The resource curse.

18 . 06 . 18

By Ignatius Wilson

One of the most fascinating economic phenomenon is the so-called resource curse, which suggests that the richer a country is in natural resources, like minerals or wood, the poorer its economy.

There may be similarities to the ‘lottery winner’s curse’ when someone may be lucky but doesn’t have the skills to cope the often complex problems associated with a large cash injection. But isn’t this a problem we’d all like? More money than we know what to do with,  newfound popularity and importance and choice.

Those three positives can quickly turn into negatives that affect either the lottery winner or the resource-rich nation. The lottery winner is probably taken advantage of by their friends and family, they might make poor choices and buy things they don’t need; maybe the power goes to their head and they ruin social relationships. Maybe the choice is overwhelming and they are taken advantage of by finance professionals like advisors or stockbrokers.

The same troubles can befall a whole country in more insidious and complex ways. The enclave effect is how investment and growth in other sectors of the economy is neglected as it isn’t as profitable as the primary industries are in the short term. A rich mining country may not incentivise underperforming sectors as it doesn’t need to.

A similar effect occurs in fiscal policy. Governments will not invest in infrastructure to stimulate overall employment, or subsidise particular university courses, for example to study IT if most jobs are in petroleum engineering.

This leads to risk exposure if the price of the commodity falls and the business hierarchy cannot sustain jobs and wage growth. Unemployment will rise and wages will stagnate. All of a sudden the primary industry seems like a weight on the rest of the economy.

Autocracy is government by one person with unlimited power. Autocracy or something similar is often seen in resource-rich nations because those in the original power structure, like the king and queen in a monarchy, were able to monopolise the resource wealth and become more and more powerful. They do not accept democracy as it will eat into their power and income streams.

Another risk of the resource curse is on the demand for workers. Whereas normally it would be a good thing, what eventuates is a brain drain from the rest of the economy to the primary sector if the wages and job opportunities are highest there. On the flipside, the risk is that this sector employs most of the population in low skill, low wage menial work without career progression. This ultimately fails society as education and self-empowerment is out of reach.

I hope this overview has covered a few important points on this interesting phenomenon. It is a only theory for thinking about economies but it has important lessons for how all economies work.

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