Menu

The resource curse hype

Paradox or red herring?

Erwin Bulte | September 26, 2007

I am the proud father of three little boys, and have the privilege to learn a bit about human nature as I watch them grow up. Currently the oldest two, aged 4 and 6, seem to have only one thing on their minds – Pokémon. For non-insiders, I am referring to artistically decorated paper cards featuring fantasy creatures with make-believe powers of destruction. Our kids go nowhere without their collection of precious cards, and neither do their friends. It is common to see groups of children sitting together, exchanging cards and commenting on each others’ latest conquests. For them, Pokémon is real, and they are unaware of the fact that they are in the middle of an enormous hype.

Obviously, hypes are serious business, and not only for children. The entertainment and fashion industries would not be able to survive without them. Perhaps less obvious for most people is that political science is not immune to them either.

One of the more potent hypes in the domain of development is the so-called resource curse hypothesis. This concerns the paradoxical finding that resource-rich countries appear to grow more slowly than resource-poor ones. Political scientists studying major oil exporters had hinted at the phenomenon before, but matters really got out of hand when Jeffrey Sachs and Andrew Warner unearthed the curse in a statistical analysis. Surely having more of a good thing cannot be bad. Or can it? Everyone likes a paradox, and researchers flocked to try to explain this puzzling phenomenon.

The snowball started rolling. Some researchers suggested an adverse relationship between resource abundance and democracy, and others did the same for resources and civil conflict. The World Bank and the International Monetary Fund became interested in the topic, and NGOs such as Save the Children and Oxfam started mentioning the curse in their communications with the public.

Flurry

A flurry of theoretical and empirical work followed. Gradually, some structure began to emerge, and the rough contours of a consensus view started to develop. I am editor of three economics journals, and many manuscripts cross my desk. I was able to observe the evolution of this microcosm from up close. Early analysts blamed the vagaries of the international markets for primary products, or the so-called ‘Dutch disease’. Then a follow-up group pointed at rent seeking. Finally, the idea dawned that resource wealth might erode institutional quality. Resource wealth might trigger corruption and invite grabbing, or enable undemocratic autocrats to retain their grip on power.

This is of course a beautiful story. Moreover, it is believable, because we can all think of high-profile examples, such as Nigeria, Venezuela or the Democratic Republic of Congo. But of course there are counter-examples as well – think of Botswana, Norway or Malaysia. Now that the dust is settling, it is about time to ask whether the new consensus story is actually true.

The World Bank recently released a set of data on the resource wealth of a wide range of countries. Together with a PhD student, I played with these data and found the exact opposite of the standard curse result. Resource wealth is positively associated with both economic growth and institutional quality. How could that be? We then revisited the earlier papers, and it dawned on us that the resource abundance variable used in other studies is not measuring abundance at all. The Sachs–Warner resource measure is simply the ratio of primary exports divided by national income. But of course this is a measure of dependence (the extent to which a country is dependent on exports of resources) and not of abundance (which should be a stock variable).

On closer inspection we found that the causation is opposite to that usually claimed in the curse literature. There is no evidence that resource-dependent countries end up with slow growth and bad institutions. Rather, countries with bad institutions attract little investment, and as a result they grow more slowly and remain dependent on exports of commodities. But this is not a paradox at all.

It is hard to shake off the feeling that the curse literature has been barking up completely the wrong tree. In their rush to avoid being scooped, many good analysts have spent their valuable time chasing a red herring. A hype of Pokémon-like proportions, but infinitely more costly in terms of the real issues in development that have been left unaddressed.

----------------------------------------------------

C.N. Brunnschweiler and E.H. Bulte (2008) The resource curse revisited and revised: A tale of paradoxes and red herrings. To appear in Journal of Environmental Economics and Management.

References

Acemoglu, D., S. Johnson, and J. Robinson, 2001. The colonial origins of comparative development: An empirical investigation. American Economic Review 91: 1369-1401.

Acemoglu, D., S. Johnson, J. Robinson and P. Yared, 2005. Income and democracy. Working paper, Massachusetts Institute of Technology.

Alexeev, M. and R. Conrad, 2005. The Elusive Curse of Oil. Terry Sanford Institute of Public policy, Duke University, Working Paper Series SAN05-07

Andersen, J. and S. Aslaksen, 2006. Constitutions and the Resource Curse, Norwegian University of Science and Technology, NTNU, Department of Economics, Discussion Paper.

Atkinson, G. and K. Hamilton, 2003. Savings, growth and the resource curse hypothesis. World Development 31: 1793-1807

Baland J.M. and Francois, P., 2000. Rent seeking and resource booms. Journal of Development Economics 61: 527-42.

Barro, R., 1996. Democracy and Growth. Journal of Economic Growth 1: 1-27

Barro, R., 1999. The Determinants of Democracy. Journal of Political Economy 107: 158-183

Beck, T., G. Clarke, A. Groff, P. Keefer, and P. Walsh, 2005. New tools in comparative political economy: The database of political institutions. World Bank Economic Review 15: 165-176.

