The Resource Curse 

What Stops Countries From Using Their Resource Wealth to Make Their Society

Wealthier?

In its original form, the Resource Curse stated that countries that had large reserves of basic commodities got poorer, not richer, during booms in commodity prices. The classic case is Nigeria during the 1971-1983 resource boom (and today), where the country seemed to get poorer not richer. In contrast, South Korea and Japan, with no meaningful resources, have done very well.

 This idea has been beaten to death statistically, with the result

being there is no systematic negative effect of resource riches on a country’s wealth. But neither there is the positive effect you might expect.

 So why does resource wealth not always lead to an increase in

society’s wealth? There are several hypotheses. (“Hypotheses are academic-speak for “educated guesses”.

What is the Resource Curse?

Educated Guess #1: “Dutch Disease”  A country finds it has a lot of mineral wealth – say silver.

The silver is mined, then sold for dollars in the international market. The dollars are then converted into the local currency.

 In the 1960s, natural gas was found off the coast of the

Netherlands. This led to rise in the value of the Dutch guilder, making Dutch manufacturing less competitive. 

Solutions: Give up your domestic currency, like Panama switching to dollars: Drawbacks: ask people in Greece.

Invest all your spare monies in foreign currency investments – like Norway does now. (But try to buy lunch in Norway!)

Why a Resource Curse?

Educated Guess #2: Import Substitution Countries respond to resource booms by putting on import

controls on manufactured goods. This results in reducing trade and reducing wealth.

Brazil and Venezuela are good examples of this.But why would should lead to the other is unclear to me. Educated Guess #3 – Currency Fluctuations

Resource booms lead to resource busts. Resource busts lead to currency depreciation.

Thus, foreign investors do not want to invest in the local currency, because it is likely to decrease in value.

Keep Guessing

Politicians worry about being reelected. So they use the money as fast as possible, rather than make long term investments in things like education and (perhaps) roads.

 The government does too many things, too

fast. So its programs become corrupt, and people focus on acquiring funds from the government, rather than doing something productive, like making things or education.

 

Educated Guess #4: Political Short-sightedness

When the money runs out, the country is just as poor as before, though now the people expect more from their government.

 During resource booms, it turns out that private parties

increase their savings rate, especially when the government starts borrowing money. This implies that parties are smarter than the government?

 Part of this applies to Venezuela in the 1980s, where

the government started spending money even faster than it came in.

And then the money runs out..

Educated Guess #5: The Government gets fat and lazy.

The government has more than enough money to keep the people (relatively) happy. So they spend all the money on themselves and their friends. The government does not focus on using the money to help its people, and the people as sufficiently satisfied not to complain.

So local institutes and taxing authorities do not get build for the bad times. This describes today’s Russia.

Wasting the Money

Educated Guess #6: The resource sector becomes too powerful.

Government focuses on the desires of the resource sector. The state begins to serve the resource sector, to the harm of the other sectors.

 When the resource prices fall, the government

subsidies the resource sector, drawing money away from other parts of the economy. (Example: coal in Britain.)

More Guesses

Educated Guess #7: The money gets wasted in nationalized companies

 Examples: Peru in the 1970s, Argentina and Venezuela today?

Government run companies are prone to a lot of waste. So they use inefficient techniques, hire too much labor, and if they have problems, they run to the government treasury for more money.

 You don’t like big mining companies? Don’t worry, nationalized companies are worse. (And pollute more.)

 

Our Final Guesses

Educated Guess #8: Resource Booms weaken property rights

Assume a country has weak property rights. So the resource company has to protect itself. Thus, it hires its own “army”, from mercenaries, militias, drug growers, and criminal gangs.

 Now the company’s army competes with the

government, weakening the government.  Examples: “Blood diamonds” in Africa, oil companies in 1910s Mexico.

And finally…