There exists a common paradox within international political economy in which states who benefit from an abundance of natural resources in their sovereign territory often do not benefit from economic stabilization and growth. In 1959, after discovering the existence of natural gas in the Netherlands, the state aimed to profit off of such extensive natural resources by exporting it to the international market. However, this sole focus on natural gas exports hurt the state’s ability to export other profitable products, ultimately leading to a recession and a term coined the “Dutch disease” (Ebrahim-zadeh, 2003). This “Dutch disease” plagues the system as a whole, weakening the body in the form that is known amongst political economists as the “resource curse” or “paradox of plenty”. This article, therefore, aims to explain the paradox of plenty as it exists within the realm of international political economy—that of states with high natural resources that would theoretically make them wealthy paradoxically being victim of a slower economic growth and underdevelopment as compared to states without such resources. In order to do so, the article will provide specific examples throughout history and in the contemporary world political economy.
Although paradoxical at first, the resource curse can be best understood as a concern in the world political economy in which states rich in natural resources such as gas or minerals are unable to use these exports to gain high levels of economic wealth and development. They are often witness to higher levels of underdevelopment as compared to states which do not have such natural resources. One of the most influential studies regarding the phenomenon, Natural Resource Abundance and Economic Growth, a 1995 paper published by researchers Sachs and Warner, finds that “economies with a high ratio of natural resource exports to GDP in 1971… tended to have low growth rates during the subsequent period… hold[ing] true even after controlling for variables found to be important for economic growth, such as initial per capita income, trade policy, government efficiency, investment rates, and other variables” (Sachs and Warner, 1995, p. 2). Comparing “resource-poor” economies to those of “resource-rich” economies has shown that those economies lacking such natural resources such as agriculture, minerals, and fossil fuels often fare better in matters of growth and economic development.
Sachs and Warner evidenced such a pattern across ninety-seven developing countries; however, this pattern extends beyond the contemporary period in which it was written and can be traced back throughout history: “Japan, Korea, Taiwan, Singapore and Hong Kong are rocky islands (or peninsulas) that were endowed with very little in the way of exportable natural resources. Nevertheless, they achieved Western level standards of living. Many countries in Africa, the Middle East and Latin America are endowed with oil, minerals, or other natural resources, and yet have experienced much less satisfactory economic performance” (Frankel, 2012, p. 4). A common historical example of the resource curse often cited is the instance of Spanish imperialism in Latin America during the sixteenth and seventeenth centuries, in which the viceroyalties of New Spain, Peru, Rio de la Plata, and Nueva Granada often had to extract tribute and material resources from their commonwealth back to the peninsula of Spain, leading to the colonies being significantly less developed and wealthy than its colonizer Spain (Baten, 2016). Specifically, the territory of Venezuela both historically and in modernity is often cited for its role as a country rich in natural resources such as gas, yet nowhere near enjoying wealth status seen by other states within the region.
In contemporary political economy, the IMF has classified 51 states in the system as “resource-rich”, citing twenty percent of their revenue or exports from natural resources (Venables, 2016, p. 2). Out of these 51, 29 states are low and lower-middle income, with “25 of these countries, resources make up more than three-quarters of exports, and in 20 of them resources provide more than half of government revenues” (Venables, 2016, p. 2). Existing within these low and lower-middle income 29 states are certain distinguishable characteristics which set it apart from other states enjoying high levels of resources and help to partially explain this curse: “extreme dependence on natural resources, export sales, or both”; low rates of saving in these low-income resource-rich states; poor growth performance; and highly volatile resource revenues due to the variability of commodity prices in the economy (Venables, 2016, pp. 163-166). These four characteristics are common in all 29 of these states, with countries such as the Democratic Republic of the Congo trading in minerals and oil showing a 94% natural resource export as compared to total exports, with this fiscal revenue only making up 30% of the total fiscal revenue. Many states on this list show a comparable pattern of high natural resource exports, but low fiscal revenue results.
Although there exists numerous hypotheses as to why such a negative relationship exists between natural resources and economic growth, Sachs and Warner point to one offered by political economists Lane and Tornell. Their explanation falls on a dependence on “political channels of influence”, in which “resource-rich economies are subject to more extreme rent-seeking behavior… lead[ing] to a feeding frenzy in which competing factions fight for the natural resource rents, and end up inefficiently exhausting the public good” (Sachs and Warner, 1995, p. 5). Such competing factions within society effectively end up stifling growth and development. While compelling, the Dutch disease model as referenced earlier in the introduction provides a more economic approach to understanding the phenomenon: “...the greater the natural resource endowment… the smaller the allocation of labor and capital to the manufacturing sector… capital and labor that otherwise might be employed in manufacturing are pulled into the non-traded goods sector” (Sachs and Warner, 1995, p. 7), becoming a new source of slow growth. Despite varying hypotheses regarding why such a resource curse exists and plagues many developing countries, there still remains to be seen a singular hypothesis that could sufficiently explain why it occurs.
