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The Political Economy of the Resource Curse

Published online by Cambridge University Press:  13 June 2011

Michael L. Ross
University of Michigan, Ann Arbor


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.

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Copyright © Trustees of Princeton University 1999

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1 United Nations Conference on Trade and Development (UNCTAD), Commodity Yearbook 1995 (New York: United Nations, 1995Google Scholar).

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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6 Davis, Graham A., “Learning to Love the Dutch Disease: Evidence from the Mineral Economies,” World Development 23, no. 10 (1995CrossRefGoogle Scholar).

7 The correlation also remained significant when the records of six oil-rich, slow-growing economies-Saudi Arabia, Oman, Kuwait, the United Arab Emirates, Bahrain, and Iraq-were excluded from the database.

A 1982 study, which controlled for only population and secondary-school enrollment, found that for forty-eight developing states the level of export processing in 1955 was highly correlated with GNP per capita in both 1970 and 1977. See Stokes, Randall and Jaffee, David, “Another Look at the Export of Raw Materials and Economic Growth,” American Sociological Review 47 (June 1982CrossRefGoogle Scholar). An earlier study by Jacques Delacroix, using a cruder measure of export processing, produced negative results. See Delacroix, , “The Export of Raw Materials and Economic Growth: A Cross-National Study,” American Sociological Review 42 (October 1977CrossRefGoogle Scholar).

8 See, for example, Viner, Jacob, International Trade and Economic Development (Glencoe, Ill.: Free Press, 1952Google Scholar); Lewis, W. Arthur, The Theory ofEconomic Growth (Homewood, Ill: R. D. Irwin, 1955Google Scholar); Spengler, Joseph J., ed., Natural Resources and Growth (Washington, D.C.:Resources for the Future, 1960Google Scholar). The most ardent support for resource-based development strategies came from economists identified with the staple theory of growth, which grew out of Harold A. Innis's studies of the Canadian fur and cod industries, and Douglass C. North's early work on economic growth in the western U.S. Proponents of the staple theory suggested that economic development in backward areas commonly begins with resource booms that draw in labor and capital. As the booms proceed, the profits of this core resource sector are reinvested in local infrastructure and value-added industries, producing a diversified pattern of growth. See Innis, , Essays in Canadian Economic History (Toronto: University of Toronto Press, 1956Google Scholar); North, “Location Theory and Regional Economic Growth,” Journal of Political Economy 63 (April 1955Google Scholar); and Watkins, Melville H., “A Staple Theory of Economic Growth,” Canadian Journal of Economics andPolitical Science 29 (May 1963Google Scholar).

9 Prebisch, Raul, The Economic Development ofLatin America and its Principal Problems (Lake Success, N.Y.:United Nations, 1950Google Scholar); Singer, Hans W., “The Distribution of Gains between Investing and Borrowing Countries,” American Economic Review 40, no. 2 (1950Google Scholar). Economist Jacob Viner was appalled by Prebisch's argument, referring to it as “mischievous fantasies, or conjectural or distorted history, or at the best, mere hypotheses relating to specific periods and calling for sober and objective testing.” Viner (fn. 8), 61–62.

10 Nurske, Ragnar, “Trade Fluctuations and Buffer Policies of Low-Income Countries,” Kyklos 11, no. 2 (1958Google Scholar); Levin, Jonathan V., The Export Economies: Their Pattern ofDevelopment in Historical Perspective (Cambridge: Harvard University Press, 1960Google Scholar).

11 Hirschman, Albert O., The Strategy of Economic Development (New Haven:Yale University Press, 1958Google Scholar); Baldwin, Robert E., Economic Development and Export Growth: A Study ofNorthern Rhodesia, 1920–1960 (Berkeley: University of California Press, 1966Google Scholar); and Levin (fn. 10).

12 While liberal and radical structuralists largely agreed on the problems of resource exports, they split over how to rectify them. Moderate structuralists favored a strong role for the state to buffer developing economies against international price shocks; to capture the economic rents that were repatriated by multinationals and to invest them in other sectors of the economy; and, for some, to use tariffs and quotas to promote import-substitution industrialization. Some also favored international commodity agreements to stabilize or improve the terms of trade for resource exporters; see Prebisch (fn. 9) and Hirschman (fn. 11).

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).

