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The Political Economy of the Resource Curse

Published online by Cambridge University Press:  13 June 2011

Michael L. Ross
Affiliation:
University of Michigan, Ann Arbor

Abstract

How does a state's natural resource wealth influence its economic development? For the past fifty years, versions of this question have been explored by both economists and political scientists. New research suggests that resource wealth tends to harm economic growth, yet there is little agreement on why this occurs. This article reviews a wide range of recent attempts in both economics and political science to explain the “resource curse.” It suggests that much has been learned about the economic problems of resource exporters but less is known about their political problems. The disparity between strong findings on economic matters and weak findings on political ones partly reflects the failure of political scientists to carefully test their own theories.

Type
Review Articles
Copyright
Copyright © Trustees of Princeton University 1999

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References

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2 I have deliberately omitted the extensive literature on the sociological impact of resource extraction on local communities. Important recent works include: Barham, Bradford, Bunker, Stephen G., and O'Hearn, Dennis, eds., States, Firms, and Raw Materials: The World Economy and Ecology of Aluminum(Madison: University ofWisconsin Press, 1994Google Scholar); Bunker, Stephen G., Underdeveloping theAmazon: Ex traction, Unequal Exchange, and the Failure of the Modern State (Urbana: University of Illinois Press, 1985Google Scholar); Frickel, Scott and Freudenburg, William R., “Mining the Past: Historical Context and the Changing Implications of Natural Resource Extraction,” Social Problems 43 (November 1996CrossRefGoogle Scholar); and Peluso, Nancy Lee, Rich Forests, Poor People: Resource Control and Resistance in Java (Berkeley: sity of California Press, 1992CrossRefGoogle Scholar).

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The radical structuralists, who became identified with dependency theory in the 1960s and 1970s, were far less sanguine; they argued that capitalist governments in developing states would be unable to take the measures proposed by moderates as long as these governments were dominated by local elites who shared the class interests of the foreign multinationals. See Baran, Paul A., “On the Political Economy of Backwardness,” Manchester School of Economics and Social Studies 20 (January 1952CrossRefGoogle Scholar); Frank, Andre Gunder, “The Development of Underdevelopment,” Monthly Review 18 (September 1966Google Scholar); and Cardoso, Fernando Henrique and Faletto, Enzo, Dependency and Development in Latin America (Berkeley: University of California Press, 1979Google Scholar).

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26 See fn. 12.

27 Fosu (fn. 20).

28 On the efficiency constraints on export diversification, see DeRosa, Dean A., “Increasing Export Diversification in Commodity Exporting Countries,” IMF Staff Papers 39 (September 1992Google Scholar); Owens, Trudy and Wood, Adrian, “Export-Oriented Industrialization through Primary Processing?” World Development 25, no. 9 (1997CrossRefGoogle Scholar). Also see the excellent collection of case studies in Auty, Richard M., Resource-Based Industrialization: Sowing the Oil in Eight Developing Countries (New York: Clarendon Press 1990Google Scholar).

29 The name was reputedly coined by the Economist in 1977. But the problem itself is much older. Davis (fn. 6) notes that in 1859 economist John Elliot Cairns described the same effect in Australia following the gold rush of the 1850s.

30 Corden, W. M. and Neary, P.J., “Booming Sector and De-industrialization in a Small Open Economy,” Economic Journal 92 (December 1982CrossRefGoogle Scholar); Neary, J. Peter and van Wijnbergen, Sweder, eds., Natural Resources and the Macroeconomy (Cambridge: MIT Press, 1986Google Scholar).

31 Some even argue that the Dutch Disease should not be considered a malady at all, since the shift of labor and capital toward booming resource sectors simply connotes a change in a state's comparative advantage. See, for example, Davis (fn. 6).

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34 Indeed, the model developed by Benjamin et al. (fn. 32) suggests that a resource boom may even lead to the expansion of a developing economy's manufacturing sector. Still, guarding against short-term deindustrialization may be important if a temporary drop in manufacturing output results in a long-term loss of comparative advantage, which may occur if there are industry-specific learning-by-doing effects that are external to the firm. See Arrow, Kenneth J., “The Economic Implications of Learning by Doing,” Review of Economic Studies 29, no. 3 (1962CrossRefGoogle Scholar); van Wijnbergen, Sweder, “The 'Dutch Disease': A Disease after All?” EconomicJournal 94 (March 1984Google Scholar); Krugman, Paul, “The Narrow Moving Band, the Dutch Disease, and the Competitive Consequences of Mrs. Thatcher,” Journal of Development Economics 27 (October 1987CrossRefGoogle Scholar); and Usui, Norio, “Policy Adjustments to the Oil Boom and Their Evaluation: The Dutch Disease in Indonesia,” World Development 24, no. 5 (1996CrossRefGoogle Scholar).

35 Neary and van Wijnbergen (fn. 30), 10–11. Other case studies by economists come to similar conclusions; see, for example, Gelb and associates (fn. 5); Wheeler (fn. 4); Bevan, David, Collier, Paul, and Gunning, Jan Willem, “Trade Shocks in Developing Countries,” European Economic Review 37 (April 1993CrossRefGoogle Scholar); Ridler, Neil B., “The Caisse de Stabilisation in the Coffee Sector of the Ivory Coast,” World Development 16, no. 12 (1988CrossRefGoogle Scholar); Urrutia and Yukawa, (fn. 33); and Schiff, Maurice and Valdes, Alberto, The Plundering of Agriculture in Developing Countries (Washington, D.C.:World Bank, 1992CrossRefGoogle Scholar).

