing first emerged as early as 1711, with English publication The Spectator noting, "It is generally observed, that in countries of the greatest plenty there is the poorest living." The idea gained further traction during debates in the 1950s and the 1960s about the economic problems of low- and middle-income countries. In 1993, Richard Auty first used the term resource curse to describe how countries rich in mineral resources were unable to use that wealth to boost their economies and how, counterintuitively, these countries had lower economic growth than countries without an abundance of natural resources. An influential 1995 study by Jeffrey Sachs and Andrew Warner found a strong correlation between natural resource abundance and poor economic growth. As of 2016, hundreds of studies have evaluated the effects of resource wealth on a wide range of economic outcomes, and offered many explanations for how, why, and when a resource curse is likely to occur. While "the lottery analogy has value but also has shortcomings", many observers have likened the resource curse to the difficulties that befall lottery winners who struggle to manage the complex side effects of newfound wealth.As of 2009, scholarship on the resource curse has increasingly shifted towards explaining why some resource-rich countries succeed and why others do not, as opposed to just investigating the average economic effects of resources. Research suggests that the manner in which resource income is spent, the system of government, institutional quality, type of resources, and early versus late industrialization all have been used to explain successes and failures.
Since 2018, a discussion has emerged concerning the potential for a resource curse related to critical materials for renewable energy. This could concern either countries with abundant renewable energy resources, such as sunshine, or critical materials for renewable energy technologies, such as neodymium, cobalt, or lithium.
Bruce Bueno de Mesquita, who developed selectorate theory, explains that when an autocratic country has lots of natural resources, the ruler's optimal strategy for political survival is to use that revenue to buy the loyalty of critical support groups and oppress the rest of the population by denying them civil liberties and underfunding education and infrastructure. Education, liberty, and infrastructure can make the people more productive, but they also make it easier for them to organize opposition movements. Since the ruler can obtain sufficient revenue from his country's natural resources, he has no need for a productive populace and therefore does not have to risk liberalization. By contrast, in a dictatorship with few natural resources, there may be a necessity for the ruler to liberalize his society somewhat so that the economy can be organized more efficiently, and to invest in education and healthcare to create a skilled and healthy workforce. Bueno de Mesquita cites Ghana and Taiwan as examples of countries where the rulers permitted democratization out of necessity.
Economic effects
The International Monetary Fund classifies 51 countries as "resource-rich," which are defined as countries that derive at least 20% of exports or 20% of fiscal revenue from nonrenewable natural resources; 29 of those countries are low- and lower-middle income. Common characteristics of the 29 countries include extreme dependence on resource wealth for fiscal revenues, export sales, or both; low saving rates; poor growth performance; and highly volatile resource revenues.There is no consensus view on the effect of natural resource abundance on economic development. Publishing in 2022, academic Jing Vivian Zhan observes that different studies, all with supporting empirical evidence, show contradictory findings on this point, as well as whether the effects vary across different historical time periods. Whether studies look at short-term or long-term economic effects of resource abundance may also result in different conclusions.
A 2016 meta-study found weak support for the thesis that resource richness adversely affects long-term economic growth. The authors noted that "approximately 40% of empirical papers finding a negative effect, 40% finding no effect, and 20% finding a positive effect" but "overall support for the resource curse hypothesis is weak when potential publication bias and method heterogeneity are taken into account."
A 2021 meta-analysis of 46 natural experiments found that price increases in oil and lootable minerals increased the likelihood of conflict. A 2011 study in the journal Comparative Political Studies found that "natural resource wealth can be either a "curse" or a "blessing" and that the distinction is conditioned by domestic and international factors, both amenable to change through public policy, namely, human capital formation and economic openness."
Dutch disease
, defined as the relationship between the increase in the economic development of a specific sector and a decline in other sectors, first became apparent after the Dutch discovered a huge natural gas field in Groningen in 1959. The Netherlands sought to tap this resource in an attempt to export the gas for profit. However, when the gas began to flow out of the country, its ability to compete against other countries' exports declined. With the Netherlands focusing primarily on the new gas exports, the Dutch currency began to appreciate, which harmed the country's ability to export other products. With the growing gas market and the shrinking export economy, the Netherlands began to experience a recession.This process has been witnessed in multiple countries around the world including Venezuela, Angola, the Democratic Republic of the Congo , and various other nations. All of these countries are considered "resource-cursed"; the DRC has been called a "classic victim" of the resource curse.
Dutch disease makes tradable goods less competitive in world markets. Absent currency manipulation or a currency peg, appreciation of the currency can damage other sectors, leading to a compensating unfavorable balance of trade. As imports become cheaper in all sectors, internal employment suffers and with it the skill infrastructure and manufacturing capabilities of the nation. To compensate for the loss of local employment opportunities, government resources are used to artificially create employment. The increasing national revenue will often also result in higher government spending on health, welfare, military, and public infrastructure, and can cause burdens on the economy if done corruptly or inefficiently. While the decrease in the sectors exposed to international competition leaves the economy vulnerable to price changes in the natural resource and consequently even greater dependence on natural resource revenue, this can be managed by active and effective use of hedge instruments such as forwards, futures, options, and swaps; however, if it is managed inefficiently or corruptly, this can lead to disastrous results. Also, since productivity generally increases faster in the manufacturing sector than in the government, the economy will have lower productivity gains than before.
According to a 2020 study, giant resource discoveries led to a substantial appreciation of the real exchange rate.
Revenue volatility
Prices for some natural resources are subject to wide fluctuation; for example, crude oil prices rose from around $3 per barrel to $12/bbl in 1974 following the 1973 oil crisis and fell from $27/bbl to below $10/bbl during the 1986 glut. In the decade from 1998 to 2008, it rose from $10/bbl to $145/bbl, before falling by more than half to $60/bbl over a few months. When government revenues are dominated by inflows from natural resources, the volatility can disrupt government planning and debt service. Abrupt changes in economic realities that result from this often provoke widespread breaking of contracts or curtailment of social programs, eroding the rule of law and popular support. Responsible use of financial hedges can mitigate that risk to some extent.Susceptibility to that volatility can be increased when governments choose to borrow heavily in foreign currency. Real exchange rate increases, through capital inflows or the "Dutch disease" can make it appear an attractive option by lowering the cost of interest payments on the foreign debt, and they may be considered more creditworthy because of the existence of natural resources. If the resource prices fall, however, the governments' capacity to meet debt repayments will be reduced. For example, many oil-rich countries like Nigeria and Venezuela saw rapid expansions of their debt burdens during the 1970s oil boom; however, when oil prices fell in the 1980s, bankers stopped lending to them and many of them fell into arrears, triggering penalty interest charges that made their debts grow even more. As Venezuelan oil minister and OPEC co-founder Juan Pablo Pérez Alfonzo presciently warned in 1976: "Ten years from now, twenty years from now, you will see, oil will bring us ruin... It is the devil's excrement."
A 2011 study in The Review of Economics and Statistics found that commodities have historically always shown greater price volatility than manufactured goods and that globalization has reduced this volatility. Commodities are a key reason that poor countries are more volatile than rich countries.