13 According to economist John P. Lewis, the Club of Rome report “froze the attention of the public-affairs community of the world as nothing had before. It knocked the underlying assumption … of the classic development program into a cocked hat.” Lewis, , “Oil, Other Scarcities, and the Poor Countries,” World Politics 27 (October 1974), 6CrossRefGoogle Scholar9. See also Meadows, Donella H., Meadows, Dennis L., Randers, Jorgen, and Behrens, William W. III, The Limits to Growth (New York: Universe Books, 1972Google Scholar).

14 According to Eduardo Borensztein and Carmen M. Reinhart, from 1980 to mid-1993 real non-oil commodity prices dropped by 42 percent, reaching their lowest level in over ninety years. Borensztein, and Reinhart, , “The Macroeconomic Determinants of Commodity Prices,” IMF Staff Papers 41 (June 1994Google Scholar). On the collapse of international commodity agreements, see Gilbert, Christopher L., “International Commodity Agreements: An Obituary Notice,” World Development 24, no. 1 (1996CrossRefGoogle Scholar).

15 Spraos, John, “The Statistical Debate on the Net Barter Terms of Trade between Primary Commodities and Manufactures,” EconomicJournal 90 (March 1980Google Scholar); and Lewis, Stephen R. Jr., “Primary Exporting Countries,” in Chenery, Hollis and Srinivasan, T. N., eds., Handbook ofDevelopment Economics (New York: Elsevier Science Publishers, 1989Google Scholar).

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17 This conclusion appears to vindicate the Prebisch-Singer hypothesis-though, ironically, long after dependency theory has fallen out of favor among political scientists. See Powell, Andrew, “Commodity and Developing Country Terms of Trade: What Does the Long Run Show?” Economic Journal 101 (November 1991CrossRefGoogle Scholar); Singer, Hans and Edstrom, Jerker, “The Impact of Trends and Volatility in Terms of Trade on GNP Growth,” in Nissanke, Machiko and Hewitt, Adrian, eds., Economic Crisis in Developing Countries: New Perspectives on Commodities, Trade, andFinance (New York: Pinter ers, 1993Google Scholar); Bleaney, Michael and Greenaway, David, “Long-Run Trends in the Relative Price of Primary Commodities and in the Terms of Trade of Developing Countries,” Oxford Economic Papers 45 (July 1993CrossRefGoogle Scholar); and Sapsford, David and Balasubramanyam, V. N., “The Long-Run Behavior of the Relative Price of Primary Commodities,” World Development 22, no. 11 (1994CrossRefGoogle Scholar).

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19 Cuddington, John T., “Long Run Trends in 26 Primary Commodity Prices,” Journal ofDevelop-ment Economics 39 (October 1992Google Scholar); UNCTAD (fn. 1).

20 MacBean, Alasdair I., Export Instability and Economic Development (London: George Allen and Unwin Ltd., 1966Google Scholar); Knudsen, Odin and Parnes, Andrew, Trade Instability and Economic Development (Lexington, Mass:Lexington Books, 1975Google Scholar); Fosu, Augustin Kwasi, “Primary Exports and Economic Growth in Developing Countries,” World Economy 19 (July 1996CrossRefGoogle Scholar); Dawe, David, “A New Look at the Effects of Export Instability on Investment and Growth,” World Development 24, no. 12 (1996CrossRefGoogle Scholar); and Ghosh, Atish R. and Ostry, Jonathan D., “Export Instability and the External Balance in Developing Countries,” IMF Staff Papers 41 (June 1994Google Scholar).

21 Knudsen and Parnes (fn. 20).

22 The conclusions of these studies are sensitive to the way they measure export instability. See Behrman, Jere R., “Commodity Price Instability and Economic Goal Attainment in Developing Countries,” World Development 15, no. 5 (1987CrossRefGoogle Scholar); Tan, Gerald, “Export Instability, Export Growth and GDP Growth,” Journal of Development Economics 12 (February/April 1983CrossRefGoogle Scholar); Moran, Cristian, “Export Fluctuations and Economic Growth,” Journal of'Development Economics 12 (February/April 1983CrossRefGoogle Scholar); Singer and Edstrom (fn. 17); and Dawe (fn. 20). A model developed by Mendoza (fn. 18) predicts that terms-of-trade instability will reduce social welfare, regardless of its effect on growth.

23 Lutz, Matthias, “The Effects of Volatility in the Terms of Trade on Output Growth: New Evidence,” World Development 22, no. 11 (1994CrossRefGoogle Scholar).

