COUNTRY NOTE 8: NATURAL RESOURCES: WHEN BLESSINGS BECOME CURSES
Since at least the time of Adam Smith and David Ricardo there has been a belief that natural
resources are a blessing: that countries richly endowed with natural resources have an
advantage over countries that are not. For centuries, people moved to where natural resources
were abundant: to the Americas, to Australia, to oil-rich countries in the Middle East. Natural
resource endowments have helped many countries, including Australia, Canada, Finland, and
Norway, to grow and diversify, in part by providing a basis for developing associated
technologies and capital goods industries (World Bank 2001).
Figure C8.1: Natural resources and growth, 1970-89
Source: Sachs and Warner (1997).
Since the end of World War II, however, and particularly since the 1960s, evidence has
accumulated that natural resources are less often a blessing than a curse.1 This finding is
statistically robust, invariant to changes in specification, variable definitions, or inclusion of
additional explanatory variables—including those commonly used in empirical growth
studies, such as geography and climate. After controlling for all possible influences and
interactions, the evidence is that countries rich in natural resources grow more slowly.
Not only economic growth is affected negatively (Gelb 1988). Controlling for country
income level, countries that are rich in natural resources have more unequal income
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Sachs and Warner (1995, 1997, and 2001); Lane and Tornell (1999); Auty and Mikesell (1998); Gylfason
(2001); Leite and Weidmann (1999); Dalmazzo and Blasio (2001). While there are many ways to define natural
resource abundance—for example as the share of natural resources in GDP or exports (as in Figure C8.1), with
further breakdown for fuel, ores and metals; or oil producing vs. other developing countries—they all suggest
that countries rich in resources grow more slowly.
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distribution and a larger share of their population in poverty, they exhibit greater corruption,
have more authoritarian regimes, spend more on the military, and face a higher probability of
an armed conflict (Palley 2003). The probability of a civil conflict is 0.5 percent in a country
with limited natural resources, but 23 percent in a country where natural resources account
for 26 percent of GDP (Collier and Hoeffler 1998, 2001). In far too many countries,
including Iraq, Nigeria, Sierra Leone, Venezuela, former Zaire, Zambia, and many others,
enormous oil or mineral wealth has not translated into economic and social well being for the
majority of the population.
Those natural resources that depress countries’ long-run growth are those whose rents are
technically easy to appropriate: so-called point-source natural resources such as diamonds,
gold, oil, and minerals. Other resources, such as land or human resources, have more diffuse
rents and do not seem to have such an effect.
Two lines of explanation have emerged to explain the “natural resource curse”. The first
focuses on how natural resources affect the economy, and the second on how they affect
institutions (Eifert, Gelb, and Tallroth 2003).
Economic effects
The so-called Dutch disease is perhaps the most well known effect of natural resource rents
on the real economy. High exports of natural resources cause an appreciation of a country’s
real exchange rate, which moves its productive resources away from tradables such as
manufactured goods. If manufacturing produces significant positive externalities that are
crucial for long-term development, such as learning-by-doing, the country’s economic
growth rate will suffer (Sachs and Warner 1997).
Another well-known problem of resource-rich economies is volatility, with cycles of boom
and bust. For example, the high resource prices of the 1970s led resource-rich countries to
borrow heavily, and the collapse of prices that ensued in the early 1980s left them with large
debts and little capacity to service them (Manzano and Rigobon 2001). The countries
affected ranged from Bolivia to Venezuela to Ivory Coast and Nigeria; many resource-rich
countries have not yet recovered.
Equally serious, unless a resource-rich economy has a large non-resource-based tradable
sector to begin with, the uncertainty associated with cycles of boom and bust can reinforce a
downward cycle. The smaller the non-resource tradable sector, the fewer opportunities
workers have to find new jobs when resource prices decline; as a result, a price decline can
cause the whole economy to contract. Interest rates will reflect the risks associated with this
volatility: the greater the volatility, the higher is the interest rate, and, in turn, the smaller are
investments in non-resource tradables. These two effects combine to cause the economy to
specialize away from production of non-resource tradables. In turn, the less the economy
produces non-resource tradables, “… the greater the volatility of relative prices, the higher
the interest rate the sector faces, causing it to shrink even further, until it disappears”
(Hausmann and Rigobon 2002).
2
Saving rates in oil-exporting countries are much higher than in other developing countries.
But even so, these relationships mean that without corrective policies, volatility causes oilexporting economies to specialize inefficiently in the production of non-tradables, retarding
their long-term growth. Thus, it has been argued that Venezuela’s growth implosion in the
early 1980s was the result of the high real interest rates facing the non-resource tradable
sector, and of uncompetitive and volatile exchange rates, which caused Venezuela to
specialize almost exclusively in resource extraction and non-tradables (Hausmann and
Rigobon 2002).
Institutional effects
These economic explanations do not answer questions about the differences in performance
across resource-rich countries, such as why diamonds have been a curse for Sierra Leone but
a blessing for Botswana, or why oil has been a blessing for Indonesia. Neither can they
explain why point-source natural resources affect growth differently from natural resources
with more diffuse rents. Such differences in performance have given rise to a large literature
offering political and institutional explanations of the resource curse.
