O THE ROLE OF NATURAL RESOURCES IN ECONOMIC GROWTH

ECONOMICS-2

SUBMITTED BY

ROHIT BARUAH

SM0115041

FACULTY IN CHARGE

Nayan Jyoti Pathak

Assistant Professor of Economics

NATIONAL LAW UNIVERSITY AND JUDICIAL ACADEMY, ASSAM

GUWAHATI
8MAY 2017

1
CONTENTS

2
ABSTRACT
In recent years economists have recognized that, along with physical and human capital,
environmental resources should be viewed as important economic assets, which can be called
natural capital. However, the services provided by natural capital are unique. They include
the use of resources for material and energy inputs, the "assimilative capacity" to absorb
waste, and the provision of ecological services. The latter services are particularly not well
understood, and lie at the heart of the debate over the role of natural capital in sustainable
development. That is, does the environment have a unique or "essential" role in sustaining
human welfare, and if so, are special "compensation rules" required to ensure that future
generations are not made worse off by natural capital depletion today? A further debate has
emerged over whether environmental degradation in an economy may initially increase, but
eventually declines, as per capita income increases. This hypothesis, called the environmental
Kuznets curve (EKC) has led to a number of attempts to estimate empirically an "inverted U"
shaped relationship between a variety of indicators of environmental pollution or resource
depletion and the level of per capita income. Finally, recent economic theories and empirical
evidence have questioned whether poorer economies that are endowed with abundant natural
resources develop more rapidly than economies that are relatively resource poor. It is possible
that resource abundant economies are not reinvesting the rents generated from natural
resource exploitation into productive assets, or that resource booms actually divert economic
resources from more productive and innovative sectors. The result is a "boom and bust"
pattern of economic development. There is evidence of this phenomenon particularly with
regard to economic development and land expansion, especially in Latin America. Overall,
although our understanding of the role of natural resources in economic development has
improved markedly in recent decades, there is still much to learn. How natural resource
depletion is affecting the ecological services provided by the environment is one concern. In
the case of the poor economies, there is increasing evidence that their prospects for economic
"take off" are being adversely affected by the lack of efficient and sustainable management of
their natural resource base. Yet the "underpricing" and "undervaluing" of natural capital
makes it difficult to design appropriate policies for ensuring that natural resource rents are
reinvested in other productive assets of the economy.

3
INTRODUCTION
Natural resources are an important source of national wealth around the world. Yet,
experience shows that natural riches are neither necessary nor sufficient for economic
prosperity and progress. The world’s richest countries include Hong Kong, Japan, Singapore
and Switzerland which do not owe their national wealth to nature and many others, such as
the United States and the United Kingdom, where natural resources nowadays play only a
minor role in the generation of national income. Among developing countries, natural
resources are relatively more prevalent. This may to some extent reflect their
underdevelopment: the modest size of the modern sector of the economy makes agriculture
and other natural-resource-based economic activity relatively more important. But there are
also clear examples of countries that are genuinely rich in terms of natural resources but still
have not been able to sustain economic growth. It thus appears that the generosity of nature
may sometimes – although by no means always – turn out to be a mixed blessing. Take
Botswana and Sierra Leone, both of which produce diamonds for export. By and large,
Botswana has managed the revenue and rent stream from its main natural resource in ways
that have contributed to impressive economic growth since independence in 1966 – in fact,
the world’s highest recorded rate of growth of gross national product (GNP) per capita from
1965 to 1998, even if it slowed down after 1990. Meanwhile, Sierra Leone has remained
mired in poverty, ravaged by crippling internal warfare as local warlords have continued to
fight for control over the diamond trade. Sierra Leone was the world’s poorest country in
1998 according to the World Bank (2000). Apparently, the rich supply of diamonds has
turned out to be a source of domestic strife that has both diverted precious national resources
towards rent seeking of the most destructive kind and destroyed the infrastructure and social
institutions that are so important for economic life. This example shows that the existence of
natural resources can be both a blessing and a curse to economic growth and development.1

In this paper, we consider the interaction between institutions, natural resource dependence
and economic growth. In particular, we are interested in the possible mechanisms through
which natural resources can stifle capital accumulation and growth and the conditions under
which economic growth can take place in the presence of abundant natural resources. In this
context it will be interesting to consider the experience of those countries – if any – which at

1
Auty, R. M., “Natural Resources, the State and Development Strategy,” Journal of International Development
9 (1997):651–63.