24 Gyimah-Brempong, Kwabena, “Export Instability and Economic Growth in Sub-Saharan Africa,” Economic Development and Cultural Change 39, no. 4 (1991CrossRefGoogle Scholar); and Fosu, Augustin Kwasi, “Effect of Export Instability on Economic Growth in Africa,” Journal of Developing Areas 26 (April 1992Google Scholar).

25 Kobrin, Stephen J., “Foreign Enterprise and Forced Divestment in LDCS,” International Organization 34 (Winter 1980CrossRefGoogle Scholar); Jodice, David A., “Sources of Change in Third World Regimes for Foreign Direct Investment, 1968–1976,” International Organization 34 (Spring 1980CrossRefGoogle Scholar). Several Latin American states, including Argentina, Bolivia, Chile, and Mexico, nationalized hard-rock mineral and petroleum production as early as the 1920s.

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).

32 Gelb and associates (fn. 5); Benjamin, Nancy C., Devarajan, Shantayanan, and Weiner, Robert J., “The 'Dutch Disease' in a Developing Country: Oil Reserves in Cameroon,” Journal of Development Economics 30 (1989CrossRefGoogle Scholar); Fardmanesh, Mohsen, “Dutch Disease Economics and the Oil Syndrome: An Empirical Study,” World Development 19, no. 6 (1991CrossRefGoogle Scholar).

33 Levin (fn. 10); Wai, Tan Tat, “Management of Resource-Based Growth in Different Factor Endowment Conditions,” in Urrutia, Miguel and Yukawa, Setsuko, eds., Economic Development Policies Resource-Rich Countries (Tokyo: United Nations University, 1988Google Scholar).

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).

36 See, for example, Bates, Robert H., “Macropolitical Economy in the Field of Development,” in Alt, James E. and Shepsle, Kenneth A., eds., Perspectives on Positive Political Economy (Cambridge: Cambridge University Press, 1990Google Scholar); Bates, Robert H., ed., Toward a Political Economy of Development: A Rational Choice Perspective (Berkeley: University of California Press, 1988Google Scholar); Grindle, Merilee S., “The New Political Economy: Positive Economics and Negative Politics,” in Meier, Gerald, ed., Politics and Policymaking in Developing Countries, (San Francisco:ICS Press, 1991Google Scholar); and Eggertsson, Thrainn, “The Old Theory of Economic Policy and the New Institutionalism,” World Development 25, no. 8 (1997CrossRefGoogle Scholar).

37 For a discussion of cognitive approaches to policy failure, see Rodrik, Dani, “Understanding Economic Policy Reform,” Journal of Economic Literature 34 (March 1996Google Scholar).

38 See, for example, Bates, Robert H., Markets and States in TropicalAfrica (Berkeley: University of California Press, 1981Google Scholar); Olson, Mancur, The Rise and Decline ofNations: Economic Growth, Stagflation, and Social Rigidities (New Haven:Yale University Press, 1982Google Scholar); Frieden, Jeffry A., Debt, Development, and Democracy (Princeton: Princeton University Press, 1991Google 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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54 See Paige, Jeffrey, Coffee and Power: Revolution and the Rise of Democracy in CentralAmerica (Cambridge:Harvard University Press, 1997Google Scholar); and Williams, Robert G., States and Social Evolution: Coffee and the Rise of National Governments in Central America (Chapel Hill:University of North Carolina Press, 1994Google Scholar). Shafer acknowledges this problem in his book's final chapter, though I believe it places more strain on his argument than he acknowledges.

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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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61 Krueger, Anne O., “The Political Economy of the Rent-Seeking Society,” American Economic Review 64, no. 3 (1974Google Scholar); Buchanan, James, Tollison, Robert, and Tullock, Gordon, Toward a Theory ofthe Rent-Seeking Society (College Station:Texas A&M University Press, 1980Google Scholar); Colander, David C., ed., Neoclassical Political Economy: The Analysis of Rent-Seeking and DUP Activities (Cambridge, Mass.:Ballinger Publishing Company, 1984Google Scholar); McChesney, Fred, “Rent Extraction and Rent Creation in the Economic Theory of Regulation,” Journal of Legal Studies 16 (January 1987Google Scholar); Appelbaum, Elie and Katz, Eliakim, “Seeking Rents by Setting Rents: The Political Economy of Rent Seeking,” EconomicJour-nal 97 (September 1987Google Scholar); and Dougan, W. R. and Snyder, J. M., “Are Rents Fully Dissipated?” Public Choice 58, no. 3 (1993Google Scholar).

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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