Large and concentrated rents, easier to appropriate than the more diffuse rents associated
with land or human resources, make societies less entrepreneurial by increasing the private
returns to unproductive rent-seeking. Several studies focus on the “voracity effect,” or
common pool problems, that move an economy into a low-growth equilibrium because of
political fights over resource rents (Lane and Tornell 1999; Mehlum, Moene, and Torvik
2003). In Nigeria, for example, governance institutions were weak and large oil resources
were wasted. Large windfall oil profits corrupted Nigeria’s institutions and changed its
politics, which came to be shaped by the incessant fight over resource revenues. Public
spending turned into outright patronage, crippling the civil service. Starting with the Biafra
war in the late 1960, successive military dictators plundered Nigeria’s oil wealth, wasting
resources on an enormous scale; the country’s total factor productivity has declined by 1.2
percent a year over the last few decades (Sala-i-Martin and Subramanian 2003).
Numerous econometric studies confirm that countries rich in natural resources have weaker
institutions, measured in terms of checks and balances on the executive, rule of law, and
corruption (Sala-i-Martin and Subramanian 2003; Isham, Woolcock, Pritchett, and Busby
2003; Sala-i-Martin, Doppelhoffer, and Miller 2003; Robinson, Torvik, and Verdier 2002;
Mehlum, Moene, and Torvik 2002). These studies also show that, controlling for institutions,
natural resources have no effect on long-term growth. That is, institutions are not just the
principal but the only channel through which resources influence the course of the economy.
While natural resources were a curse for Nigeria, the discovery of diamonds became a
blessing for development in Botswana, as did oil in Indonesia.
Botswana has effectively maintained law and order, limited state predation, and enforced
hard budget constraints on its parastatal organizations (Acemoglu, Johnson, and Robinson
2003). The government has invested heavily in the expansion of infrastructure and efficient
delivery of education and health services. While AIDS has reversed some of the health gains,
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and led to a sharp decline in life expectancy, Botswana’s other social indicators are among
the better in Africa and in the developing world. The bureaucracy is largely meritocratic,
relatively non-corrupt, and efficient. Fiscal revenues from resource rents have used to smooth
revenue over commodity price cycles, rather than financing consumption booms; indeed,
Botswana was one of the first countries to establish a stabilization fund, which it managed
well. One of the reasons behind Botswana’s success is believed to be its benign neglect by
colonial powers: Botswana was on the periphery of the British empire, not known to have
valuable resources, and hence of little interest. Thus, unlike in most other African countries,
colonialism had a negligible effect on traditional social and political institutions. Botswana’s
pastoral traditions traditionally encouraged broad-based participation and constraints on
political leaders; rural interests, chiefs, and cattle owners retained their political power
throughout the colonial period. They have been the source of checks on the executive, and
explain why diamond rents have been exceptionally well managed.
Indonesia did not have democratic and participatory institutions, at least until very recently.
But although corruption and governance problems were widespread, Soeharto’s regime
focused on economic and social development. On the one hand, it provided checks on state
and individual predation and, on the other, it provided predictability and consistency in
policy making (Temple 2003). Internal accountability mechanisms enabled the bureaucracy
to deliver a wide array of social and infrastructure services, and poverty programs. Growth in
Indonesia was not only rapid but quite widely shared, through programs such as the
Instruction of the President (INPRES), a rural development program that was started at the
time of the first rise in oil prices in 1973 and subsequently expanded. INPRES included
village support grants, rural infrastructure, and a massive expansion of schooling (World
Bank 1994). One reason for Indonesia’s success was that the Soeharto regime shielded
technocrats from political pressures: the group of high-level technocrats responsible for
policy making (the “Berkeley mafia”) was empowered to make economic policy decisions
with long-term growth and development objectives in mind. Thus, the response to a fall in oil
prices in the early 1980s was a text-book adjustment that triggered comprehensive
microeconomic reforms—from competition policy to exchange rate adjustments and trade
liberalization (see also Country Note 2, Lessons from Countries That Sustained Their
Growth).
Economic and political explanations are difficult to disentangle. In the course of
development, economic institutions are shaped by economic incentives and opportunities,
and political dynamics respond to underlying economic forces (Engermann and Sokoloff
2003). Political and other institutions may be the main explanatory forces, but economic
forces also play a role in explaining why the institutions are the way they are.
Conclusion
Simply copying or adopting policies that have been effective elsewhere rarely succeeds.
Many resource-rich developing countries have experimented with oil funds or stabilization
programs but with disappointing results. Successful management of a natural resource curse
calls for a combination of policies and institutions. On the economic policy front, countercyclical stabilization policies have a critical role to play, as do policies that maintain the
4
competitiveness of the real exchange rate for the non-resource tradable sector, and financial
policies that encourage investments in that sector. On the institutional front, institutions such
as transparency, and checks and balances on the use of rents, that increase the costs of nonproductive activities can help countries to move away from rent-seeking equilibria to more
dynamic, diversified, and growing economies. East Timor’s oil stabilization fund illustrates
this approach. While it is too early to conclude how the fund will work in practice, the intent
of the fund is to rely on institutional improvements that ensure resource rents are effectively
used for long-term development. It emphasizes transparency and public awareness of the
issues that concern the good use of oil revenues, thus developing constituencies in support of
prudent policies.
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