Resources: Blessing or Curse?

Have you ever come across people who became instantly rich, be it through winning the lottery or some other stroke of luck, only to squander their newfound wealth and end up in a worse financial state than they started? What if I tell you that countries are much like people?

Some nations are blessed with abundant natural resources that have the potential to drive economic growth, elevate living standards, and pave the way for development. However, there's a puzzling paradox at play.

Many resource-rich countries struggle to harness their resource wealth for the betterment of their people. Countries heavily reliant on resource exports as a proportion of their GDP tend to experience slower economic growth compared to their resource-poor counterparts. So, why is it?

Several theories have been proposed to explain why increasing economic dependence on natural resources is associated with poorer economic development. One such explanation is "Dutch Disease." Dutch Disease typically occurs in countries that experience a boom in a specific industry, often driven by an increase in natural resource prices or large resource discoveries, like oil, gas, or minerals.

As revenues from this resource sector pour in, the national currency appreciates. This may sound like a good thing, but it has significant repercussions. A stronger currency makes other exports more expensive for foreign buyers, causing a decline in industries outside the booming resource sector.

Over time, the country becomes increasingly reliant on the resource sector for its revenue and economic growth. When resource prices decline or the sector faces difficulties, it can lead to economic challenges, including job losses and budget shortfalls.

The term "Dutch Disease" unsurprisingly originates from the experience of the Netherlands after the discovery of vast natural gas deposits in the North Sea in 1959. The newfound wealth and massive exports of oil caused the value of the Dutch guilder to rise sharply. This made Dutch exports of all non-oil products less competitive on the global market, severely impacting sectors like manufacturing.

Venezuela is another unfortunate example of Dutch Disease and the phenomenon called the “resource curse”. The country's heavy reliance on oil exports led to a significant appreciation of its currency, the bolívar, causing unintended harm to other industries, particularly manufacturing and agriculture.

In 2015, a perfect storm hit Venezuela's oil-dependent economy. The significant drop in oil prices, a major revenue source, combined with decreased oil production due to a lack of maintenance and investment, triggered severe economic problems.

To sustain social spending, the Venezuelan government resorted to printing money, resulting in unprecedented levels of inflation. In late 2016 the inflation reached 800 percent and by 2018 it was estimated to be 80,000 percent. It is hard to pinpoint the exact progression of inflation after 2018, but estimates range from 380,000 percent to 1.35 million percent.

Venezuela's hyperinflation and currency devaluation devastated people's savings, leaving them uncertain about their future. But instead of dealing with the crisis, the Venezuelan government kept denying its existence. Chronic shortages of food and medicine, unemployment, corruption, human rights violations, political killings, gross economic mismanagement, and high dependence on oil all contributed to the worsening of the crisis.

By 2017, hunger reached a point where nearly 75 percent of the population had lost an average of over 19 pounds or 8 kg in weight. In 2019, a UN report estimated that 94 percent of Venezuelans lived in poverty.

Since 2015, over 7.7 million people have left Venezuela, in search of better and safer lives. And this is Venezuela, one of the founding members of OPEC. The country’s heavy reliance on natural resource export, mismanagement of the resource revenues, corrupt practices and non-diversification of the economy lead to catastrophic outcomes.

Other explanations about the resource curse and how it leads to poor economic outcomes include inequality, political power, and immense wealth concentrated in the hands of few. A good example of a resource-cursed economy is Nigeria, Africa's largest oil producer. Despite its vast oil and mineral wealth, Nigeria too faces extreme poverty, corruption, and political instability. Oil revenues have not translated into better living conditions for most Nigerians. Today, Nigeria has the awful distinction of being the world capital of poverty.

When it comes to the resource curse, it's not just oil-rich countries that face its challenges. The list of countries suffering from the resource curse goes on and on. So, are countries rich in resources doomed? Is this a vicious cycle that no one can break free from?

As it turns out, there is a way. Countries, such as Malaysia, Botswana, and Thailand have shown just how a resource curse can be turned into a blessing. Those countries have shown that the key to successful resource-based development appears to be sound policies and favorable institutions, especially those aimed at reinvesting resource rents in more productive and dynamic sectors of the economy, diversifying the economy, investing in people, and developing political and legal institutions.

For more information, please watch our video.

See also: Barbier, Edward (2006). Natural Resources and Economic Development.