Natural resources – boon or curse?

Additional (updated) content from One Billion Hungry: Can we feed the world?

ID-10073328In recent years, it has become fashionable to argue that the less developed countries of Sub-Saharan Africa should emulate Brazil and the eastern tigers with rapid industrialization, in many cases on the back of the exploitation of rich mineral, oil and other resources. Around one third of the growth in GDP in Africa between 2000 and 2008 (4.9%) has come from these resources and the associated government spending they generated. The rest has come from internal structural changes (e.g. Nigeria privatized more than 116 enterprises between 1999 and 2006) and from other sectors. Africa is projected to continue to profit from the rising global demand for natural resources given that it comprises 10% of the world’s oil reserves, 40% of its gold and 80 to 90% of the chromium and platinum metal group. But so far, the experience has not been accompanied by much trickle down and indeed has reversed progress towards reduction in poverty and social freedoms. Moreover, countries both with and without significant resource exports have had similar GDP growth rates between 2000 and 2008.

Although in  the short term the export of natural resources such as oil and minerals can give an economy a boost, generating higher incomes, allow greater consumption of both imported and domestically produced goods, and provide governments with greater resources for investment in development, the long-term impacts may offset, if not exceed, these positives. In 1977 the Economist published an article entitled The Dutch Disease that described the situation whereby a country’s export performance is reduced as a result of an appreciation of the exchange rate after a natural resource such as oil has been discovered.

The transition of an economy to the production of natural resources, despite mixed evidence of the nature (i.e. positive or negative) of its impact on economic growth, has been deemed the ‘resource curse’.

The transfer of capital and labour to the natural resource sector can lead to declines in productivity in other sectors, such as agriculture, that will be important sources of growth when the natural resource is depleted. Further impacts can include volatility in public spending associated with volatile prices and thus revenue from natural resources, as well as over borrowing, when commodity prices are high, leading to high debt levels, when commodity prices fall. [Read more…]