Noah Wilbur | Opinions Editor
In a world dominated by finite resources and an endless desire for consumption, nations around the globe are in a continuous effort to discover the next major shale formation or iron ore deposit to achieve economic prosperity.
With rapid population expansion and ever-increasing consumer demand, natural resources are ubiquitously viewed among world leaders as essential for driving growth and gaining a competitive advantage on an international scale.
Significant revenue gains, reductions in poverty and social order are few of the outcomes that resource-rich countries can potentially derive from rich deposits of natural capital.
Despite these apparent perks, I am of the opinion that natural resources adversely impact economic development and lead to declining quality of life. Although contingent on other relevant factors as well, it is the case that extreme poverty and inequality are characteristic of “resource-rich” countries.
A notable real-world case is Venezuela, and its immense supply of proven oil reserves. Once hailed as the richest country in South America, the economy has now collapsed with Venezuelans suffering severely from hunger, human rights’ violations and political turmoil.
The resource curse – or, the paradox of plenty – alludes to this paradoxical situation in which nations endowed with a wealth of natural resources experience stagnant economic growth and social unrest in comparison to resource-poor countries.
Without diving into complex economic theory, a simple theoretical example clearly demonstrates the logic behind this phenomenon. Let’s imagine that a country discovers a major natural gas reserve deep underground. With this abundance of natural gas, governmental officials and institutional investors begin shifting the majority of labor, capital and other resources toward production.
By diverting nearly all its resources to the production and exportation of natural gas, the country becomes dependent on the performance of one commodity. If prices surprisingly decrease resulting in a bear market, then the country will fall into a recession for as long as the bear market lingers.
The failure to diversify into other industries leaves the country vulnerable to a downturn in the natural gas industry, resulting in extreme volatility regarding Gross Domestic Product (GDP), fiscal revenue, and unemployment.
In a nutshell, natural resources have a negative impact on economic growth because resource-abundant countries are too reliant on a single industry, causing them to forgo ample investment opportunities that are vital for driving an economy’s long-run growth.
Although still viewed as unpopular opinion, a growing number of studies have confirmed the validity of the resource course with considerable evidence.
In their study “Natural Resources and Economic Development: The curse of natural resources,” authors Jeffrey Sachs and Andrew Warner offer a simple rationale explaining the paradox of plenty: “Natural Resources crowd-out activity x. Activity x drives growth. Therefore Natural Resources harm growth.”
Admittedly, this statement seems rather dubious and suspect due to its elementary nature. However, by continuing the theoretical example from above, I can demonstrate the viability of this theory.
Following the framework, let’s assume that education is activity x – in other words, education is necessary to drive economic growth.
When the country contributes a great deal of productive resources to retrieve natural gas, the activity necessary for growth – education – is crowded out. There is an underallocation of capital invested in academia. In turn, future generations fail to acquire the necessary knowledge and professional skills pertaining to emerging markets, developing technologies and innovation.
Without this expertise, future leaders are unable to develop and implement new profit creating endeavors once the natural gas finally dries up, leaving the country exposed to the perils facing an undiversified economy.
One fact that cannot be denied is that there are indeed several examples of resource-rich nations unharmed by the so-called “resource course” who have ascended the global hierarchy as world leaders.
Nevertheless, from Venezuela and Saudi Arabia to Zimbabwe and Nigeria, the list continues to grow of countries – primarily developing nations – with large supplies of natural resources that failed to diversify their economies and are now in the midst of a financial crisis.