4
some point in the past relied on nature’s bounty but now enjoy the benefits of developed and
diversified manufacturing and service industries.2

AIM

The aim of this project is to understand the role of natural resources in the economic growth

OBJECTIVES

The objectives of this project are

-To understand the role of natural resources in the economic growth

-To give a detailed understanding of the role of natural resources in the economic growth

LITERATURE REVIEW

Acemoglu, D., S. Johnson, and J. A. Robinson, “Institutions as the Fundamental Cause

of Long-Run Growth,” in P. Aghion and S. Durlauf (eds), Handbook of Economic
Growth, Vol. 1, Amsterdam: Elsevier (2005)

The relationship between natural capital and economic growth is an open debate in the field
of economic development. Is an abundance of natural resources a blessing or a curse for
economic performance? The field of Economic History offers an excellent vantage to explore
the relevance of institutions, technical progress and supply-demand drivers.

This book emphasizes that an abundance of natural resources is not a fixed situation. It is a
process that reacts to changes in the structure of commodity prices and factor endowments,
and progress requires capital, labour, technical change and appropriate institutional
arrangements. This abundance is not a given, but is part of the evolution of the economic
system. History shows that institutional quality is the key factor to deal with abundant natural
resources and, especially, with the rents derived from their use and exploitation.

Auty, R. M., “Natural Resources, the State and Development Strategy,” Journal of
International Development 9 (1997)
2
Brunnschweiler, C. N. and E. H. Bulte, “The Resource Curse Revisited and Revised: A Tale of Paradoxes and
Red Herrings,” Journal of Environmental Economics and Management 55 (2008):248–64.

5
It offers a timely and multifaceted look at the often double-edged relationship between
natural resource wealth and long-term economic development. The volume’s sixteen
chapters, which range in format from single-country case studies to cross-national statistical
analyses, address natural resource governance issues that have been encountered on each
continent at various points in (generally post-industrial) history. Specific country cases
include Australia, Botswana, Indonesia, Nigeria, Norway, Spain, the United States, and
Venezuela. Contributors focus heavily, although not exclusively, on the political and
economic challenges associated with the endowment of coal, petroleum, precious metals, and
other coveted mineral assets. This makes the book an especially informative read in light of
the ongoing slump of global commodity prices and the concomitant political fallout now
being felt in many resource rich countries.

RESEARCH QUESTIONS

Q-1 What is the role of natural resources in the economic growth?

Q-2 How is economic growth dependent on natural resources?

Q-3 What are the linkages of natural resource on economic growth?

RESEARCH METHODOLOGY

The researchers have adopted Doctrinal type of research approach.

Help from library resources and websites was taken.

The researchers adapted Descriptive type of research design.

The researchers adapted Explanatory type of research design

RELATIONSHIP BETWEEN NATURAL RESOURCE AND ECONOMIC

GROWTH

6
Sachs & Warner (1995) examine the effect of natural resources on long-term economic
growth and find that resource-rich countries tend to grow more slowly than resource-scarce
countries. This has become known as the natural resource curse. The literature published after
Sachs & Warner (1995) primarily investigates different transmission mechanisms of how
natural resources affect growth, assessing whether it is possible to avoid the natural resource
curse by improving the quality of institutions, or whether the existence of the natural resource
curse depends on the means of measurement and the type of natural resources. Several
studies investigate the role of institutional quality and find that the natural resource curse can
be avoided if institutional quality is sufficiently high (Isham et al., 2005; Mehlum et al.,
2006; Arezki & van der Ploeg, 2007; Boschini et al., 2007; Horvath & Zeynalov, 2014).
Brunnschweiler & Bulte (2008) make a distinction between resource dependence (the degree
to which countries depend on natural resource exports) and resource abundance (a stock
measure of resource wealth) and, unlike many other studies, they treat institutions as
endogenous. While they fail to find a link between resource dependence and growth, they
show that resource abundance is associated with better institutions and more growth3. As a
consequence, their results do not provide support for the existence of the natural resource
curse. Sala-i-Martin & Subramanian (2013) document that new oil discoveries tend to cause
real exchange rate appreciation and harm other export sectors of the economy. Gylfason &
Zoega (2006) examine a different channel and find that natural resource richness crowds out
human and physical capital, leading to slower growth in the long term. Another stream of
literature examines the impact of natural resources on variables other than economic growth.
Natural resource richness might induce more corruption, increase political instability and the
likelihood of conflicts, and hinder the functioning of democratic institutions (Tella & Ades,
1999; Barro, 1999; Ross, 2001; Jensen & Wantchekon, 2004; Collier & Hoeffler, 2005).4 In
our meta-analysis we examine not only real factors, such as the role of institutional quality in
the occurrence of the natural resource curse, but also the role of study design in the estimated
effect of natural resource richness on growth. Researchers often employ cross-sectional data

