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Economic Premise
JUN 2012
010 •• Number
Numbe 83

Natural Capital and the Resource Curse
Otaviano Canuto and Matheus Cavallari

An abundance of natural resources is intuitively expected to be a blessing. Nonetheless, it has been argued for some decades
that large endowments of natural resources—oil, gas, and minerals in particular—may actually become more of a curse, often
leading to slow economic growth and redistributive struggles (including armed conflict). Over the years, vast empirical
literature has addressed this “paradox.” The literature has had to rely on proxies for natural resource abundance because of
the lack of appropriate data, generating doubt on whether results would be similar if direct measures of natural wealth were
available. This gap is now starting to be filled with the data series released by the World Bank (1997, 2006, 2011) on natu-
ral capital and other forms of countries’ wealth. This note presents an analysis of these data to revisit some of the conclusions
reached in the literature on the relationship between natural resource abundance and economic growth. The findings are in
alignment with the view that there is no clear deterministic evidence of natural resource abundance as a curse or a blessing;
therefore, the effect on a country depends on other determinants.

Natural Capital and Income Levels ests, minerals, and energy); and intangible capital. The latter is
clearly a wealth component requiring much further work. In-
How to measure development progress? “While precise defini-
tangible capital is still measured as a residual, the difference
tions may vary, development is, at heart, a process of building
between estimates of total wealth and the sum of natural and
wealth—the produced, natural, human, and institutional capi-
produced capitals:1 “It implicitly includes measures of human,
tal which is the source of income and wellbeing” (Andersen
social, and institutional capital, which includes factors such as
and Canuto 2011, xi). However one defines development, it
the rule of law and governance that contribute to an efficient
supposes rising income levels and an underlying process of
economy” (World Bank 2011, 4–5).2
building and managing a portfolio of assets. At least in an ac-
Table 1 reproduces the aggregate figures of wealth and per
counting sense, such wealth accumulation spans the wide
capita wealth by type of capital and income group in 1995 and
range of capital types mentioned above.
2005 (World Bank 2011, 7). From an accountant’s perspective,
The World Bank (1997, 2006, 2011) has started a break-
there are some striking features regarding an archetype of prog-
through in national accounts toward capturing the span of as-
ress up the income-wealth ladder. First, the share of produced
sets. A set of wealth accounts covering a 10-year period, 1995
capital in wealth moves upward from low levels in low-income
to 2005, for more than 120 countries is now available. This
countries, but remains reasonably modest thereon. Figures for
includes produced capital (machinery, structures, and equip-
lower-middle-income countries are heavily influenced by the
ment); natural capital (agricultural land, protected areas, for-
weight of China and by its extraordinarily fast pace of produced


315 81 17 2 why paradoxically: World 673.354 69 16 15 2) has highlighted. Upper-middle income 47. tions. Low income 2. however. education. Data in this table do not include high-income oil exporters. governance. this partially explains High-income OECD 551. 7. flects a massive failure in the discovery pro- tionate speed. as well as improvements in institu- in many low-income countries. In all cases. As Collier ( accumulation. the aver- numbers closer to a smoother evolution. age kilometer of Africa had only $25.540 68 17 15 Natural capital also varies over time for High-income OECD 421. but instead is used to support con- sumption. 