The Resource Curse

By | Updated Feb 15, 2017 3:50 PM UTC

Striking gold or discovering oil would seem to guarantee instant fortune. Instead, it often leads to conflict, corruption and poverty. History is full of examples of countries whose natural-resource wealth led to less economic success. Revenue from extracting raw materials might be mismanaged or embezzled by government officials, or siphoned off by foreign corporations. The bonanza might crowd out investment in other parts of the economy and make goods and services more expensive. And the country’s fiscal and economic fate might hang on volatile global commodity prices, especially for smaller and less diverse economies. All told, local populations can be left with little to show for their resources except a degraded environment. Economists and social scientists call this phenomenon “the resource curse.” Many countries are trying to determine how to prevent or reverse it. 

The Situation

For a decade, international momentum has been building behind efforts to prevent corruption and improve management of natural-resource wealth through greater transparency. Fifty-one countries are in various stages of adopting a voluntary system that involves auditing corporate payments to make sure they match government revenue. In the U.S., however, the Republican-controlled Congress and the Donald Trump administration are headed in the opposite direction: On Feb. 14, Trump signed a measure revoking  U.S. Securities and Exchange Commission rules that would have required publicly traded energy and mining companies to disclose payments made to governments for access to natural resources. Trump's secretary of state, Rex Tillerson, had personally lobbied against the regulations as head of Exxon Mobil Corp. Canada and the European Union have adopted similar rules, aimed at uncovering the corrupt practices that can keep citizens from sharing in the wealth of their countries' resources. The average incomes of African countries, including Angola, Nigeria and Sudan, are low and their health indicators are poor, despite their abundance of oil, diamonds and other precious minerals. While Middle East oil exports prop up extensive welfare spending, the region’s petro-states remain vulnerable to price swings and their people subject to undemocratic regimes. Brazil continues to grapple with corruption and vast, dangerous slums, though it's rich in resources as varied as oil, iron ore, coffee and soybeans.

Source: World Bank

The Background

The British economist Richard Auty coined the term “resource curse” in a 1993 book investigating why resource-rich countries under-performed other developing economies. A 1995 study found that economies with high commodities exports grew more slowly from 1971 to 1989, even after controlling for variables such as initial per-capita income and investment rates. Notwithstanding a few success stories (such as Botswana), the negative correlation between raw-material exports and economic growth suggests that resource wealth at least doesn’t help. The most commonly suspected causes include under-investment in other industries (such as manufacturing), exposure to price swings, and concentration of wealth that discourages the development of rule of law and other conditions needed for a vibrant economy. The resource curse is sometimes lumped with the Dutch Disease, when an event like a commodity boom makes a country’s currency more expensive and its other goods less competitive, named for the Netherlands’ 1960s crisis after discovering natural gas in the North Sea.

The Argument

Researchers more recently have questioned the existence of a resource curse, suggesting that resource wealth helps growth after all. Others have suggested that what matters isn’t resource abundance but dependence, or the strength of a country’s institutions. Initiatives to lift the curse have become a source of friction between developed and developing countries in intergovernmental bodies and in the international energy and mining industries. Experiments with controlling prices, blocking foreign direct investment and capping exports sparked controversy and backlash. The risk is always that the measures might kill the proverbial golden goose. Countries have had better luck with rules to moderate government spending, sovereign wealth funds and lump-sum per-capita rebates. The newest discoveries, such as Ghana's 2007 oil find, are almost inevitably accompanied by discussion of what can be learned from the mistakes of the past.

The Reference Shelf

  • A Bloomberg View columnist’s take on the resource curse in Africa. 
  • A U.S. National Bureau of Economic Research survey paper on ways to address the resource curse.
  • A 2012 Council on Foreign Relations article about efforts to counteract the curse in Africa.
  • A Stanford University paper challenging the conventional account.
  • A platinum deal that supported despotism in Zimbabwe was the subject of a 2014 Bloomberg Businessweek article.

Isaac Arnsdorf contributed to the original version of this article.

First published Sept. 12, 2014

To contact the writer of this QuickTake:
Melissa Mittelman in New York at mmittelman@bloomberg.net

To contact the editor responsible for this QuickTake:
Paula Dwyer at pdwyer11@bloomberg.net