What is the resource curse? What are the causes of the resource curse? What are the consequences? What is dutch disease? Other names: the rent curse, the paradox of plenty.
Natural resources, especially strategic fuel and mineral resources, are crucial in economic development. They are used both in the production of advanced technology, and everyday consumer goods. It may seem that countries with rich resource deposits should have great economic success, and yet they often have to deal with the paradoxical phenomenon called the resource curse.
▪ What is the resource curse?
The author of the name “the resource curse” is Richard M. Auty, who defines it as an under-performance in countries that have easy access to natural resources, in comparison to the countries that don’t have rich natural resources.1 In other words, plenty of resources in the country doesn’t have to be good for its development, and even can be bad for development. That’s why the term “paradox of plenty” is used to describe this phenomenon. The author of this term is Terry L. Karl.2
▪ What are the causes of the resource curse?
‼ Ok, this doesn’t make any sense. How could this be the reason for weak development? This must be some kind of “correlation that isn’t causation”, right? Turns out that it’s not. There is a link between resource abundance and under-development.
Imagine that you are the ruler in a country and have the goose that lays the golden eggs. First, you need some allies to help you “guard” the goose. Then, maybe you’ll evenwant to share some of the wealth with your subjects. Either because you are nice that way, or simply don’t want the goose to be taken away from you by your unhappy crowd. Nevertheless, everything starts to revolve around the goose. You don’t care about new investments, new technology, innovations and so on. Why bother, when you have the goose? Your focus is to keep the goose safe, and keep it under your control. In the real world this translates to two main categories of causes:
▪ Political and social
Which include negative changes in state administration, such as rent-seeking, rise in corruption and bureaucracy, high and unstable government spending, malinvestments made only because of political reasons, without economic calculation, concentration of power and wealth and internal conflicts (for a share in the pool).
Christa Brunnschweiler and Erwin Bulte also point out that gains from resources may lead to separation of government structures from citizens needs and autocracy, that misallocate capital and resources.3
Which include the quality of public institutions, which are responsible for creating climate for business. Low quality of institutions have a negative impact on economic development. It’s a premise to recognize institutional factors as responsible for the inefficiency in resource management, which doesn’t allow the economy to counteract the resource curse.4
Have you heard about the resource curse prior to this material?
▪ Which countries are “cursed”?
The resource curse effects both most-developed and poor countries. The best known and well described example is 17th century Spain, whose economy had collapsed (and stayed down for at least a century) in consequence of intensive exploitation of natural resources in colonies. Their domestic economy deteriorated because the Spanish Empire could easily import anything from abroad using it’s “excess” gold.5 Remember the goose right? Why bother to produce something, when you can take one gold egg from the vault and buy it?
As money poured in to the 17th Spain or countries exporting crude oil in the seventies in the 20th century, the government expenses grew. The problem was, that this high expense didn’t go down even when gains from resource exports went down.6 It’s bad for PR. In Poland, there’s even old saying for this, which translates to: “Who gives and then takes back, burns in hell”. It rhymes in Polish.
Bauer i Mihalyi presented a list of countries and regions rich in natural resources that are well or poorly prepared for the bust in the resource market. The criteria of this assessment is based on whether the country saved money during prosperity and whether the money was properly invested. Well prepared countries include: Bolivia; Brunei; Chile; Libya; Norway; Peru; Qutar; Saudi Arabia; East Timor and the United Arab Emirates. Poorly prepared countries include: Alberta (province of Canada); The Republic of Congo; Equatorial Guinea; Iran; Malaysia; Mexico; Mongolia; South Sudan; Venezuela and Zambia.7
▪ What are the consequences of the resource curse?
Every country that rips gains from exporting resources feels the impact of falling prices of these resources. It’s connected to so called “dutch disease”. The name comes from the situation Holland found itself in, where large deposits of natural gas were discovered in 1959. The “dutch disease” is a situation in which sudden rise in development of one sector can be harmful to other sectors. The economy doesn’t have time to adjust. Other factors of production (like workforce and capital) are still relatively scarce. So the new, fast growing sector performs at the expense of other sectors of the economy. It sucks out the factors of production from other sectors. There is also a sudden change in currency exchange rate, which gives other sectors a hard time, because they struggle to maintain competitiveness on global market. That’s why the economy that “caught the dutch disease” becomes dependent of this one sector (for example natural resources sectors), which is doing great, but at the expense of other sectors (like agriculture or manufacturing). This kind of economy is more prone to instability. Instability of resource prices may lead to instability in government income and spending as well as a decline in both domestic and foreign investments.
There are some political instruments that can help to deal with the resource curse. From the most radical, such as cessation of resource extraction in the poorest countries, to more mild like adoption of reasonable macroeconomic policies in countries with rich resources, which include avoiding large domestic and foreign debt, accumulating a budget surplus, controlling the level of inflation and maintaining a competitive exchange rate. The implementation of political and social changes in countries specializing in the export of resources may be difficult. However, it is important to create appropriate political, social and institutional conditions if we want the resource curse to be “lifted”.
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1 R.M. Auty, Industrial policy reform in six large newly industrialising countries: The Resource
Curse. World Development vol. 22, 1997, p. 11–26.
2T.L. Karl, Paradox of plenty: Oil booms and petro-states, University of California Press, Berkley