Despite the presence of natural resources seeming implicitly advantageous, resource rich economies have shown very little economic growth and have often seen negative affects from their discovery. For this essay a natural resource is limited to resources that can be mined, such as oil, gold, diamonds and many more, rather than the smaller natural commodities such as soil type or a temperate climate - which have a little effect on the economy. Natural resource wealth ‘can be bad for growth and bad for democracy’, in what has become to be known as the ‘resource curse’. The curse has effects such as loss of foreign investment and crowding out caused by the Dutch disease, and can also have a direct link to civil war and corruption through its change of incentives that strain democracy, stall political change and change institutions- all of which contribute to the slow growth of an economy.
The Dutch disease is one explanation for the slow growth of resource rich economies. The Dutch disease is a direct correlation between the exploitation of natural resources and the decline in the manufacturing sector of an economy. “resource exports lead to a rapid contraction of the non-resource traded goods sector.” this occurs because the discovery or price increase of a natural resource, such as oil, causes a spike in the strength of the countries currency due to an increased demand for these resources, this exposes the manufacturing sector to foreign competition as it becomes cheaper to import goods whilst increasing the price of exporting these goods to foreign buyers, this in turn causes a movement of labour and capital to the more profitable non-tradable sectors which “hurts domestic manufacturers” , and inevitably diminishes the traded good sectors. As Larsen (2004) conveyed it in ‘Escaping the resources curse and the dutch disease’ this slows the overall economic growth due to the loss of positive externalities from manufacturing which are not replaced by resource extraction industry, these externalities include innovative technological progresses, good management, learning-by-doing and industrial progress as a whole, which are essential to the growth of an economy.
The quality of the institutions within a country are a great determinant of the level of development of a country and the quality of the ruling government. In a normal, healthy state the government gets a share of the overall production, hence it has a great incentive to improve its institutions making the country a more valuable and viable investment for outside investors - hence increasing production and government returns. “oil and minerals in particular exert a negative and nonlinear impact on growth via their deleterious impact on institutional quality” the benefit to institutions does not exist in a resource rich economy as stated by Subramanian and Martin here. This can be explained by the fact that resource rich countries, where the states owns the resources, can have a government independent of their economy using revenues from natural resources - hence the government has no need to tax its citizens and therefore lacks incentive to develop or sustain quality institutions or to “promote protection of property rights as a way of getting wealth”, in summary the state has no incentive to help its people.
The counter effect of this is that the citizens also have no way to hold their government responsible for the slowly declining economic growth and poorly developed institutions, and therefore cannot request or protest for change through democracy. Political institutions quickly deteriorate in these circumstances and the wealthy few at the top can be susceptible to bribery and corruption - the worse case scenario developing from this would be the countries descent into civil war or a repressive military rule as occurred in Nigeria. The absence of strong property rights and the presence of corruption makes the country a less desirable investment and helps to discourage growth - meaning that the decline of institutions has a negative correlation with the countries economic growth.
The ultimate decline in the manufacturing sector and the externalities that are lost along with it cause a generally lower rank of labour skills and slows progress of labour industries other than that of the natural resource - hence have a long term negative affect on the growth of an economy. The decline in quality institutions can only eventually lead to corruption and government independence which is inevitably working against the future of economic growth for any countries economy. In conclusion, resource rich economies have grown so little due to the drastic change of incentives that their discovery causes.
Bibliography
Nancy Birdsall, Arvind Subramanian, Saving Iraq From Its Oil, (Foreign Affairs 2004)
Erling Larsen, Escaping the Resource Curse and the Dutch Disease, (Statistics Norway 2004)
Xavier Sala-i-Martin, Arvind Subramanian, Addressing the Natural Resource Curse: An Illustration from Nigeria, (National Bureau of Economic Research 2003)
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