Bohn, H. and R.T. Deacon, 2000. Ownership risk, investment and the use of natural resources. American Economic Review 90: 526-549

Boschini, A.D., J. Pettersson and J. Roine, 2004. Resource curse or not: A question of appropriability, Stockholm University, Department of Economics, mimeo.

Boyce, J.R. and J.C.H. Emery, 2006. What can exhaustible resource theory tell us about per capita income growth in resource intensive economies? University of Calgary, Department of Economics, mimeo.

Bravo-Ortega, C. and J. De Gregorio, 2005. The relative richness of the poor? Natural resources, human capital and economic growth, World Bank Working Paper Series No. 3484.

Brunnschweiler, C.N., 2007. Cursing the blessings? Natural resource abundance, institutions, and economic growth. World Development forthcoming.

Bulte, E.H., R. Damania and R.T. Deacon, 2005. Resource intensity, institutions and development. World Development 33: 1029-1044

Chand, S. and K. Moene, 1999. Controlling fiscal corruption. World Development 27: 1129-1140.

Clarida, R.H. and R. Findlay, 1992. Government, trade and comparative advantage. American Economic Review (Papers and Proceedings) 82: 122-127.

Collier, P. and A. Hoeffler, 1998. On Economic causes of Civil War. Oxford Economics Papers 50: 563-573.

Davis, G.A., 1995. Learning to love the Dutch disease: Evidence from the mineral economies. World Development 23: 1765-1779.

Davis, G.A., 1998. The minerals sector, sectoral analysis, and economic development. Resources Policy 24: 217-228.

Ding, N. and B.C. Field, 2005. Natural resource abundance and economic growth. Land Economics 81: 496-502.

Djankov, S., J.G. Montalvo and M. Reynal-Querol, 2005. The Curse of Aid. World Bank, Washington DC.

Durham, J.B., 1999. Economic growth and political regimes. Journal of Economic Growth 4: 81-111.

Easterly, W. and R. Levine, 2003. Tropics, germs, and crops: How endowments influence economic development. Journal of Monetary Economics, 50, 3-39.

Edwards, S., 1998. Trade, productivity and growth: What do we really know? EconomicJournal 108: 383-398.

Findlay, R. and Lundahl, M., 2001. Natural resources and economic development: The 1870–1914 experience, in Richard M. Auty (ed.), Resource Abundance and Economic Development. Oxford: Oxford University Press.

Frankel, J.A. and D. Romer, 1999. Does trade cause growth? American Economic Review 89: 379-399.

Glaeser, E.L., R. La Porta, F. Lopez-De-Silanes and A. Shleifer, 2004. Do institutions cause growth? Journal of Economic Growth 9: 271-303

Greene, W.H., 2003. Econometric analysis, 5th ed. Upper Saddle River, NJ: Prentice-Hall.

Gylfason, T., 2001. Natural Resources, Education and Economic Development. European Economic Review 45: 847-859

Harford, T. and M. Klein, 2005. Aid and the Resource Curse. The World Bank Group, Private Sector Development Vice Presidency, Note # 291, Washington D.C.

Hausmann, R and R. Rigobon, 2002. An Alternative Interpretation of the ‘Resource Curse’: Theory and Policy Implications. NBER Working Paper Series, WP 9424, Cambridge: National Bureau of Economic Research.

Hodler, R., 2006. The curse of natural resources in fractionalized countries, European Economic Review, In Press.

Institute of Geological Services (IGS), 1978. World Mineral Statistics 1970-1974: Production, Exports, Imports, London: Her Majesty’s Stationery Office

Isham, J. L. Pritchett, M. Woolcock and G. Busby, 2005, The Varieties of Resource Experience: Natural Resource Export Structures and the Political Economy of Economic Growth. World Bank Economic Review 19: 141-174.

Jensen, N. and L. Wantchekon, 2004. Resource wealth and political regimes in Africa. Comparative Political Studies 37: 816-841.

Karl, T. 1997. The paradox of plenty: Oil booms and petro-states. Berkeley: University of California Press.

Knack, S. and P. Keefer, 1995. Institutions and Economic Performance: Cross Country Tests Using an Alternative Institutional Measure. Economics and Politics 7: 207-227.

Kaufmann, D., A. Kraay, and M. Mastruzzi, 2005. Governance matters IV: governance indicators for 1996-2004. World Bank Policy Research Working Paper Series, No. 9424

Ledermann, D. and W. F. Maloney, 2003. Trade structure and growth. World Bank Policy Research Working Paper No 3025.

Leite, C and J. Weidmann, 2002. Does Mother Nature corrupt? Natural resources, corruption and economic growth. Chapter 7 in Abed, G. and S. Gupta (eds.): Governance, Corruption, and Economic Performance, Washington DC: International Monetary Fund, 159-196.

Manzano, O. and R. Rigobon, 2001. Resource curse or debt overhang? Cambridge MA: NBER Working Paper No W8390.

Matsen, E. and R. Torvik, 2005. Optimal Dutch Disease. Journal of Development Economics 78: 494-515.

