Definition, Overview, and Examples of the Resource Curse

What Is the Resource Curse?

The resource curse is a term that describes the perplexing scenario where a country fails to thrive economically despite possessing valuable natural resources. This phenomenon typically occurs when a nation overly relies on a few industries that are dependent on these resources, neglecting to invest in other sectors. Consequently, fluctuations in commodity prices can lead to prolonged economic underperformance.

Key Takeaways

Countries experiencing the resource curse struggle economically despite having valuable natural resources.
The resource curse often results from an excessive focus on a resource-dependent industry.
Relying heavily on the price of a single commodity can hinder economic development.
Diversifying the economy can help prevent the resource curse.
While Angola and Saudi Arabia are affected by the resource curse, Saudi Arabia has made successful diversification efforts.

How the Resource Curse Works

The resource curse manifests as a paradoxical situation in oil-producing or mineral-rich countries where economic growth stagnates or declines. This occurs when a nation overly invests in a single sector, such as mining or oil, while neglecting diversification in other crucial industries.

Also known as a resource trap or paradox of plenty, the resource curse can also be fueled by government corruption. When wealth is concentrated in a few sectors, governments may exploit regulatory power, leading to detrimental effects on the economy as a whole.

This phenomenon is commonly observed in developing economies upon the discovery of substantial natural resources, as investments tend to gravitate towards the newly found industry.

Following the discovery of a natural resource, investment capital flows into the industry, offering economic growth and prosperity initially. However, this heavy reliance on a single commodity’s price can hinder overall economic progress in the long term.

The term “resource curse” was coined by Richard Auty in his 1993 book on the subject.

Special Considerations

The resource curse is particularly prominent in petroleum-rich nations. A study by the University of California, Los Angeles, highlighted the adverse impacts of natural resource wealth on politics, especially in oil-rich regions.

The study identified three major negative effects in these countries:

Empowering authoritarian regimes
Increasing corruption
Fueling conflicts in lower- and middle-income countries

Across Africa, Latin America, the Middle East, and the former Soviet Union, the term “resource curse” finds relevance due to observed economic challenges.

The necessity of diversification becomes apparent as over-reliance on a limited number of resources can severely impact an economy.

Economies with diversified sectors tend to better withstand global economic fluctuations compared to those reliant on a single industry.

Real-World Examples of the Resource Curse

Angola

Angola, situated in Southern Africa, heavily relies on oil and gas resources despite having a population of 34 million. Approximately 75% of the country’s national revenues come from the oil and gas sector.

This heavy reliance on oil renders Angola highly vulnerable to price fluctuations, reflecting a classic case of the resource curse.

Saudi Arabia

Saudi Arabia, a major oil exporter, has actively diversified its economy to reduce its vulnerability to the resource curse. While its oil exports are substantial, the nation has made strides in diversifying its economy.

By enhancing exports of petroleum-related goods further up the value chain, Saudi Arabia has reduced its reliance on crude oil, fostering economic development and resilience against the resource curse.

Noteworthy industries flourishing in Saudi Arabia include: