What Is the Resource Curse?
The term resource curse refers to a paradoxical situation in which a country underperforms economically, despite being home to valuable natural resources.A resource curse is generally caused by too much of the country’s capital and labor force concentrated in just a few resource-dependent industries. By failing to make adequate investments in other sectors, countries can become vulnerable to declines in commodity prices, leading to long-run economic underperformance.
Key Takeaways
- The resource curse refers to countries that underperform economically, despite benefitting from valuable natural resources.
- It mainly occurs when a country focuses all of its production means on a resource-dependent sector.
- This can lead to becoming very dependent on the price of a particular commodity, making it difficult to continue developing the economy.
- Diversifying a nation's economy can help it avoid a resource curse.
- Angola and Saudi Arabia both suffer from the resource curse, although Saudi Arabia has had success diversifying in recent years.
How the Resource Curse Works
The resource curse is a paradoxical situation in which countries with an abundance of non-renewable natural resources experience stagnant economic growth or even economic contraction. Although there may be multiple reasons to explain why a resource curse happens, the phenomenon mainly occurs when a country begins to focus all of its production means on a single industry, such as mining or oil production, and neglects investment in other major sectors.
Also called a resource trap or paradox of plenty, it may also result from government corruption. If a large share of national wealth is concentrated in just a few industries, the government might abuse its regulatory powers, such as by awarding valuable contracts based on bribes. An overabundance of labor and capital that flow into just a small handful of sectors may weaken the rest of the economy and harm the country overall.
This type of problem is often observed in developing economies that discover large natural resource deposits. Once a natural resource is discovered, available investment capital tends to gravitate to this industry.
This new industry becomes a source of economic growth and relative economic prosperity, offering attractive wages, and encouraging citizens to invest their savings in the new industry. In the long run, this dynamic can lead to countries becoming very dependent on the price of that particular commodity, subsequently making it difficult to continue developing the economy.
The term resource curse is attributed to Richard Auty, who wrote about the concept in his 1993 book titled Sustaining Development in the Mineral Economies: The Resource Curse Thesis.
Special Considerations
The resource curse is considerably noticeable when it comes to one particular natural resource: petroleum. The political science department at the University of California, Los Angeles, conducted a study, analyzing the correlation between natural resource wealth and politics. It concluded that a resource curse did exist in petroleum-rich countries.
According to the study, three harmful (and largely unresolved) effects were evident in these countries:
- Boosting authoritarian regimes
- Increasing corruption
- Triggering conflict in low- and middle-income nations
The study cited the use of the term resource curse in countries in Africa, Latin America, the Middle East, and the former Soviet Union.
This brings out the importance of diversification. If a country is too dependent on one or two resources, it can have severe and negative effects to its economy.
Countries with more diversified economies tend to weather global economic cycles better than countries with concentrated economies.
Real-World Examples of the Resource Curse
Angola
Located on the west coast of Southern Africa, Angola is home to some 34 million citizens. Its economy, however, is heavily dependent on commodities—particularly oil and gas resources. According to the International Trade Administration, roughly 75% of Angola's national revenues come from the oil and gas sector.
Angola’s economy, though, is extremely vulnerable to any large or sustained decline in the price of oil, since virtually all of the nation’s wealth is reliant on this one sector. In this sense, Angola may have been cursed by its large oil reserves.
Saudi Arabia
Another country that relies heavily on selling oil to other nations is Saudi Arabia. The value of the kingdom's oil exports exceeded $202.1 billion in 2021. But unlike Angola, Saudi Arabia took steps to steadily diversify its economy and move away from its resource curse.
Saudi Arabia succeeded in increasing its exports of various petroleum-related manufactured goods but these lie further up along the value chain. In doing so, the nation reduced its reliance on crude oil and take steps toward developing its economy, making it less vulnerable to the resource curse.
Some of the most notable industries that are flourishing include:
- Financial: The Financial Sector Development Program was launched in 2017. Its aim was to boost the country's private sector, develop a capital market, and enhance financial planning.
- Travel, Tourism, and Entertainment: The primary goal is to make the kingdom a major destination for tourists. The kingdom also aims to boost household spending when it comes to entertainment and leisure, notably through the new construction of movie theaters and a stake in Live Nation.
