The Resource Curse

Paradoxically, wealth in natural resources is often associated with poverty, authoritarianism, and conflict. This phenomenon—the “resource curse”—is one of the central puzzles in the political economy of development.

Empirical Observations

The relationship between resources and development is ambiguous:

Negative examples: Nigeria — enormous oil revenues, mass poverty, corruption
Venezuela — largest oil reserves, economic collapse
Democratic Republic of the Congo — richest subsoil, poverty and wars
Post-Soviet resource countries — authoritarianism, weak diversification

Positive examples:
Norway — oil and the highest development level
Botswana — diamonds and one of the best growth figures in Africa
Chile — copper and steady growth
Australia, Canada — resources and prosperity

Conclusion: resources are neither a verdict nor a guarantee. Institutions and policy determine the outcome.

Economic Mechanisms

How do resources undermine development?

“Dutch Disease”:

Inflow of petrodollars strengthens the national currency
This makes exports of other goods more expensive
Manufacturing and agriculture lose out
The economy becomes single-sector

Volatility:

Commodity prices are volatile
Boom—growing expenditures, commitments
Downturn—fiscal crisis, contraction
Procyclical policy amplifies fluctuations

Suppression of human capital:

Resource revenues reduce incentives to invest in education
Easy money vs. accumulation of capabilities
Young people go into the resource sector rather than productive industries

Political Mechanisms

Resources transform politics:

Resource Rent and Authoritarianism:

The state is not dependent on citizens’ taxes
No taxes—no representation
Rent allows the purchase of loyalty and suppression of the opposition
“Rentier state”

Competition for rent:

Control over resources is the main prize
Politics is a struggle for rent allocation, not development policy
Corruption, clientelism, patronage

Conflicts:

Resources finance both rebels and governments
“Blood diamonds”, oil in South Sudan
Secessionist movements in rich regions

Why Do Some Countries Avoid the Curse?

Successful resource-rich countries share common features:

Pre-existing institutions:

Norway was a democracy with the rule of law before oil
Botswana had traditional consultative institutions
Institutions precede resources—a key condition

Geology:

Point resources (oil, diamonds) are more dangerous than diffuse ones (farmland)
Offshore oil is less dangerous—harder to seize

Governance rules:

Sovereign funds (Norwegian Oil Fund)
Spending rules (budget rules)
Transparency and accountability

Diversification:

Investment of resource revenues in human capital and infrastructure
Creation of other industries in advance

International Dimension

The resource curse is not solely an internal problem:

Demand from developed countries. Oil and mineral consumers create the market.
Geopolitical interests support authoritarian regimes.
MNCs: Oil companies work with any regime
Transfer pricing—tax minimization
Corruption in obtaining concessions

Global Governance:

EITI (Extractive Industries Transparency Initiative)—payment transparency
Kimberley Process—diamond certification
Sanctions against “blood” resources

Policy for Overcoming

How to fight the resource curse?

Institutional reforms:

Democratization and accountability
Independent regulators
Anti-corruption measures

Fiscal rules:

Sovereign wealth funds
Spending rules smoothing the cycle
Direct transfers to citizens (Alaska Permanent Fund)

Diversification:

Industrial policy
Investment in education and infrastructure
Development of non-resource exports

Transparency:

Publication of contracts
Disclosure of revenues
Civil society participation

The resource curse is not destiny. Given the right institutions and policies, resources can become a blessing. But this requires political will and favorable initial conditions.