Matsuyama, K., 1992. Agricultural productivity, comparative advantage and economic growth, Journal of Economic Theory 58: 317-334.

Mehlum, H., K. Moene and R. Torvik, 2006. Institutions and the resource curse. Economic Journal 116: 1-20.

Miguel, E, S. Satyanath and E. Sergenti, 2004. Economic shocks and civil conflict: an instrumental variables approach. Journal of Political Economy 112: 725-753.

Mookherjee, D., 1997. Wealth Effects, Incentives and Productivity. Review of Development Economics 1: 116-133.

Neumayer, E., 2004. Does the “resource curse” hold for growth in genuine income as well? World Development 32: 1627-1640.

Norman, C.S., 2006. Rule of law and the resource curse: abundance versus intensity, Johns Hopkins University, mimeo.

Papyrakis, E. and R. Gerlagh, 2004. The resource curse hypothesis and its transmission channels. Journal of Comparative Economics 31, 181-193.

Persson, T., 2005. Forms of democracy, policy and economic development. NBER Working Paper No. 11171.

Persson, T., G. Roland and G. Tabellini, 2000. Comparative politics and public finance. Journal of Political Economy 108: 1121-1141.

Persson, T and G. Tabellini, 2003. The Economic Effects of Constitutions: What do the Data Say? Cambridge MA: MIT Press.

Persson, T. and G. Tabellini, 2004. Constitutional rules and fiscal policy outcomes. American Economic Review 94, 25-46.

Prebisch, R. 1950. The economic development of Latin America and its principal problems. New York: United Nations.

Przeworski, A. and F. Limongi, 1993. Political regimes and economic growth. Journal of Economic Perspectives 7: 51-69.

Robinson, J.A., R. Torvik and T. Verdier, 2006. Political foundations of the resource curse. Journal of Development Economics 79: 447-468.

Rodrik, D., 2001. The global governance of trade as if development really mattered. Trade and Human Development Series, New York: UNDP.

Rodrik, D., A. Subramanian and F. Trebbi, 2004. Institutions rule: the primacy of institutions over geography and integration in economic development. Journal of Economic Growth 9, 131-165.

Ross, M.L., 1999. The political economy of the resource curse. World Politics 51, 297-322.

Ross, M.L., 2001a. Does Oil Hinder Democracy? World Politics 53, 325-361.

Ross, M.L., 2001b. Timber booms and institutional breakdown in Southeast Asia. Cambridge: Cambridge University Press.

Sachs, J.D and A.M. Warner, 1995. Natural resource abundance and economic growth. NBER Working Paper No. 5398.

Sachs, J.D and A.M. Warner, 1997. Natural resource abundance and economic growth, CID and Harvard Institute for International Development, Mimeo.

Sachs, J.D and A.M. Warner, 1999. The big push, natural resource booms and growth. Journal of Development Economics 59: 43-76.

Sala-i-Martin, X. and A. Subramanian, 2003. Addressing the natural resource curse: an illustration from Nigeria. NBER Working Paper No. 9804.

Sala-i-Martin, X., G. Doppelhofer and R. Miller, 2004. Determinants of long-term growth: A Bayesian averaging of classical estimates (BACE) Approach. American Economic Review 45: 827-838

Sokoloff, K.L and S.L. Engerman, 2000. Institutions, factor endowments and paths of development in the new world. Journal of Economic Perspectives 14, 217-232.

Stijns, J., 2005. Natural resource abundance and economic growth revisited. Resources Policy 30: 107-130.

Tornell, A. and P. Lane, 1999. The voracity effect, American Economic Review 89: 22-46

Torvik, R., 2002. Natural resources rent seeking and welfare, Journal of Development Economics 67: 455-70.

Williamson, O., 2000. The new institutional economics: taking stock and looking ahead. Journal of Economic Literature 38: 595-613

World Bank, 1997. Expanding the measure of wealth: indicators of environmentally sustainable development. Environmentally Sustainable development Studies and Monographs Series No. 17.

Wright, G. and Czelusta, J., 2004. Why economies slow: The myth of the resource curse. Challenge 47: 6-38

Yanikaya, H., 2003. Trade and economic growth: A cross country empirical investigation. Journal of Development Economics 72: 57-89.

Zalik, A., 2004. The Niger Delta: “petro violence” and “partnership development”. Review of African Political Economy 101: 401-424.

Photo credit main picture: HH / Magnum Photos

Inclusive Economy

Theme

Inclusive Economy

Research article

Summary

I am the proud father of three little boys, and have the privilege to learn a bit about human nature as I watch them grow up. Currently the oldest two, aged 4 and 6, seem to have only one thing on their minds – Pokémon. For a lot of children, who sit together, exchanging cards and commenting on each others’ latest conquests, Pokémon is real, and they are unaware of the fact that they are in the middle of an enormous hype.

About the author

Related articles

A curse with no cure?
Special report: Collective self-interest
Embracing inclusive growth
Stalling growth and development