Liberal economic theorists Acemoglu and Robinson posit that economic and political institutions are the inherent cause of growth and development across states in the international sphere, with such institutions varying across societies because of both their political makeup (of democracy versus authoritarianism) and their historical status in the larger world of colonialism (Acemoglu and Robinson, 2008, p. 1). Specifically, Acemoglu and Robinson posit the difference between “extractive” and “settler” states during European colonialism, stating that the institutions in such extractive colonies in Africa, Latin America, and South Asia “did not introduce much protection for private property, nor did they provide checks and balances against the government”, as European colonizers did not intend for these colonies to be little more than a method in which to extract extensive natural resources (Acemoglu and Robinson, 2008, p. 4). They compare these relative absence of protective institutions to “settler colonies” such as the United States and Canada, where permanent populations settled in large droves and where “the emphasis was on the enforcement of property rights for a broad cross section of the society, especially smallholders, merchants, and entrepreneurs” (Acemoglu and Robinson, 2008, p. 4). These settler colonies were more permanent than extractive colonies, where the main goal was to set up a highly centralized state in the short term to extract as much natural resources for industrialization as possible, due to the large populations which permanently settled there.
According to Acemoglu and Robinson, once extractive colonies—and now modern day states—are burdened by the resource curse precisely because they never developed liberal economic institutions such as free markets and property rights in their past. Such states will remain entrenched within this period of slow development and growth because of the group with de facto political power, “[who] push for economic and political institutions favourable to its interests, reproducing the initial disparity” and remain sceptical regarding reform and economic liberalization beyond the sale of natural resources if the de facto power does not change (Acemoglu and Robinson, 2008, p. 7). As such, liberal theorists would likely believe that the resource curse, while a prevalent issue in the international economy, could be diminished if lower-income developing states liberalize and develop institutions which are conducive to progress such as property rights and freer markets—but only if the de facto political power benefitting is fundamentally changed. In this lens, low levels of economic development can ultimately be explained by domestic policies enacted by the de facto political power which constrain free markets and narrowly curtail exporters to focus on distributing natural resources.
OPEC founder Juan Pablo Perez Alfonso once remarked: “It [oil] is the devil’s excrement. We are drowning in the devil’s excrement” (Ross 1999, p. 297). These mere two sentences summarize the paradox of plenty as experienced by these states afflicted by the curse: seemingly drowning or overwhelmed in material resources which do not pay back in wealth accumulation nor economic development for the state. To be fortunate enough to have such considerable natural resources, yet otherwise unable to use them to further economic development and growth because of ineffective government leadership and an inefficient division of labor, can sure enough appear to be the work of the devil. Even so, economic theorists have attempted to find answers to the resource curse within political history, drawing back to the pervasive effects of colonialism on its subjugated states. As of now, despite the liberal economic’s approach to the issue, no tangible consensus has been reached—further allowing for this paradox to propagate.
Acemoglu, D., & Robinson, J. (2008). The role of institutions in growth and development (Vol. 10). Washington DC: World Bank.
Ebrahim-Zadeh, C. (2003). Dutch Disease: Too much wealth managed unwisely. Finance & Development, 40(1), 50-50.
Frankel, J. A. (2012). The Natural Resource Curse: a Survey of Diagnoses and Some Prescriptions. John F. Kennedy School of Government, Harvard University. https://dash.harvard.edu/handle/1/8694932.
Ross, M. L. (1999). The political economy of the resource curse. World politics, 51(2), 297-322. http://www.jstor.org/stable/25054077
Sachs, J. D., & Warner, A. (1995). Natural resource abundance and economic growth. DOI 10.3386/w5398.
Venables, A. J. (2016). Using natural resources for development: why has it proven so difficult?. Journal of Economic Perspectives, 30(1), 161-84. DOI 10.1257/jep.30.1.161.
Cover Image: Getty (n.d.). Is the "Resource Curse" a Myth? [Illustration]. JSTOR Daily. Retrieved from: https://daily.jstor.org/is-resource-curse-a-myth/ Figure 1: Anonymous (n.d.). Are natural resources a curse, a blessing, or a double-edged sword? [Photograph]. Brookings. Retrieved from: https://www.brookings.edu/blog/future-development/2020/07/16/are-natural-resources-a-curse-a-blessing-or-a-double-edged-sword/ Figure 2: OFC (2020). Agriculture's role in unraveling the 'paradox of plenty'. [Photograph]. OFC. Retrieved from: https://www.ofc.org.uk/blog/agriculture-s-role-unravelling-paradox-plenty Figure 3: Getty (n.d.). Is the "Resource Curse" a Myth? [Illustration]. JSTOR Daily. Retrieved from: https://daily.jstor.org/is-resource-curse-a-myth/