Is there a Resource Curse?

I have mentioned the ‘resource curse’ in many postings since starting this blog. It affects economies with a lot of natural resources – energy and minerals. The curse comes in two forms:

1. With high revenues from the sale of a resource, governments try and seek to control the assets and use the money to maintain a political monopoly.

2. This is where you find that from the sale of your important natural resource there is greater demand for your currency which in turn pushes up its value. This makes other exports less competitive so that when the natural resource runs out the economy has no other good/service to fall back on.

In 1995 Jeff Sachs, then a Harvard Professor, co-authored a paper with Andrew Warner in which they stated that countries with a higher proportion of resource exports had experienced a slower rate of economic growth. However, The Economist recently noted the research of two Swiss-based economists which draws different conclusions. They basically say that it is crucial to distinguish between the following:

Abundance – having lots of resources
Dependence – having a high proportion of exports in resource-related industries.

They found that greater resource abundance leads to better political institutions and more rapid growth. Those with poor political institutions – Zaire, Nigeria etc – are unlikely to develop other sectors of the economy to reduce dependency on natural resources. The chart below from The Economist shows that the recent growth of OECD countries that are energy exporters against other members that are neutral or oil importers. Although they have grown more over the years with an increasing oil price, their strengthening currency hasn’t affected their economy’s that much. The key test is when the resource runs out – have countries reinvested in areas that they can fall back on or has this investment gone into the energy industry itself. For the Aussies this is very important especially if China has a hard landing. Time will tell.

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