The Political Economy of the Resource Curse- Michael Ross
- states with abundant resource wealth perform less well than their resource-poor
counterparts
- ¾ of SubSaharan African, and 2/3 of Latin American, Carribean, Middle Eastern and
North African countries still depend on primary resources for at least ½ their economy
- 27/ 36 states on the World Bank’s severely indebted poor countries are primary
commodity exporters.
- minimally processed natural resources that cause the curse
o hard rock minerals, petroleum, timber, agriculture…
original development strategy- more resources would help by providing labor and increasing
investable capital
Objections:
Economic Explanations for the Resource Curse
1- Poor resource-exporting states will still suffer in trade with rich industrialized states
case-study proven, but statistically not proven…
- 1960-70s- growth
- 1980s – terms of trade for primary commodities worsened
o rising volume of exports
o SAPs cause debt crisis
- 1989- fall of Soviet Union - International commodity agreements collapse
- 1997-98- Asian financial crisis lowers demand- decreases prices more
Counteractive measure:
- Invest in productivity of resource sectors by diversifying exports
2- International commodities markets are subject to sharp fluctuation
instability proven, harm not necessarily proven
- 1960s- studies find that instability increases private investment (high levels of investment
will insulate investors)
- later studies show either negative impact or none at all…
Counteractive measure:
- Use commodity stabilization funds and create careful fiscal policies
3- Resources may not stimulate growth in the rest of the economy
- 1950s- virtually all hard rock mineral and petroleum firms in developing world were
foreign-owned
- 1976- virtually all nationalized- govs attempt to capture economy diverting to foreign
multinationals
o but- btw. 1967- 1986- growth in commodity export found not to increase growth
in nonexport sector
Counteractive measure:
- Use commodity windfalls to promote upstream and downstream linkages
4- Dutch Disease effect
a) appreciation of state’s real exchange rate following resource boom
b) resource sector tends to draw capital/ labor from manufacturing/agriculture sectors
raised production costs
- may be less common and more easily counteracted by developing gov.s than previously
thought.
- Assumptions:
o Economy’s labor/ capital supplies are fully employed/ fixed prior to boom (which
would drive these away to the new resource sector)
But- developing states tend to have labour surpluses
o Domestic and foreign goods are perfect substitutes
But- manufacturers in developing states tend to import intermediate goods
which become cheaper w/ exchange rate appreciation- so Dutch Disease
may not damage manufacturing sector’s competititveness
Counteractive measure:
- Maintain tight fiscal policies, temporarily subsidize agricultural and manufacturing
sectors
- Place windfalls in foreign currency to prevent exchange rate appreciation
A country’s economy depends largely on the ability of the government to counteract the
resource curse… so, why don’t they all take these counteractive measures?
Political Explanations for the Resource Curse
Cognitive Explanations
- Windfalls produce nearsighted disorders among policy makers
o Resource wealth lax economic planning and insufficient diversification
o Resource wealth “get-rich-quick” mentality in light of boom-bust mentality
Societal Explanations
- Windfalls empower social groups that favour growth-impeding fiscal or trade policies
o Latin America fell behind East Asia bc S.Korea/ Taiwan both employed export-
promotion strategies while L.America stuck with ISI (import-substituting
industrialization)
L.A – workers who enjoyed subsidies desired retention of ISI
(protectionism)
Sk/ Tw- worker’s little resource wealth favoured export promotion
Statist Explanations
- Windfalls can weaken state institutions that are necessary to foster long-term economic
development
o = mix of societal and cognitive explanations
o “Rentier state theory”- when govs get revenue externally or from resources, they
become unaccountable to their societies
Parasatals
- State ownership of resources resource curse
o Foreign multinationals serve as buffers against export instability
o When states have resource wealth, they soften their budget constraints and allow
for fiscal laxity and overborrowing
Property Rights
- poorly enforced property rights economic decline and resource dependence
where rule of law is weak, private resource-wealth firms may be free to pay criminal gangs/
militias or rebels for enforcement, or even catalyze these gangs formation. (ie. Congo, Columbia,
Ni
