Does a nation’s economy suffer when it makes a large natural resource discovery? In this episode, we explore the economic and financial consequences associated with resource abundance with recent Elliott School graduate alumnus Josh Park. He explains the underlying factors of the “resource curse” phenomenon and how states can mitigate its harmful effects.
Paradox of Plenty
The resource curse can trigger severe consequences for nations. Discovery of a natural resource in a nation attracts massive amounts of investment that can disrupt the nation’s economic equilibrium and redirect money away from other economic sectors. Moreover, industries created to extract the natural resource are subject to volatile valuations and eventual resource depletion.
The discovery of gas fields in the Netherlands in the 1970s precipitated a massive influx of investment money into its extraction industry. Despite the economic disequilibrium resulting from the flow of currency into the Netherlands (coined the Dutch Disease), the Dutch government redirected the money into a national fund to pay for state expenditures. This response illustrates that a nation exhibiting good governance can mitigate consequences of the resource curse.
Oil-rich Gulf states have also weathered consequences of the resource curse, but they face future challenges. States such as Saudi Arabia, Qatar, and the UAE have managed their oil wealth to create welfare states and increase standards of living. As oil prices drop, however, these nations are seeking ways to diversify their economies.
Impact on Weak States
In weak states that have different groups competing for power, natural resource discovery can trigger and perpetuate conflict. In resource-rich countries such as Nigeria and the DRC, militants fight for resources and use the extracted resources to pay for wars. Resource discovery will continue to hurt economies and exacerbate conflicts in areas with poor governance and civil strife.
Take a look at some of our favorite articles that we came across while researching this topic:
- The paradox of the plenty, Special Report, The Economist
- What Resource Curse?, Charles Kenny, Foreign Policy
- Why Natural Resources Are a Curse on Developing Countries and How to Fix It, Stewart M. Patrick, The Atlantic
- Beating the Resource Curse: Global Governance Strategies for Democracy and Economic Development, Terra Lawson-Remer, Council on Foreign Relations