The Symptoms of the Resource Curse

Extractive Industries refer to the industry or sector that involves (non-regenerative) natural resources, such as minerals, oil and gas. Extractive industries can contribute significantly to a country’s economic development and often offers the first opportunities for foreign direct investment and private sector development. They generate government revenues, foreign exchange earnings, and employment. If managed well, revenues from oil, gas and mining could stimulate economic growth and social development.

However, many resource-rich countries are currently near the bottom of international human development indicator rankings and perform worse than resource-poor countries in economic, social, and environmental development and governance. This is what we call the ‘resource curse’.

High levels of corruption are associated with extractive industries, as well as conflict and war (see Table 1 for an overview of civil wars linked to resource wealth). Natural resources’ extraction increase chances of civil conflicts through the weakening of the state. The negative spiral of corruption, crime and war significantly hinders economic growth. Economies that are significantly dependent on oil and mineral wealth often have authoritarian rather than democratic forms of governance, and weak legal or regulatory frameworks. See for example figures 1 and 2. Figure 1 suggests that rule of law and the ration of natural resource exports (or natural capital) to national income (GNI) are greatly negatively correlated. This means that on average, if natural resource exports in a country are high, the rule of law is likely to be of relatively bad quality. The reverse is also true: if natural resource wealth in a country is low, then the quality of the rule of law tends to be better. Figure 2 shows a strong correlation between expropriation risk/corruption and natural capita. This suggests that natural resources have an adverse effect on income per capita through a worsening of institutional quality.

Resource-rich countries have little international trade, few incentives for the development of capital, a weak connection between the natural resource and other sectors of the economy, and limited economic diversification into competitive manufacturing industries. They also have very low investment rates, and low saving rates. Other economic symptoms of the curse are a decline in the competitiveness of non-resource economic sectors, macroeconomic vulnerability to fluctuations in world commodity prices and deteriorating government finances because of excessive government borrowing during ‘boom’ years.