The natural resource curse is where a country with abundant natural resource wealth fails to utilise them for economic growth. This results from over dependency on these resources and failing to diversify the economy. The curse has been prevalent in many LEDC countries keeping many stuck in poverty.

What causes the Natural Resource Curse?

Countries caught in a natural resource curse tend to focus all their production on a single industry such as mining. A surplus of resources allows the country to export^[i] these goods to earn foreign currency to buy imports and aid its development. However, a heavy dependence on commodity^[ii] exports leaves the country vulnerable to global price fluctuations. Natural resources tend to be price volatile meaning any fall in price could leave the country’s economy in a bad shape.

In many LEDCs^[iii] natural resource wealth has facilitated copious amounts of corruption. Government officials may abuse their positions for money or power resulting in economic mismanagement and damaging the economy. Corruption can shrink any funds available for investment into diversifying the economy into other industries. Natural resource wealth has also led to conflict and oppression in many nations such as Angola’s blood diamonds. Conflict damages economic growth and can a set a country back decades in terms of development.

Over reliance on finite natural resources can lead to over abstraction. Once the resource is all but gone the economy can see their main export industry collapse resulting in a negative multiplier effect. Tens of thousands of workers will be left unemployed leading to a fall in material living standards and forcing them to reduce their consumption. Firms will make less revenue due to less demand and thus may go out of business causing further unemployment. The government sees its tax revenues from exports, business profits and income drastically fall while expenditure on welfare benefits rise which can lead to a budget deficit and rising government debt. A persistent budget deficit can lead to a threat of austerity measures which may reduce living standards and exacerbate economic inequalities.

The natural resource wealth can also lead to a case of Dutch Disease. This is where an overvalued exchange rate damages the price competitiveness of the economy’s export industries which can lead to unemployment and a severe current account deficit. In the late 1970s the discovery of North Sea oil caused the UK to catch Dutch Disease. The value of the sterling exponentially increased. This means imports become cheaper while exports are more expensive thus damaging many export industries leading to structural unemployment and many former industrial cities to be caught in a cycle of deprivation.

What is an example of a country affected by the Natural Resource Curse? 

Nauru, the world's third smallest nation by size with only around 13,000 people, once had rich deposits of phosphate ore. Phosphate can be used to produce high grade fertilisers as well as cosmetics and livestock fodder. In 1981 Nauru was one of the richest countries in the world with a GDP per capita of $27,000 thanks to phosphate exports. To put that into perspective, the UK in 1981 had a GDP per capita of $10,420. By 2001, the phosphate reserves had been exhausted. Consequently, unemployment jumped to 90% and public services such as education collapsed. The country's GDP contracted 6.8% GDP per capita plummeted to just $1,884 in 2001. This saw a huge reduction in income and living standards for the people of Nauru. In addition, the mining industry completely destroyed their natural environment making large parts of the island uninhabitable and reduced any tourism opportunities.

How can a country avoid the Natural Resource Curse?

Diversification of the economy is essential to avert dependency on a few industries. A country can use its profits from their natural resource boom to invest into other sectors or set up a sovereign wealth fund.

For example, much of modern-day Saudi Arabia has been built on crude oil exports. In 2018 crude oil accounted for 90% of the nation's export earnings and 42% of the GDP. However, its leaders have recognised the need to transition away from hydrocarbons due to its finite nature and a global focus on renewable energy sources. As such, in 2016 the government launched an extremely ambitious project known as Vision 2030 in an attempt to fast-track the diversification of the economy. The programme aims to inject $3.2 trillion into the economy by investing in sectors like tourism and the construction of mega projects such as THE LINE. The government is also creating 5 special economic zones to attract FDI^[iv] and create new job opportunities in the manufacturing and quaternary sectors.

Saudi Arabia’s sovereign wealth fund, the PIF, provides investment for many industries such as real estate and aerospace. The PIF manages $1.07 trillion worth of assets and has created 1.8 million direct and indirect jobs. If managed correctly a sovereign wealth fund can provide financial stability and reduce the effects of future economic shocks.

Footnotes:

[i] Export - goods sold abroad.

[ii] Commodity - a raw material or primary agricultural product that can be bought and sold, such as copper or coffee.

[iii] LEDC - Less Economically Developed Country.

[iv] FDI - Foreign Direct Investment, an ownership stake in a foreign company or project made by an investor, company, or government from another country.

Bibliography:

The Natural Resource Curse: A Survey of Diagnoses and Some Prescription

Nauru: An Island Country Destroyed by Phosphate Mining | Amusing Planet

Economic Diversification in Saudi Arabia - The Borgen Project

PIF - Public Investment Fund | One of the Largest SWF in the World