4 Upper-middle income 36.183 81.000 of known subsoil assets and Development. there will be no . measured by per capita natural wealth—is in principle favorable and other social groups. Norway.964 588.023 16. Table 1.290 48 12 41 such as forest land.311 76 18 6 minishes in relative terms as a wealth compo- 2005 nent when the economy moves up the in- Low income 3. cess in Africa: the scope for resource extrac- Secondly.593 120. In contrast. ap- ments and showed their (nonlinear) relationship with income pendix C). inappropriate manage- ment regimes and property rights may also Lower-middle income 33. gas. Income group billions) (US$) (%) (%) (%) As for the renewable part of natural capital. The value of existing as- nuto 2011). the average derived technical progress).3 archetype of wealth-cum-income progression depicted in table It follows that natural assets comprise a substantial por- 1 may take place with different shares of natural wealth in dif- tion of total wealth at low-income levels. kilometer of the OECD had Note: Figures are based on the set of countries for which wealth accounts are available from 1995 to 2005.794 73.597 6. Furthermore. and non-research. collective knowledge tacitly One may then guess that abundance of natural capital—as embedded in routines of firms. because the on less efficient sources at the margin. The World Bank As one might expect. institutional evolution.and development- to raising per capita income levels.475 77 18 5 As of 2000. Most likely. 1995 and 2005 cumulation of other forms of productive 1995 wealth. Japan. levels and compositions of natural (2007) developed country indexes of technological achieve- capital vary widely between countries (World Bank 2011. it combines middle.and high-income levels. Total wealth Per capita Intangible Produced Natural (US$ wealth capital capital capital ing assets to replace it when it is exhausted.138 57 13 30 come ladder does not preclude it to rise in absolute terms as a result of technological Lower-middle-income 58.903 51 24 25 changes or new discoveries. The nexus with savings and investments is not as sets may rise if increases of global production have to be based straightforward as in the case of produced capital. Increased “good governance.950 11. if the use of nonrenewable natural capital—extractive resources such as oil.330 45 21 34 lead to wealth depletion. but increasingly so as it Collier remarks that the discovery process depends upon moves to the upper-middle. It appears that cumu. but typically at a propor. with unskilled labor and existing intangible wealth to generate Differences in the quality of natural resources may also ex- income. and Australia). this re- and support the rise in income levels. as well as among matter how large or small that natural capital is. 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www. and minerals—does not lead to the ac. achievement can have similar income levels.and low-income countries (table 2). organizations. and the subsequent corresponding savings and invest- plain why countries with different levels of technological ments create new produced capital and intangible wealth. and other intangible forms of wealth are im- Values of natural capital may also change as a result of het- perative if a country is to overcome “middle-income traps” (Ca- erogeneity among natural resources. This is illustrated by the different wealth com- vance—particularly compared to intangible wealth—if the econ- positions as of 2005 among high-income countries (the United omy succeeds in moving up the income ladder. intangible wealth is the largest single component tion may be five times what it currently appears to be. of total wealth at all levels of income. World 504. OECD = Organisation for Economic Co-operation $125. The fact that it di.447 5.worldbank.548 103. However. with the ex-China subgroup displaying waiting to be exploited. decreasing in rele- ferent countries. Wealth and Per Capita Wealth by Type of Capital and Income Group. Canada. Such “rents” tend to be dynamics of intangible wealth accumulation—or depletion— reflected in the value of natural capital in countries well en- depend to a large extent on factors of another nature (quality of dowed with high-quality resources. the typical square Source: World Bank 2011.445 80 18 2 reasons other than its use.000 of lative savings used for investments in physical assets accompany known subsoil assets.641 478.” a missing component of intangible wealth educational attainments. the public sector. no States.

