Do Natural Resources Lead to Slow Growth?
Economies in which natural resource sectors account for at least 10 per cent of gross domestic product (GDP), a share of export of at least 20ā40 per cent, or where such sectors represent ākey stoneā sectors, have been defined in the literature as ānatural resourceāintensive economiesā.1 Their natural resource industries rest essentially on production of raw materials, such as agriculture, forestry, and extraction of metals and minerals, which make them different from countries which base their economies on manufacturing or high-tech industries. Nobel Laureate in economics Douglass C. North defined āindustrialisedā societies as āregion[s] whose export base consists primarily of finished consumersā goods and/or finished manufactured producersā goodsā.2 The economist Keith Smith describes natural resourceāintensive economies as countries
with a strong emphasis on agriculture, a small manufacturing sector with a large proportion of output concentrated in low and medium-technology sectors, and a large service sector incorporating a large social and community services element. [ā¦] Natural resources may provide a significant proportion of output, but more commonly a large proportion of exports. [ā¦] Significant natural resources may include agricultural land, timber and forests, fish, hard rock minerals, and oil and gas.3
Some of the poorest countries in the world fit this description, notably African and Latin American countries. The poor economic performance of these countries has led to the notion that natural resources directly cause slow growth and retard development. An important argument for this is that natural resources ācrowd outā manufacturing. Imports are therefore focused on manufactures, which means that countries which base their economies on natural resource industries find themselves in a vicious circle, or a āresource curseā, in which they are always in external deficit because of declining terms of trade between natural resources and manufactures. These features prevent the economic progress that characterises industrialised countries and are understood to be important reasons why natural resourceāintensive economies show poor economic performance.
Multiple negative symptoms are categorised under the resource curse. From the 1950s, the ādependency theoryā had major effects on economic policy in Latin America. It stated that resources flowed from peripheral underdeveloped countries to the core of industrialised and developed countries. The idea was that developed countries became rich at the expense of underdeveloped countries. There were nuances within this approach, but they had some common traits. The economist Matias Vernengo summarises the dependency theory approach and finds that these theorists
would agree that at the core of the dependency relation between center and periphery lays [lies] the inability of the periphery to develop an autonomous and dynamic process of technological innovation. Technology ā the Promethean force unleashed by the Industrial Revolution ā is at the center of stage. The Center countries controlled the technology and the systems for generating technology.4
Latin American countries gradually imported fewer manufactured goods in exchange for their exports of natural resource products. This, in turn, led to deficits in trade balances and subsequently economic underdevelopment.5 In a similar line of argument, the famous paper by the economists Jeffrey D. Sachs and Andrew M. Warner āNatural resource abundance and economic growthā compared data from a wide range of countries and found that economies with natural resources as a large share of exports in 1970 grew slowly during the following two decades.6 In some cases, large natural resource industries have led to the so-called āDutch diseaseā. In such cases, resource industries have caused a too strong currency for other export products, and have resulted in a decline in manufacturing, or other, industries. The term is related to the decline of the manufacturing sector in the Netherlands after the discovery of natural gas in 1959.7
A vast amount of literature finds that natural resources destroy institutions and in some cases create civil wars. Sudan, Nigeria, Angola, and Congo are examples of countries with such problems.8 The challenge is that while natural resources tend to implicate large incomes fast, they can also be fluctuating. The volatility which these industries represent often destabilises public regimes, weakens state capacity, and encourages rent-seeking behaviour and corruption.9 In Nigeria, for instance, oil extraction has changed politics and governance. Military dictatorships have plundered large amounts of wealth gained from this production, which has contributed to miserable economic performance.10 Political scientist Terry Lynn Karl examines oil-exporting countries in the 1970s and finds that governments in Venezuela, Iran, Nigeria, Algeria, and Indonesia rely too heavily on income from natural resource industries. Public spending increased, but without maintaining a general tax regime and long-term fiscal balance.11
Other analyses indicate that natural resources have had negative effects on social structures and human capital formation. According to economists Thorvaldur Gylfason and Gylfi Zoega, dependency on natural resources is often accompanied by greater social inequality.12 Natural resources have also appeared to weaken the incentives to invest in human capital. This is based on the idea that natural resource industries are founded on medium and low technological activities, which in turn create very few qualified jobs and therefore lower incentives to develop good education systems compared to countries with fewer natural resources. The underdeveloped education systems slow down the pace of economic development.13 The authors Elena Suslova and Natalya Volchkova test human capital formation and find that industries which require āsophisticated human capital inputsā would be at a disadvantage in natural resourceārich countries.14
Thus, in many cases, and in multiple countries, natural resources seemed to have had multiple negative impacts on institutions, social structures, and economic development. Underlying these negative economic effects lies the notion that natural resources generate sectors with medium and low technological activities that are less knowledge-intensive and innovative than manufacturing sectors. Although economists recognise that natural resources provide opportunities for economic growth, it is held that natural resource industries have weak dynamic development patterns, lack linkages with the wider economy, and are less knowledge-intensive and productive than manufacturing or āhigh-techā industries.15
However, the idea that natural resources are unfavourable to economic growth was questioned early. Economist Jacob Viner declared that ā[t]here are no inherent advantages of manufacturing over agricultureā and, in 1955, Douglass North argued against Prebischās hypothesis, and wrote that āthe contention that regions must industrialize in order to continue to grow [ā¦] [is] based on some fundamental misconceptionsā.16 In this line of argument, comparative analyses by economist Angus Maddison show that resource-rich countries from 1913 to 1950, including Latin American economies, actually grew faster than industrialised countries.17 Research on specific natural resource industries finds that agriculture and ...
