The fact that resource-intensive economies tend to suffer from larger macroeconomic fluctuations than their peers of comparable size and development is rather well-known. This is mainly due to the cyclical nature of commodity prices, which tend to impact general revenue both for the general population (through job booms and losses), and the public sector (through rising and decreasing royalty payments).

Despite this, the idea that natural resources are a boon for national economies remains part of mainstream economic culture. Norway is often cited as an example of a country which strongly benefited from the presence of natural resources – in this case, oil – on its territory.

Empirical research suggests a different pattern. A substantial scientific literature has been developed around the concept of a ‘Resource Curse’, an economic – and to some extent political – dynamic through which resource-intensive economies were shown to under-perform in the long-run, even when controlling for commodity price fluctuations.

The main dynamic identified by Sachs and Warner1 is one of crowding-out effects; by driving the increase of local price levels – particularly for production inputs – the resource sector tends to  crowd out the manufacturing sector. Additional research by Gylfason2 attributes the negative effect of natural resource specialization to lowered education levels, while Papyrakis and Gerlagh3 associate it to investment levels. Finally, a number of articles associate the main driver of the Resource Curse to the weakened state of political institutions4 in countries with a high level of resource-sector specialization, promoting rent-seeking for the revenues generated by extraction.

Because of growing demand for natural resources from developing economic powerhouses, the prospect of investing in the resource sector may appear attractive even to advanced economies. The literature on the performance of resource-intensive countries should serve as a cautionary tale on the matter; though it is indeed possible to benefit from specialization in the sector, it remains a risky investment for most economies.

 

Significant papers

[1] Sachs, J. D. and A. M. Warner (2001). “The curse of natural resources.” European Economic Review 45(4-6): 827-838.

[2] Gylfason, T., Herbertsson, T.T., Zoega, G., 1999. A mixed blessing: Natural resources and economic growth. Macroeconomic Dynamics 3, 204-225.

[3] Papyrakis, E. and R. Gerlagh (2004). “The resource curse hypothesis and its transmission channels.” Journal of Comparative Economics 32(1): 181-193.

[4] Mehlum, H., K. Moene, et al. (2006). “Institutions and the resource curse.” Economic Journal 116(508): 1-20.

 

Additional reading

Sachs, J. D. and A. M. Warner (1999). “The big push, natural resource booms and growth.” Journal of Development Economics 59(1): 43-76.

Auty, R. M. (1994). “Industrial policy reform in six large newly industrializing countries: The resource curse thesis.” World Development 22(1): 11-26.

Torvik, R. (2009). “Why do some resource-abundant countries succeed while others do not?” Oxford Review of Economic Policy 25(2): 241-256.

Kronenberg, T. (2004). “The curse of natural resources in the transition economies.” Economics of Transition 12(3): 399-426.

Atkinson, G. and K. Hamilton (2003). “Savings, growth and the resource curse hypothesis.” World Development 31(11): 1793-1807.

Collier, P. and B. Goderis (2012). “Commodity prices and growth: An empirical investigation.” European Economic Review 56(6): 1241-1260.

Bulte, E. H., R. Damania, et al. (2005). “Resource intensity, institutions, and development.” World Development 33(7): 1029-1044.

James, A. and D. Aadland (2011). “The curse of natural resources: An empirical investigation of U.S. counties.” Resource and Energy Economics 33(2): 440-453.

Tornell, A. and P. R. Lane (1998). “Are windfalls a curse? A non-representative agent model of the current account.” Journal of International Economics 44(1): 83-112.

Williams, A. (2011). “Shining a Light on the Resource Curse: An Empirical Analysis of the Relationship Between Natural Resources, Transparency, and Economic Growth.” World Development 39(4): 490-505.

Norrbin, S. C., O. Pipatchaipoom, et al. (2008). “How robust is the natural resource curse?” International Economic Journal 22(2): 187-200.

 

Counter-arguments

Mikesell, R. F. (1997). “Explaining the resource curse, with special reference to mineral-exporting countries.” Resources Policy 23(4): 191-199.

van der Ploeg, F. and S. Poelhekke (2009). “Volatility and the natural resource curse.” Oxford Economic Papers 61(4): 727-760.

Cavalcanti, T. V. D. V., K. Mohaddes, et al. (2011). “Growth, development and natural resources: New evidence using a heterogeneous panel analysis.” Quarterly Review of Economics and Finance 51(4): 305-318.

Davis, G. A. (1995). “Learning to love the Dutch disease: Evidence from the mineral economies.” World Development 23(10): 1765-1779.

Brunnschweiler, C. N. (2008). “Cursing the Blessings? Natural Resource Abundance, Institutions, and Economic Growth.” World Development 36(3): 399-419.