As one can see in Norway 861.10 index index .2 ly in combination with political disruption. instead of being followed by a transforma- Malaysia 64.751 2. both system- Brazil 79.697 36. Resources shift out of pro- ductive activities into unproductive rent-seeking activity when. tractive industries (oil. sponding poor economic policies underlie the misallocation and mismanagement of resources. Consumption use of tax revenues derived from natural resource extraction through public spending is also a typical Figure 1.162 12. and Vostroknutova (2010) explain India 10.0 .30 developing countries only Europe and Central Asia . Pro.Table 2.979 7.924 6.195 13. were Botswana 58. Canuto.797 110.20 accompanied by stagnation or even income regression.9 atic and anecdotal.05 -0. well be among the explaining factors. patronage networks are strengthened with their and the Caribbean managed to reach middle-income levels appropriation of fallen-from-heaven rents.worldbank. 8.05 Caribbean Latin America and the Caribbean 0 0 -0.750 19.0 . there is no clear pattern regarding gross domestic United States 734.7 tion of natural capital into other forms of productive wealth through some virtuous process of savings and investment.10 12 0 00 00 00 00 00 0 0 0 0 0 00 00 00 00 00 00 00 00 00 00 00 00 . 84.000 and natural wealth ratios ranging from almost Canada 538.05 -0.10 -0.690 5. from World Bank (2011. Australia 518.0 . gas.420 9. 10 15 20 25 30 35 40 per capita income (PPPs) per capita income (PPPs) East Asia and Pacific Europe and Central Asia high-income OECD countries high-income other countries Latin America and the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa Source: World Bank 2007.4 US$35.9 product (GDP) per capita and shares of natural capital.0 Brahmbhatt.0 . 3her POVERTY REDUCTION countries atinAND ECONOMIC America MANAGEMENT and the Caribbean (PREM) Ea t a     NETWORK Middle www.822 1. many countries in Latin America for example.042 55. levels. and minerals) because these are apart from non-technology-related intangible wealth. there is now enormous evidence.0 5.0 .0 . of arable land and mapped sources of oil and minerals—may 107). general- Jordan 51.05 Latin America and the .767 12. Technological Achievements Rise with Income Levels all countries . 10 14 16 18 20 0 .9 zero up to 79 percent.0 .454 2. Shares of Natural Capital in Total Wealth Per Capita So.4 ies or appreciations.0 . appendix C).20 Europe and Central Asia .267 14.895 5.471 1.0 .10 .252 10. the high “concentrated ‘point source’ resources that can easily become quality of known natural resources in the region—large swaths the object of rent-seeking and redistributive struggles” (ibid.25 .0 .142 14.7 resource booms become a curse.25 .8 figure 2. of cases in which natural resource discover- Argentina 71. there ap- capita per capita capital pears to be no inevitable impediment to income growth associ- Country (2005 US$) (2005 US$) (%) ated with abundance of natural resources.982 6.7 how certain conditions could result in situations where natural Malawi 3. One can find 14 countries with GDP per capita higher than Japan 548.5 Nigeria 10. where can one locate a possible “natural resource (Selected Countries) curse”? Since country rankings by per capita income display Total wealth per Natural capital Share of natural several natural resource–rich countries at the top. On the other hand.094 0. 6.805 39.170 33.978 18.0 2.0 . It is not by chance with much less technological effort than others (figure 1).539 2.20 .15 .15 all countries .7 . a point originally made by Collier and Goderis (2007). 4. Weak governance and corre- Source: Authors’ calculation.704 25. that resource curse cases can be primarily associated with ex- duced capital does not seem to explain such a discrepancy and.

pact of the natural resource richness. In this case. measure of natural resource abundance. investment rates. phasizes a special case for rent seeking in the oil. 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www. from World Bank (2011). for example. data on production flows in some sectors—notably which may be highly convenient given its longer-term availabil- oil and mineral extraction—are also used.2 0. and natural pact of institutions. able). that proxy seems to be satisfactory. precede the boom or emerge with it (the “voracity effect” [Tor. trade openness. and 2005. 