Resource curse

Definition

The resource curse is a paradoxical situation where countries rich in natural resources, such as oil and minerals, tend to experience less economic growth, less democracy, and worse development outcomes than countries with fewer natural resources. This phenomenon often leads to an over-reliance on resource extraction, which can negatively impact other sectors of the economy and hinder long-term sustainable growth.

5 Must Know Facts For Your Next Test

1. Countries with abundant natural resources often experience slower economic growth because they fail to diversify their economies, making them vulnerable to commodity price shocks.
2. The resource curse can lead to political instability as governments may become authoritarian and corrupt, focusing on extracting wealth rather than promoting democratic governance.
3. In many cases, regions with rich natural resources see increased inequality and social tensions, as wealth becomes concentrated among elites while the broader population remains impoverished.
4. Resource-dependent economies often suffer from a lack of investment in education and infrastructure since governments may rely on resource revenues instead of developing human capital.
5. Countries experiencing the resource curse frequently face challenges in establishing strong institutions that promote accountability and effective governance.

Review Questions

• How does the resource curse contribute to economic dependency and hinder diversification in resource-rich countries?
  • The resource curse creates a scenario where countries rely heavily on the extraction and export of natural resources for revenue. This dependency limits investment in other sectors like manufacturing and agriculture, as profits from resources dominate the economy. Consequently, when global commodity prices fluctuate or resources deplete, these countries often find themselves with weak alternative industries, leading to economic instability and vulnerability.
• Discuss the political implications of the resource curse on governance structures within affected nations.
  • The resource curse often leads to authoritarian governance structures as leaders exploit resource wealth to maintain power without accountability. This dynamic can suppress democratic movements since governments may prioritize short-term gains from resource extraction over long-term development strategies. Moreover, corruption can flourish in environments where vast revenues are poorly managed, further entrenching undemocratic practices and reducing civic engagement.
• Evaluate the potential strategies that resource-rich countries can implement to mitigate the effects of the resource curse and promote sustainable development.
  • Resource-rich countries can adopt various strategies to combat the resource curse. Diversifying their economies by investing in sectors like education, infrastructure, and technology can reduce reliance on volatile resource revenues. Establishing strong institutions that promote transparency and accountability is crucial for managing resource wealth effectively. Additionally, countries can implement sovereign wealth funds to manage revenue from natural resources sustainably, ensuring that benefits are equitably distributed and invested for future generations.

Related terms

Dutch disease:

Dutch disease refers to the economic phenomenon where an increase in revenues from natural resources causes a decline in other sectors of the economy, particularly manufacturing, due to currency appreciation and labor market shifts.

Rentier state: A rentier state is a country that derives a significant portion of its national revenues from the export of natural resources, often leading to a lack of economic diversification and reliance on external factors.

Economic volatility: Economic volatility refers to the degree of variation in economic performance over time, which can be exacerbated in resource-rich countries due to fluctuating commodity prices.