The resource curse refers to the paradox that countries with an abundance of natural resources have less economic growth than countries without these natural resources. This may happen for many different reasons, including a decline in the competitiveness of other economic sectors, underinvestment in education and mismanagement of revenues from the natural resource sector. Note that the source of the curse is not natural resources, but government mismanagement when resources are present.

Resource Curse Thesis

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The term 'resource curse thesis' was first used by Richard Auty in 1993 to describe how countries rich in natural resources were not able to use that wealth to boost their economies and how, counter-intuitively, these countries had lower economic growth than countries without an abundance of natural resources.Auty, Richard M. (1993). Sustaining Development in Mineral Economies: The Resource Curse Thesis. London: Routledge. However, the idea that natural resources might be more a curse than a blessing began to emerge in the 1980's. Numerous studies, including a notable one by Jeffrey Sachs and Andrew Warner, have shown a link between natural resource abundance and poor economic growth.Sachs, Jeffrey D., Warner, Andrew M. (1995). Natural resource abundance and economic growth. NBER Working Paper 5398. This disconnect between natural resource wealth and economic growth can be seen clearly by looking at an example from the oil-producing countries. From 1965-1998, in the OPEC countries, gross national product per capita growth decreased on average by 1.3%, while in the rest of the developing world, per capita growth was on average 2.2%.Gylfason, Thorvaldur (2000). Natural resources, education and economic development. CEPR Discussion Paper 2594.

Negative Effects

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Dutch Disease

Dutch disease is an economic phenomenon in which the revenues from natural resource exports deindustrialises a nation's economy by causing an increase of the real exchange rate and thus making the manufacturing sector less competitive in the world market. The decrease in the manufacturing sector and dependence on natural resource revenue is bad because it leaves the economy extremely vulnerable to price changes in the natural resource. Also, since productivity generally increases faster in the manufacturing, the economy will lose out on some of those productivity gains.

Excessive Borrowing

Since governments expect more income in the future, they start accumlating debt, even though they are receiving oil revenues as well. This is encouraged, since, if the real exchange rate increases, through capital inflows or the Dutch disease, then this makes the interest payments on the debt cheaper. However, if oil prices begin to fall, and if the real exchange rate falls, then a government would have less money to pay, and more expensive debt payments.

Corruption

In resource-rich countries, it can be easier to maintain authority through bribery or a well-armed military than through growth-oriented economic policies. The government has less need to build up the institutional infrastructure to regulate and tax a productive economy outside the resource sector, so the economy may remain undeveloped.

Government Complacency

Economic diversification may be neglected by authorities or delayed in the light of the temporary high profitability of the limited natural resources. The attempts at diversification that do occur are often grand public works projects which may be misguided or mismanaged.

Neglect of Education

Another possible effect of the resource curse is the crowding out of human capital; countries that rely on natural resource exports may tend to neglect education because they see no immediate need for it. Resource-poor economies like Taiwan or South Korea, by contrast, spent enormous efforts on education, and this contributed in part to their economic success (see East Asian Tigers). Other researchers, however, dispute this conclusion; they argue that natural resources generate easily taxable rents that more often than not result in increased spending on education.

Notes

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