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The Resource Curse: Rich in Natural Wealth, Slow to Grow
¶1 For decades, one of economics' more persistent puzzles has concerned countries rather than individuals: nations rich in oil, natural gas, diamonds, or other valuable resources have often grown more slowly than resource-poor countries that started from similar levels of income. Economists call this pattern the resource curse, the tendency for resource wealth to correlate with weaker, not stronger, economic growth. Two broad explanations have competed to account for it. One locates the damage in currency markets and export prices; the other locates it in how easy revenue reshapes the relationship between a government and the citizens it depends on. Comparing the two has narrowed the debate without closing it.
¶2 The clearest illustration of the currency-based mechanism came from the Netherlands. In 1959, drillers struck a massive natural gas field near the town of Groningen, and the country moved quickly to develop and export it. Export revenue poured in, and the Dutch guilder strengthened sharply against other currencies as a result. A stronger currency made every other Dutch export, from textiles to machinery, more expensive for foreign buyers, while imports became cheaper for Dutch consumers at home. Factories that competed internationally lost customers, and manufacturing employment declined through the 1960s and 1970s even as the country grew richer overall. In 1977, The Economist gave the pattern a name, Dutch disease, to describe how a resource boom in one part of an economy can quietly hollow out another part of the same economy.
¶3 Economists eventually generalized the Dutch disease mechanism into a broader claim: any sudden surge in resource exports, not just natural gas, could push up a country's exchange rate and squeeze its manufacturing and agricultural sectors, leaving the whole economy more dependent on a single volatile commodity. In 1995, the economists Jeffrey Sachs and Andrew Warner tested this claim against data from roughly one hundred countries. They found that nations with a higher ratio of resource exports to national income in 1971 had, on average, grown more slowly over the next two decades than nations with a lower ratio, even after accounting for differences in starting income and trade policy. The correlation was strong enough that Sachs and Warner treated it as evidence that resource abundance itself was dragging growth down rather than lifting it.
¶4 A currency effect alone, however, could not explain why some resource-rich countries thrived while others with comparable exports stagnated. The political scientist Michael Ross proposed a different mechanism, one centered on institutions rather than exchange rates. Governments that draw most of their revenue from resource exports, he argued, need to tax their own citizens far less than governments that depend on income and sales taxes. Citizens who pay little in taxes, in turn, tend to demand correspondingly little accountability in return, a relationship he called the rentier effect. In a 2001 study covering 113 countries over more than two decades, Ross found that oil exports were strongly associated with authoritarian rule, an effect that held even outside the Middle East; other mineral exports showed a similar pattern, but exports of agricultural commodities did not.
¶5 Botswana supplies a case that supports Ross's account without fully deciding the debate. Diamonds were discovered there in 1967, the year after independence, and the country had already built accountable, property-protecting local institutions before the revenue arrived. [A] It went on to avoid the slow growth common among other resource-rich nations, even though its economy became far more resource-dependent than the Netherlands ever was. [B] Nigeria, by contrast, has exported oil since the late 1950s and has experienced many of the difficulties associated with the resource curse, including long periods of authoritarian rule and heavy dependence on a single commodity. [C] The contrast points toward institutions rather than currency markets as the more decisive factor. [D] It does not, however, settle the matter, because resource wealth and institutional strength are difficult to separate once a boom is already under way, since a country's institutions can shape how it handles a windfall just as a windfall can reshape a country's institutions over time. More than two decades after Ross's study, economists and political scientists still do not agree on how much of the resource curse to attribute to each mechanism, or whether the two operate together in ways neither theory captures alone.
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Highlighted: "It does not, however, settle the matter, because resource wealth and institutional strength are difficult to separate once a boom is already under way, since a country's institutions can shape how it handles a windfall just as a windfall can reshape a country's institutions over time."
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That timing mattered: the institutions were already in place before diamond wealth began flowing in, not created afterward in response to it.
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The tendency for resource-rich countries to grow more slowly than resource-poor countries, known as the resource curse, has been explained in competing ways that remain only partly reconciled.