Natural Resources: Curse or Blessing?

TLDR

Natural resources can act as either a curse or a blessing, with empirical evidence indicating that both outcomes are possible. This paper surveys a range of hypotheses and evidence explaining why some countries benefit from natural resources while others suffer. The survey examines mechanisms such as resource‑induced real exchange rate appreciation, deindustrialization, and adverse growth prospects—particularly in volatile, poorly governed countries—as well as rent‑grabbing, civil conflict, corruption, and persistent bad policies, and proposes welfare‑based fiscal rules to harness resource windfalls. Resource‑rich developing economies appear unable to convert their depleting exhaustible resources into other productive assets. JEL codes: O47, Q32, Q33.

Abstract

Are natural resources a “curse” or a “blessing”? The empirical evidence suggests that either outcome is possible. This paper surveys a variety of hypotheses and supporting evidence for why some countries benefit and others lose from the presence of natural resources. These include that a resource bonanza induces appreciation of the real exchange rate, deindustrialization, and bad growth prospects, and that these adverse effects are more severe in volatile countries with bad institutions and lack of rule of law, corruption, presidential democracies, and underdeveloped financial systems. Another hypothesis is that a resource boom reinforces rent grabbing and civil conflict especially if institutions are bad, induces corruption especially in nondemocratic countries, and keeps in place bad policies. Finally, resource rich developing economies seem unable to successfully convert their depleting exhaustible resources into other productive assets. The survey also offers some welfare-based fiscal rules for harnessing resource windfalls in developed and developing economies. (JEL O47, Q32, Q33)