Resource Curse

What Is the Resource Curse?

The resource curse is a term used to describe a paradoxical situation in which a country underperforms economically, despite being home to valuable natural resources. The resource curse may also be called the resource trap or the paradox of plenty.

There are many potential explanations for this phenomenon, but, generally speaking, it is thought to be caused by too much of the country’s capital and labor force being 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.

How the Resource Curse Works

The resource curse, or resource trap, is a paradoxical situation in which countries with an abundance of non-renewable natural resources experience stagnant economic growth or even economic contraction. The resource curse 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.

At times, the resource curse can 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. If too much labor and capital flows into just a small handful of sectors, it may weaken the rest of the economy and harm the country overall.

Countries with more diversified economies tend to weather global economic cycles better than countries with concentrated economies.

This type of problem is often observed in developing economies that have recently discovered large natural resource deposits. Once a natural resource is discovered, available investment capital tends to gravitate to this industry.

The 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.

Real World Examples of the Resource Curse

Consider the case of Angola. Located on the west coast of Southern Africa, Angola is home to some 30 million citizens. Its economy, however, is heavily commodity-dependent, with oil products accounting for roughly 90% of the country’s exports.

Angola’s economy 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.

Another country that relies heavily on selling oil to other nations is Saudi Arabia. Fortunately, unlike Angola, Saudi Arabia has taken steps to steadily diversify its economy away from crude oil exports. In 2010, crude oil accounted for 75% of Saudi Arabia’s total exports. Fast forward to 2018 and this figure had declined to just over 55%.

In the intervening years, Saudi Arabia succeeded in increasing its exports of various manufactured goods that are related to crude oil but lie further up the value chain. In doing so, Saudi Arabia was able to reduce its reliance on crude oil and take steps toward developing its economy, making it less vulnerable to the resource curse.