Governance and Development Review home page Centre for the Future State website
Most recent reviews on the site Complete list of reviews Search reviews by subject Contact the Governance and Development Review
     
 

< Go back

 

There Really is a Natural Resource Curse

 

Natural resources have been under suspicion for several years now. They should be a great blessing to any country, and especially to a poor country. What shorter cut could there be to prosperity than a diamond mine, an oil well, a generous endowment of valuable tropical timber, or land well-suited to growing high value agricultural exports? Such resources should provide abundant export earnings, and large revenues which government can use to pay for roads, health, electricity and education. But it is now several decades since economists began to suggest that natural resource wealth might be more a curse than a blessing. Their central insight, based mainly on European experience, was often labelled the 'Dutch disease': the earnings from oil export exports so distorted the exchange rate that other domestic industries found it hard either to export or to compete against cheap imports. Oil, it seemed, drove out other economic activities - or might do so if not very carefully managed.

It is only relatively recently that researchers have paid attention to the 'cursing' potential of natural resource wealth in poor countries. The main reason is that the agricultural export commodities in which developing countries traditionally specialised - cotton, coffee, groundnuts, tea, tobacco, etc. - did not appear as a curse. They generated wealth. While that wealth was not equally distributed, it did get to a lot of people. And there was little industry to be driven out by exchange rate effects. This situation began to change substantially in the 1960s, with changes in the world oil economy. Many developing countries became oil exporters for the first time. And the world market price of oil went up enormously in the 1970s, as a result of buoyant international demand and the actions of OPEC, the producers' cartel. The governments of many developing countries were oil-rich for the first time. But their citizens did not always benefit. It took some years for most development specialists to realise that there were some very serious problems here. Economists began to point out that the developing economies 'blessed' with oil and mineral were performing poorly. Political scientists also began to see that the worst governance - the greatest corruption and authoritarianism, and high levels of conflict and civil war - was often found in the oil and mineral states.

The question of whether various kinds of natural resources really were blessings or curses for poor countries has become a hot policy and research topic in recent years. The evidence has accumulated, and most of it is damning and distressing. But much scepticism has remained. Some people point out that natural resources have 'only' been a problem since around 1970. (The explanation for that is given above). Others suggest that the direction of causation is wrong: some countries are heavily dependent on natural resources because they have such bad governance and economic policies that no other economic activities will thrive; natural resources are not the cause of bad governance and poverty, but the symptom. Still others have pointed to the relatively good human development record of one oil-rich state - Venezuela - as a 'refutation' of the more general argument that natural resources somehow cause poverty. (As Michael Ross explains, Venezuela really is an exceptional case, and not a good basis for any generalisations). Some people have muddied the waters by seeking to attribute curses to all kinds of natural resource abundance - including the availability of good agricultural land resources - instead of focusing on the particularly problematic resources like oil and minerals. However, on this issue, social science researchers really have shown the value of their craft. Taking advantage of rapidly expanding historical data bases and of the spread of quantitative analysis techniques from economics into political science, all these ideas have been thoroughly tested in the past few years. We do not yet know all the answers, but the general conclusion is now overwhelmingly clear: the oil /mineral curse is real and serious for poor countries. Two recent papers very much put the seal on that conclusion.

Xavier Sala-I-Martin and Arvind Subramanian deal with the connection between resource wealth and rates of economic growth. They review existing econometric work in this area, and report on extensive analysis of their own, that addresses the questions from many different angles, and asks similar questions in a range of different ways. They compare the experiences of all countries for which they can find data since 1970. Their most striking findings are:

  • Along with a number of other researchers, they find that the resource curse stems from possession of what are sometimes known as 'point resources' - oil and other minerals (mainly mined metals) - not from generous endowments of land or forest resources. Economies with oils and other minerals grew more slowly than expected.

  • The adverse impact of oil and other minerals works indirectly: possession of these resources leads to a deterioration in the quality of public institutions, that in turn manifests itself in bad policy and bad governance. This is especially true of oil.

  • The adverse effects of oil increase more than proportionately to the relative size of the oil sector. A little oil may do no harm; a lot of oil may do a great deal of harm.

  • Oil and mineral resources really are the culprits. It is not true, as suggested above, that the direction of causation runs mainly from bad governance and bad economic policies to being dependent on oil/mineral resources because no other economic activities will thrive in such an environment.

Michael Ross is the doyen among political scientists using large international data sets to test statistically the developmental impacts of natural resources. A number of his other papers on this topic are available on his web-site (www.polisci.ucla.edu/faculty/ross). In 'How Does Mineral Wealth Affect the Poor', he examines, for almost all countries in the world since 1970, the effect of natural resource wealth on poverty. He measures both poverty and natural resource wealth each in several different ways, and examines their connections through six different potential politico-economic mechanisms - economic volatility, inequality, slow economic growth, the crowding-out of manufacturing, civil war, and authoritarianism. Again, he uses a variety of sets of data and statistical exercises to approach any given question from several angles: the results are robust in a technical sense. Like Sala-I-Martin and Subramanian, he finds that the culprits are oil and non-fuel minerals, not agricultural and forestry resources. They increase poverty through several mechanisms. But non-fuel minerals tend to work mainly by reducing the overall growth rates of economies, while oil works mainly by crowding-out manufacturing and making polities more authoritarian. The poorer countries are, the greater the cursing effect of an oil or mineral find.

Significance?

There is actually some good news buried in all this analysis. As other researchers have also found recently (e.g. Atkinson and Hamilton), there is nothing automatic about the resource curse. It works through people, incentives, and institutions. We can in principle find ways to mitigate it. That is where a great deal of thought is now directed - and that indeed is the main focus of the paper by Sala-I-Martin and Subramanian. We should now be able to lay to rest any debate about whether there is a resource curse, and concentrate on the more practical questions of (a) how it works in different circumstances and (b) what can be done about it.

Sources: Atkinson, G. and K. Hamilton, "Savings, Growth and the Resource Curse Hypothesis," World Development, Vol. 31 No. 11, (2003), pp. 1793-1808. World Development is published by Pergamon Press.

Ross, M. L., "How Does Mineral Wealth Affect the Poor?," Philadelphia: Paper presented to the 2003 meeting of the American Political Science Association, 2003. (www.polisci.ucla.edu/faculty/ross)

Sala-I-Martin, X. and A. Subramanian, "Addressing the Natural Resource Curse: An Illustration from Nigeria," Working Paper, No. WP/03/139, Washington D.C.: IMF, 2003. (www.imf.org/external/pubs)

Keywords: oil, natural resources, poverty, civil war.

Commentator: Mick Moore, IDS, (November 2003)

< Go back

       
     
      Top | Home | Latest reviews | Archive | Subject search | Contact | CFS site