Natural resources – blessing or curse?

This policy bulletin is an extract from Habits of Highly Effective Countries: Lessons for South Africa, Published by Law Review Project 2006 (Chapter 9 – Factors affecting growth)

Mauritius, like many of the world’s most celebrated success stories, including the Asian Tigers, provides compelling anecdotal evidence that natural resource endowment is not a determinant of prosperity. Equally conspicuous is the poor performance of resource-rich countries, especially resource-rich African countries, like Nigeria, Tanzania, Ghana, Zambia and Angola. That resource-rich countries tend to be losers and winners tend to be resource-poor is known as the ‘the resource curse’ or ‘the paradox of plenty’.

There are interesting theories about why resource- rich countries seem to be ‘cursed’. One of the most compelling is that ‘resource-rich countries are subject to more extreme rent-seeking behaviour than resource-poor economies, which results in competing factions fighting for natural resource rents, which in turn ends up inefficiently exhausting the public good’ (Lane and Tornell argued). In other words, governments of resource-rich countries are easily intoxicated by the assumption that they or their citizens will prosper simply because of their resources. They assume that they can extract massive revenues from resources by exploiting them directly or sub-contracting to private companies subjected to heavy taxes. They do not appear to realise that natural resources contribute to prosperity only if accompanied by highgrowth policies. Resource-rich countries are often characterised by internal conflict as rivals lock horns over who should control and be enriched by natural resource exploitation.

Just as there are impoverished resource-rich countries, there are also very successful ones. Obvious examples are the USA, oil-rich Gulf States, Norway, Holland and Australia.

Notwithstanding the widely held belief amongst experts that there is a resource curse, they are probably mistaken. Firstly, there is no accurate way to rank countries according to natural resource endowment. Most experts merely assume that countries are resource- rich or -poor on the basis of popular perception, as if it is a matter of common knowledge. Some economists use objective cohorts for resource endowment, especially to determine whether or not countries have ‘mining dominant’ economies – whether minerals account for a significant part of national income or exports. There are two important problems with this definition: (a) ‘natural resources’ include much more than minerals – navigable rivers, natural harbours, arable land, moderate climate, etc are natural resources – and (b) natural resources are a source of revenue only if they are exploited successfully. The degree to which a country benefits from its minerals depends more on its policies than on being resource-rich. Recognising this fact, economist Julian Simon concluded that people are ‘the ultimate resource’.

Chamber of Mines economist, Roger Baxter, has shown that some eminent scholars have reached overhasty conclusions. According to Richard Auty, for instance, ‘since the 1960s resource-rich developing countries have under-performed compared with resource- deficient economies’. One of the world’s most celebrated economists, Jeffrey Sachs, and his co-author, Andrew Warner, concluded in Natural Resource Abundance and Economic Growth that ‘countries with abundant natural resources have tended to grow less rapidly than natural-resource-scarce economies’. Raul Prebish and Hans Singer, in discussing the ‘Dutch Disease’, which refers to a specific variant of the concept, argued that ‘resource based growth would be ineffective because world prices of primary exports … show a deep tendency towards secular decline’.

It is true that many or most resource-rich countries are poor – some are amongst the world’s poorest countries. Even so, resource-rich countries are usually slightly more prosperous than resource-poor ones. The problem is that they are not as prosperous as they should be. Baxter’s research shows that growth rates in mining-dominant countries are above the average for their region, but well below growth rates in mineral-rich countries with high levels of economic freedom and good governance (as defined by the World Bank).

Source: This policy bulletin may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.


Help FMF promote the rule of law, personal liberty, and economic freedom become an individual member / donor HERE ... become a corporate member / donor HERE