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42 See, for example, Mitra, Pradeep K., Adjustment in Oil-Importing Developing Countries (New York: Cambridge University Press, 1994Google Scholar); Auty (fn. 5); and Krause, Lawrence B., “Social Capability and Long-Term Economic Growth,” in Koo, Bon Ho and Perkins, Dwight H., eds., Social Capability and Long-Term Economic Growth (New York: St. Martin's Press, 1995CrossRefGoogle Scholar).

43 Note, however, that the concept of wealth-induced sloth would be consistent with models that treat rational actors as revenue satisficers instead of revenue maximizers.

44 See, for example, the quotes at the beginning of this article.

45 For recent examples, see Salant, Stephen W., “The Economics of Natural Resource Extraction: A Primer for Development Economists,” World Bank Research Observer 10 (February 1995CrossRefGoogle Scholar); Varangis, Panos, Akiyama, Takamasa, and Mitchell, Donald, Managing Commodity Booms-and Busts (Washington D.C.:World Bank, 1995Google Scholar).

A classic example can be found in Machiavelli's Discourses, which prescribes measures to counteract the hazards of wealth-induced sloth: “as for that idleness which (an exceptionally fertile) site invites, one should organize the laws in such a way that they force upon the city those necessities which the location does not impose.” Machiavelli, “Discourses on the First Ten Books of Titus Livius,” in Bondanella, Peter and Musa, Mark, eds. and trans., The Portable Machiavelli (New York: Penguin, 1979), 173Google Scholar–74.

46 This is why export volatility is correlated with higher-than-normal savings rates, at least in the private sector; see fn. 20. On the proclivity of private actors in low-income countries to take precautionary measures against income fluctuations, see Townsend, Robert M., “Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Countries,” Journal ofEconomic Perspectives (Summer 1995CrossRefGoogle Scholar); and Morduch, Jonathan, “Income Smoothing and Consumption Insurance” Journal of Economic Perspectives 9 (Summer 1995CrossRefGoogle Scholar).

47 Versions of this argument have been offered by Miguel Urrutia, “The Politics of Economic Development Policies in Resource-Rich States,” in Urrutia and Yukawa (fn. 33); Ranis, Gustav, “Toward a Model of Development,” in Krause, Lawrence B. and Kihwan, Kim, eds., Liberalization in the Process of Economic Development (Berkeley: University of California Press, 1991Google Scholar); Ranis, Gustav and Mahmood, Syed Akhtar, The Political Economy of Development Policy Change (Cambridge, Mass.:Blackwell, 1992Google Scholar); Wade, Robert, “East Asia's Economic Success: Conflicting Perspectives, Partial Insights, Shaky Evidence,” World Politics 44 (January 1992CrossRefGoogle Scholar); Mahon, James E. Jr., “Was Latin America Too Rich to Prosper?” Journal of'Development Studies 28 (January 1992Google Scholar); Auty, Richard M., “Industrial Policy Reform in Six Large Newly Industrializing Countries: The Resource Curse Thesis,” World Development 22, no. 1 (1994CrossRefGoogle Scholar); Broad, Robin, “The Political Economy of Natural Resources: Case Studies of the Indonesian and Philippine Forest Sectors,” Journal of Developing Areas 29 (April 1995Google Scholar). Sachs and Warner offer a heterodox version of this argument, suggesting that when states are affected by the Dutch Disease, lagging manufacturing sectors will demand compensation in the form of trade barriers and thus produce economic stagnation.

48 Schiff and Valdés(fn.35).

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57 See Gelb and associates (fn. 5); Auty (fn. 28).

58 William Ascher, Why Governments Waste Resources: The Political Economy of Natural Resource icy Failures in Developing Countries (Baltimore: Johns Hopkins University Press, forthcoming).

59 Hartwick, John M., “Intergenerational Equity and the Investing of Rents from Exhaustible Resources,” American Economic Review 67 (December 1977Google Scholar); and Vincent, Jeffrey R., Panayotou, Theodore, and Hartwick, John M., “Resource Depletion and Sustainability in Small Open Economies,” Journal of Environmental Economics and Management 33 (July 1997CrossRefGoogle Scholar).

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62 Levin (fn 10); Shafer, D. Michael, “Capturing the Mineral Multinationals: Advantage or Disadvantage?” International Organization 37 (Winter 1983CrossRefGoogle Scholar).

63 Kornai, Janos, “The Soft Budget Constraint,” Kyklos 39 (1986Google Scholar).

64 The World Bank notes that privately owned tea plantations in both Sri Lanka and India are far more productive and profitable than state-owned tea plantations. See Bank, World, Global Economic Prospects and the Developing Countries (Washington D.C.:World Bank, 1996), 51Google Scholar.

65 In fact, when a state poorly enforces property rights to its natural resources, it may gain a comparative advantage in international trade; see Chichilnisky, Graciela, “North-South Trade and the Global Environment,” American Economic Review 84, no. 4 (1994Google Scholar).

66 On the concept of “protection rents,” see Lane, Frederic C., “Economic Consequences of Organized Violence,” Journal of Economic History 18 (December 1958CrossRefGoogle Scholar). Firms with highly specific assets, such as resource firms, are especially vulnerable to extortion; see Klein, Benjamin, Crawford, Robert G., and Alchian, Armen A., “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process,” Journal of Law and Economics 21 (October 1978CrossRefGoogle Scholar).

67 Evidence of a link between resource extraction and extralegal violence can be gleaned from William Reno's intriguing history of the diamond industry in Sierra Leone's Kono District, Corruption and State Politics in Sierra Leone (New York: Cambridge University Press, 1995Google Scholar). See also Jonathan C Brown's fine study of oil firms during the Mexican revolution, Oil and Revolution in Mexico (Berkeley: University of California Press, 1992Google Scholar).

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