2001) estimated a negative by investment ratio. and theoretical arguments in favor of the idea 0 that natural resources are neither curse nor destiny as far as in- 0 0. factor—including capital—endowments. the analysis estimated a regression for the panel data to Due to the lack of more precise data.6 0. is a good predictor of the latter. The regression estimations were accompany natural resource booms in natural resource–rich based on the countries for which there are data available for countries (volatility. Natural Capital and GDP Per Capita however. using natural resource curse is based on a few proxies of natural re. sources per capita on GDP per capita. in Sachs and good fit with significant coefficients. historical. % of natural capital This note uses Changing Wealth of Nations (World Bank Source: Authors’ calculation. could have a negative er good or bad) of macromanagement challenges that typically impact on future income. On the other hand. no management decisions associated with 8 natural resource richness. geographical factors as control variables to find a positive im- tries seemed not to have invested previously in human capital.6 Natural resource curs. es be traced back to governance quality.2%<NCP<50%) impact of natural capital abundance. Similarly.Figure 2. 6 Lederman’s and Maloney’s (2007) empirical study is an- other oft-quoted source for links between natural resources and 4 economic growth. and terms of trade. Al. This group of intangible wealth-intensive manufacturing) can in most . that is. As long as a forward-look- Warner (1995. natural resource abundance is a curse or blessing. and crowding out both the GDP in 1970 and the wealth estimations. The analysis considered five-year averages of nell and Lane 1999]). In fact. can be made. empirical literature on the explain this ratio by natural capital shares in total wealth. cross-section fixed dummies for each country to exclude coun- source abundance.7 GDP per capita in each country of the sample for periods sub- The next section uses the data on wealth stocks presented sequent to each corresponding point-in-time data on wealth by the World Bank (2006. As a first task. Because the literature em- which tended to slow the pace of economic growth. because these data are ity. the most-used proxy for Natural Wealth and the Resource Curse: abundance in past literature. Most of their report is dedicated to showing high (>50%) the difficulties in making any safe statement about the negative 2 middle (2. risks of overborrowing. The study presents statis- low (<2. Gylfason (2001) used wealth lar approach to estimate the impact of oil and other mineral re- data from 1995 to explain growth figures from 1965 to 1998.8 1 come convergence among countries is concerned. Alexeev and Conrad (2009) used a simi- law.9 This regression showed a very GDP is the most common proxy—as. logarithmic of numbers of years of school- growth impact of natural resource intensity between 1970 and ing. ternatively. The ratio of natural resource exports to tries’ particular specificities. logarithmic of natural resource per capita. If subsoil LN (GDP PPP per capita) assets are unknown. the handling (wheth.worldbank. 2000. using an estimated equation where GDP per capita is explained Sachs and Warner (1995. is very similar to one considered in Sachs and Warner (1995). natural gas. it is not recommended to match wealth composi- 10 tion in a certain slice of time with past growth data. 2011) data to estimate in a panel whether absolute levels of natural capital and/or their shares in total wealth. as a direct manifestation of poor governance. 2011) to empirically revisit whether stocks. rule of capital participation. 8 An Empirical Examination For that. They argue this is the case even controlling for the im. Patterns of exports or production in of Nations (World Bank 2011) are made available. 2001) or Lederman and Maloney (2007).4 0. but they used exogenous and proposed some evidence that natural resource–rich coun. ing perspective is kept. at least until more exercises such as in the Changing Wealth more frequently available. one should not lose sight of the fact that the impact of a new discovery is forward looking.10 logarithmic of GDP per capita in 1970 (as a control vari- 1990. some sectors are supposed to reflect an underlying structure of The next step was to estimate a basic model in a panel data. it may cause benefits 12 or distortions in the economy only after resources are known.2%) tical. the analysis checked whether the ratio of natural resource exports to GDP. either good or bad. In this sense. the estimations had to limit the study to the es may thus be associated with governance traits that either period for which those wealth stock figures are available: 1995.

