Natural Resource Curse

Natural Resource Curse

Introduction

The curse of natural resources - the observation that countries rich in natural resources tend to perform badly - has been shown empirically and analyzed in a number of recent studies. These studies, which include Auty (1990), Gelb (1988), Sachs and Warner (1995, 1999), and Gylfason et al. (1999), among others, have emerged late in the 20th century, as evidence accumulated on the poor growth experience of resource -rich countries in the post-world-war II period. On an intellectual level, this issue first emerged as an important international issue during the inter-war period in Latin America, after many Latin American economies suffered from the global slump in commodity prices. However during this time and in the immediate post-war period, the skepticism about natural resource -led development was rooted in forecasts of declining global demand and prices. What the studies based on the post-war experience have argued is that the curse of natural resources is a demonstrable empirical fact, even after controlling for trends in commodity prices. Since so many poorer countries still have abundant natural resources, it is important to better understand the roots of failure in natural resource -led development.

Does the curse really exist?

Empirical support for the curse of natural resources is not bulletproof, but it is quite strong. First, casual observation suggests that there is virtually no overlap in the set of countries that have large natural resource endowments - and the set of countries that have high levels of GDP. Many resource -rich countries have been resource rich for a long time. If natural resources really do help development, why do not we see a positive correlation today between natural wealth and other kinds of economic wealth? Second, casual observation also confirms that extremely resource -abundant countries such as the Oil States in the Gulf, or Nigeria, or Mexico and Venezuela, have not experienced sustained rapid economic growth. In addition, empirical growth studies tend to confirm this casual evidence. The finding in repeated regressions using growth data from the post-war period is that high resource intensity tends to correlate with slow growth. This finding is not easily explained by other variables, since this empirical result survives the introduction of a long list of control variables. It is also not easily explained as an accident from the special experience of the Persian Gulf states, since most of these states drop out of regression samples for lack of data on other control variables. In addition the finding survives statistical procedures for eliminating unusual observations. For some examples of the evidence, Sachs and Warner (1997) show regression evidence of the curse of natural resources with as many as nine additional regressors, and Sachs and Warner (1995) show regression evidence for the curse after controlling for popular variables favored by four other empirical growth studies. In more recent work, Sala-i-Martin (1997) and Doppelhofer et al. (2000) classify natural resources as one of the ten most robust variables in empirical studies on economic ...