Frankel surveys the natural resource curse literature

Michael Giberson

We’ve mentioned the “natural resource curse” a few times here.  Harvard’s Jeffrey Frankel provides a recent and thorough overview of the literature in “The Natural Resource Curse: A Survey” with a helpful focus on what policies resource rich companies can consider to mitigate the curse. Abstract:

It is striking how often countries with oil or other natural resource wealth have failed to grow more rapidly than those without. This is the phenomenon known as the Natural Resource Curse. The principle is not confined to individual anecdotes or case studies, but has been borne out in econometric tests of the determinants of economic performance across a comprehensive sample of countries. The paper considers six aspects of commodity wealth, each of interest in its own right, but each also a channel that some have suggested could lead to sub-standard economic performance. They are: long-term trends in world commodity prices, volatility, crowding out of manufacturing, civil war, poor institutions, and the Dutch Disease. The paper concludes with a consideration of promising ideas for institutions that could help a country that is rich in, say, oil overcome the pitfalls of the Curse and achieve good economic performance. They include indexation of oil contracts, hedging of export proceeds, denomination of debt in terms of oil, Chile-style fiscal rules, a monetary target that emphasizes product prices, transparent commodity funds, and lump-sum distribution.

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3 thoughts on “Frankel surveys the natural resource curse literature

  1. My guess. Natural resources are cursed because they invite government intervention.

    Government can tax (say) agriculture and manufacturing, but they can’t totally control these complex activities without destroying them.

    They CAN completely control a resource that is localized on particular land, and which can be sold as-is, either directly or to favored developers. That is, the value of the resource in the ground is a large fraction of the value after extraction. (Not true for agriculture and manufacturing).

    This empowers a government of complete control, which squashes more complex development as a side effect.

    Advising such a government is a waste, regarding the niceties of better resource management. As an institution, that government doesn’t care. The scramble to divide the proceeds politically squashes any individual visions of better management.

  2. I’m perhaps slightly more optimistic about “advising such a government.” Any government is a coalition of interests. Good advice about maximizing the value of a resource may help coalition members who have longer-term interests in the country’s economy at the expense of those seeking short term division of spoils.

  3. The Resource Curse is operative independent of government. It exerts a pull to human and productive capital towards a commodity that is inherently cyclical. Thus the entire economy becomes more cyclical.

    Also, the resource becomes debilitating towards the development of entrepreneurial initiative, because economies of scale require significant bureaucracy and subsequent stifling of innovation.

    BTW, the resource curse operates withing familie as well as political entities. It is rare to see the children or grandchildren of a founder become as accomplished as him/her, with only a few notable exceptions. I would be surprised to see Gates’, Buffet’s or Bezos’ children or grandchildren become prominent or accomplished in any meaningful way. Paris Hilton is the more likely model.

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