pletion.coal and mining sectors (that is. Reforms to LNC—total 0. the p-value for the coefficient of the LNC consumption along a 25-year time horizon. and Note: Method—pooled least squares. as well as to Dependent variable: Ln GDP (1) (2) (3) minimize risks of rent capture by patronage networks and avoid premiums on rent-seeking behavior. ** Significant at 2 percent. this analysis could not find signifi- capita.071* 0.010   management. it just seems that in most cases new capital translates tween the abundance of natural resources and income per capi- into more income. rate of time preference and the future rate of per capita con- * Significant at 1 percent. (2) and (3). case (1) and case (2) showed results very similar to the basic estimation exhibited in table 3.150 duced capital and intangible wealth. there is no regular pattern between relative abundance of in the form of governance quality is a key determinant to the natural wealth and income levels.858* fects of the usual volatility associated with natural resource LNC—agriculture     0. and so forth will also help transform natural wealth into pro- NCT—share 0.84 0.846* 0.worldbank. and thus no kind of natural outcome of natural resource abundance as a blessing or a curse.485* overtime depletion of natural resources and to mitigate the ef- Ln YSC 0. Clearly. the coefficients are very similar in cases (1). This was the only particular subcase of significant negative impact of natural capital share in GDP per capital among all nine 1. lier 2010. gross investment Using the data on the natural wealth of countries recently made ratios. Bernard Hoekman. intertemporal decisions.” The results cent of the GDP per capita . allowing for contemporaneous covariances and for serial correlation. Kirk Hamilton. as well as Lederman. and finally. Regardless of whether natural resources are dominant cant deterministic evidence of a direct negative relationship be- or not. By the same token. natural logarithmic of natural capital per authors thank Taewon Um for his technical assistance.81 0.5 percent. and Cara Zappala for their comments. coping with the volatility of this income stream crop. Daniel capital (NCT). To natural capital per capita and its share of total wealth.311* prices can reinforce the virtuous dynamics of wealth accumula- LNC—subsoil   0. natural Matheus Cavallari is a Consultant for the PREM Network. ta levels.036* tion toward the upper scales of the income ladder. GCF/GDP 0. Reduction and Economic Management (PREM) Network. Variables are defined as: gross capital formation (GCF)/GDP.436* 0. budget processes. ances for all phases of natural resource extraction and use (terms of contracts. this analysis ing other kinds of abundance for future generations and sus- replicates the estimations for three similar cases: (i) the total taining income per capita at corresponding higher levels. When considering the serial correlation. natural logarithmic of GDP per capita (Ln GDP).072* 0.167   -0. Total wealth is estimated as the present value of sustainable subcases. abundance (Collier 2010). responsible governments need to deal with the subsoil per capita and its abundance. (iii) simi. the higher the GDP per available by the World Bank. here align with others who have stressed that intangible wealth ure 2.039* 0.036* adopting fiscal rules to ring-fence investments from proceeds of Ln GDP (1970) 0. and natural capital per capita. but in case (1). especially in the case of low-in- cause they expand the country’s stock of total capital. Canuto. resource curse can be depicted. (ii) only meet this challenge.053**     improve public sector capacities in terms of public investment NCS—share   0. saving rules. 5 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www. and Vostroknutova 2010). Coefficients were significant to all independent variables Concluding Remarks except for the natural capital share in all the cases! As presented in table 3. the generalized least squares. but in case (3). Brahmbhatt. collection and Table 3. the subsoil and the total. monitoring and evaluation. subsoil assets). In fact. such as those embedded in fiscal and lar measures isolating agriculture assets per capita (for example. assuming the pure total was 11. all the Notes coefficients are significant.89 Otaviano Canuto is the Vice President and Head of the Poverty Source: Authors’ calculations. Estimations were calculated using ordinary least squares. thereby generat. lifting the GDP per capita. as shown in fig. and timber) from subsoil assets per capita. In this come countries for which the use of natural resources may be sense. or the so-called “natural resource curse. Cross-sections 58 51 51 Total pool observations: 173 150 150 About the Authors R-squared 0. In the first variant. Three types of policies have been emphasized in the litera- Intuitively.797* 0. The logarithmic of years of schooling (Ln YSC). the real challenge is Ensuring high transparency and strengthened checks and bal- to invest those rents in other productive assets.728* 0. the potential ture as the safest way to make sure the bang from the natural blessing associated with natural resource discoveries exists be. but also while transitioning between the ex ante scarcity and the ex post considering their share in total wealth. land. Regression Results (1995–2005) use of taxes) are critical for a favorable outcome. the higher the levels of education. nations can take advantage of the additional source of crucial for a leap upward in the income per capita ladder (Col- richness from the period of exploration until the complete de. resource buck is maximized. monitoring of operations. subsoil capital as share of the total wealth (NCS) and the same measure considering all natural Milan Brahmbhatt. as well as capita (LNC) considering the agriculture. as confirmed by these results. The model accounted for around 85 per.

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