Resource Curse

The resource curse, also called the paradox of plenty, is the observation that many countries with abundant oil, gas or minerals end up with slower growth, weaker institutions, more corruption or more conflict than countries with fewer natural resources. The British economist Richard Auty introduced the term in 1993, and a widely cited 1995 study by Jeffrey Sachs and Andrew Warner found that countries with high natural-resource exports in 1970 tended to grow more slowly over the following two decades.

The curse is not a law of nature. Norway, Botswana, Australia, Canada and Chile have used resource wealth well, while Nigeria, Venezuela, Angola and the Democratic Republic of the Congo are often cited as cases where it went badly. Economists therefore study the conditions that turn resources into a blessing or a curse, with a central role for institutions, fiscal management and the commodity cycle. The idea is closely linked to OPEC members and to many developing countries.

Think of a family that wins a large lottery prize. Some families invest it, keep working and are better off for decades. Others stop working, argue over who controls the money, spend heavily in good years and borrow when the money runs short. The windfall itself is not the problem; how the family handles it is.

A country that finds oil faces the same choices. The money arrives in big, uneven waves as commodity prices swing. Other industries can wither, politicians can fight over who controls the income, and governments that do not need to tax their citizens may stop listening to them.

• Dutch disease. Named by The Economist in 1977 after the Netherlands' experience following its large natural-gas discoveries, it describes how resource exports push up the real exchange rate and draw workers and capital into the resource sector, making manufacturing and farming less competitive.
• Price volatility. Revenues rise and fall with world prices, so budgets swing between boom and bust. Governments often spend and borrow heavily in booms and face crises, or even sovereign default, in busts.
• Rent-seeking and corruption. Resource income is a large economic rent that is easy to capture. Political energy goes into rent-seeking rather than productive activity.
• Weak accountability. Governments funded by oil rather than by taxes have less need for citizens' consent, which some political scientists link to persistent authoritarian rule.
• Conflict. Lootable resources such as alluvial diamonds have financed civil wars in several countries.

The squeeze on other exporters shows up in the real exchange rate, which compares the price of foreign goods with domestic goods:

• $q$ is the real exchange rate; a fall means the home country has become more expensive (a real appreciation).
• $e$ is the nominal exchange rate, in units of home currency per unit of foreign currency.
• $P^{*}$ is the foreign price level and $P$ is the home price level.

Example: before an oil boom, $e = 10$, $P^{*} = 100$ and $P = 1{,}000$, so $q = (10 \times 100) / 1{,}000 = 1.0$. Oil inflows strengthen the currency to $e = 9$ and push up domestic prices to $P = 1{,}100$. Now $q = (9 \times 100) / 1{,}100 \approx 0.82$. The country's goods have become about 18% more expensive relative to foreign goods, hurting non-oil exporters. Economists track this with measures such as the real effective exchange rate (REER).

Later research has qualified the original findings. Some studies argue that the problem is dependence on resources, not abundance: countries whose economies rely mainly on a single export do badly, but countries that are rich in resources and diversified do not. Others find that the effect depends on the quality of institutions before the discovery, so that resources amplify whatever governance a country already has. Some economists argue that the 1970s and 1980s results partly reflected a long fall in commodity prices over that period. Others point to persistent problems in oil-dependent states such as Venezuela, where the collapse of oil revenue after 2014 contributed to hyperinflation and the collapse of the bolívar.

• Saving the windfall. A sovereign wealth fund invests resource income abroad, reducing pressure on the currency. Norway's Government Pension Fund Global, whose spending is limited by a fiscal rule of about 3% of the fund's value a year, is the best-known example; it also cushions the Norwegian krone.
• Fiscal rules. Chile's structural-balance rule bases spending on a long-run copper price rather than the current price, saving in booms and spending in busts as part of countercyclical fiscal policy.
• Transparency. The Extractive Industries Transparency Initiative (EITI), launched in 2003, requires member countries to publish what companies pay and what governments receive.
• Fair taxation of rents. Royalties, resource rent taxes and occasional windfall taxes aim to capture value for citizens without deterring investment.
• Diversification. Investing resource income in human capital, infrastructure and other industries, sometimes through industrial policy, as the Gulf states have attempted in recent decades. Botswana, using diamond revenue under stable institutions, is often cited as a model.

• Extractive Industries Transparency Initiative
• Norges Bank Investment Management