In development economics, there are few topics that capture academia’s imagination as intensively as the resource curse. According to one count, the academic literature has grown from thirteen academic papers covering some aspect of the resource curse in 1995 to 543 in 2005 and 2420 in 2014 (Gilberthorpe and Papyrakis, 2015). The temptation seems intuitive. Why do some countries, despite the ostensible advantages afforded to them by resource endowments, show signs of retarded growth and political decay? Are resource endowments perhaps a significant causal factor generating underdevelopment, rather than engendering growth? Based on conventional economic theory, such a finding would seem rather surprising.
Given the recent attention paid to the concept, a number of studies have investigated the intricacies of the resource curse. This essay will therefore examine whether the resource curse theory is convincing. To what extent can it explain phenomena relating to lack of development and economic growth? Given the vastness of the literature covering the resource curse, the essay will attempt to establish some order by presenting the most significant empirical findings, followed by an account of economics-based, institutional and anthropological understandings of the phenomenon. It will be argued that the resource curse concept is perhaps a misguided attempt to provide a heuristic device in order to understand broader development challenges. While institutions are indeed a crucial component determining the effects resource dependence can have on societal welfare, a deeper anthropological account highlights some of the gaps inherent in subscribing to the idea of a curse.
What do we mean when we say resource curse?
Linguistically, the term resource has a positive connotation. Resources allow us to do things, to transform ourselves and our environment in a given direction. Therein lies the paradox of the resource curse. Until quite recently, the economics literature regarded resources as an input to be used to promote economic development. Mineral resources are thus a form of natural capital. Earlier literature thus focused on the resource blessing rather than on a potential curse (see e.g. Watkins, 1963). According to Atkinson and Hamilton, “the discovery of a natural resource endowment is an asset that can be liquidated in order to finance investment in other productive assets such as produced or human capital” (2003: 1794).
Resources allow governments to undertake spending in order to boost the productive capacity of their economies. However, as Gylfason points out, “rich parents sometimes spoil their kids [and] Mother Nature is no exception” (2001: 850). Auty (1993) subsequently coined the term resource curse in a pioneering study. Goodman and Worth define the resource curse as “the socio-economic disadvantage, political disruption and ecological damage that results from extractive industries” (2008: 202).
Early empirical studies found a negative correlation between resources and economic growth (e.g. Sachs and Warner 1995; Sachs and Warner 2001). Auty (2001: 3) suggests that per capita incomes of resource-poor countries grew between two to three times faster than those of resource-rich countries. By contrast, however, Smith (2015) finds a positive effect on GDP per capita following long-term resource exploitation. Against this background, van der Ploeg posits that “the key question is why some resource rich economies […] are successful while others […] perform badly despite their immense natural wealth” (2011: 366). It is moreover necessary to distinguish resource abundance from resource dependence. While the former is measured in relation to land size, the latter is a measure of the relative weight of resources within economic production, and exports in particular.
As underscored by Findlay and Lundhal (1999), there are a number of countries which have managed to transform their resource endowments into positive drivers of economic development, including Canada, Norway, and Malaysia. Thus, what explains the significant number of negative cases where such transformations did not occur, and where resources rather retarded development? We first turn to economic explanations to understand the resource curse.
It’s the economy, stupid!
Early iterations of the resource curse focused very much on economics. Prebisch (1950) and Singer (1950) had both made attempts to explain the structural impediments to resource-led growth due to declining terms of trade. However, the most fashionable explanation for the resource curse was the Dutch Disease. Through the combined ramifications of two phenomena, the resource movement effect (Davis and Tilton, 2005) and the spending effect (Corden and Neary, 1982), economic growth is retarded. Other industries are displaced and inflation is rampant. The lack of economic diversification can lead to significant problems (Murshed and Serino, 2011). However, the validity of the Dutch Disease explanation has been challenged. Van der Ploeg (2011) points out that the most significant implication of abundance is to increase price volatility, reducing long-term growth. Moreover, there is some evidence to suggest that resource dependence erodes human capital (Gylfason, 2001). There are further problems associated with excessive growth of debt (Sarr et al., 2011) and reduced investment and savings rates (Atkinson and Hamilton, 2003). In summary, Papyrakis and Gerlagh (2004) find that the indirect detrimental effects of natural resources on growth outweigh the direct beneficial effects (see also e.g. Collier and Goderis, 2007, for a discussion on short-term versus long-term gains).
The observations above indicate that there is some meat on the bones of the resource curse. However, economics alone does not appear sufficient for a nuanced understanding of the curse. We would expect all countries to struggle more or less equally with the curse. Moreover, economic explanations fail to account for some of the intricacies of the resource curse. Hodler (2006) has found that resources tend to have particularly negative implications in societies subject to ethnic fractionalization. In addition, there is some evidence to suggest that point-source resources such as alluvial diamonds in particular can facilitate economic and social conflict within societies (Isham et al., 2005). It appears quite obvious that there is more to the resource curse than cold, rational economic processes. Recent analysis has therefore moved away from economic perspectives in favor of an institutional understanding of the resource curse. The next section will deal with the added value of institutional analyses.
Institutions, Institutions, Institutions
The institutional turn within the resource curse literature to some extent mirrors the increased attention being paid to institutions within development studies in general. As Rodrik and Subramanian (2003) argue, institutions override almost any other factor with regard to economic development. In general terms, institutions can be defined as the formal and informal rules governing human interactions (North, 1990: 4). More specifically, Edison defines institutions as “the degree to which laws and regulations are fairly applied, and the extent of corruption” (2003: 36). This includes the quality of governance, the extent of legal protection, and the limits placed on political leaders. Such institutions can act as a mediating factor between resources and economic performance. Acemoğlu et al. (2012), for instance, point out that, in Botswana, the presence of reasonably strong institutions prior to the colonial period, coupled with the relatively low colonial engagement by Britain, led to resource-led growth post-independence.
Mehlum et al. (2006) have highlighted that institutions play a crucial role within the resource curse paradigm. While institutions matter in a number of dimensions, including corruption (Bhattacharyya and Hodler, 2010), weak accountability (Le Billion, 2005) and bad policy choices (Robinson et al., 2006), perhaps the most significant effect of weak institutions is the emergence of rent-seeking behavior. Coined by Krueger (1974), rent-seeking refers to competition over the diversion of income into the hands of certain individuals or groups within society. Without quality institutional frameworks, resources provide incentives to engage in such behavior. Torvik (2002) has documented the empirical relationship between resource dependence and rent-seeking in the absence of good institutions. The so-called voracity effect (Lane and Tornell, 1996) means that the supposed advantages afforded by resource endowments are swallowed up in unproductive processes, which may go some way toward explaining the negative correlation between resources and economic growth. Moreover, distinctions can be made between “grabber-friendly” and “producer-friendly” institutions (Mehlum et al., 2006). While the former enable and encourage rent-seeking, the latter are associated with positive and productive economic activity (an equivalent argument is made by Acemoğlu and Robinson, 2012, with regard to economic development in general, using the term “extractive institutions”). Resources themselves can impede the formation of good institutions. When resources are found, the rent-seeking effect impinges both on economic growth as well as institutional development. Thus, Sala-i-Martin and Subramanian (2003) have posited that resources and growth are interlinked through institutions. To further add nuance to the discussion, different resources respond differently to the presence or absence of good institutions. Boschini et al. (2013), for instance, argue that institutions make the biggest difference in countries rich in ores and metals.
- Quote paper
- Tim Pfefferle (Author), 2016, Resource Endowments and Underdevelopment. Is the Resource Curse Theory Convincing?, Munich, GRIN Verlag, https://www.grin.com/document/335978