to investigate the long-term effect of natural resources on growth (Sachs & Warner, 1995;
Leite & Weidmann, 1999; Tella & Ades, 1999; Lederman & Maloney, 2003; Boschini et al.,
2007; Sala-i-Martin & Subramanian, 2013; Ding & Field, 2005; Mehlum et al., 2006;
Brunnschweiler & Bulte, 2008; Arezki & van der Ploeg, 2007). But van der Ploeg (2011)

3
Findlay, R. and M. Lundahl, “Natural Resources, ‘Vent-for-Surplus’ and the Staples Theory,” in G. Meir (ed.),
From Classical Economics to Development Economics, New York: St. Martin’s Press (1994):68–93.
4
http://ageconsearch.umn.edu/bitstream/10510/1/dp020071.pdf

7
notes that the application of cross-sectional data in growth regressions suffers from omitted
variable bias because of the correlation between initial income and the omitted initial level of
productivity. Lederman & Maloney (2003) estimate cross-sectional as well as panel
regressions and find that the results differ. Panel regressions provide a significantly positive
effect of natural resources on economic growth, while cross-sectional regressions result in
negative but insignificant estimates5. Tella & Ades also use both cross-sectional and panel
data and find that the impact of natural resources on economic growth becomes insignificant
when using panel data. Panel data has also been applied by Jensen & Wantchekon (2004),
Ilmi (2007), and Horvath & Zeynalov (2014). The primary studies also differ with respect to
the measurement of natural resource richness. Sachs & Warner (1995) measure natural
resource richness as the share of primary exports (agriculture, fuels, and minerals) in GDP.
Boschini et al. (2007), Lederman & Maloney (2003), Isham et al. (2005), and Brunnschweiler
& Bulte (2008) also apply this measure. Leite & Weidmann (1999) and Mehlum et al. (2006)
use the share of exports of primary products in GNP. Sala-i-Martin & Subramanian (2013)
and Jensen & Wantchekon (2004) use the percentage share of fuel, mineral, and metal
exports in merchandise exports. Collier & Hoeffler employ 4 the sum of resource rents as a
percentage of GDP. Papyrakis & Gerlagh (2004) use the share of mineral production in GDP
and Gylfason & Zoega (2006) employ natural resource capital as a percentage of total capital.

The relationship between resources and development is a complex one for many reasons.
Resources are naturally occurring things that a country needs either to trade or survive. For
example: building space, arable land, water, coal, oil, gold, etc. Definitions of development
vary greatly. The most widely accepted division of countries is the division between the
economic north and the economic south. The economic north consists of More Economically
Developed Countries (MEDCs) and Less Economically Developed Countries (LEDCs).6
Great Britain, North America, Japan and Australia are examples of MEDCs. Zambia,
Ethiopia, Brazil and India are examples of LEDCs. Even within this clear definition there are
differences, recently a new class of country, the Newly Industrialising Countries (NICs) has
been introduced. Some NICs include Thailand and Indonesia.

It would be a fair assumption to make that a country with a large amount of natural resources

5
Gwartney, J. and R. Lawson, “Economic Freedom of the World: 2005 Annual Report”, Vancouver: Fraser
Institute. www.freetheworld.com (2005).
6
Lane, P. and A. Tornell, “Power, Growth and the Voracity Effect,” Journal of Economic Growth 1 (1996):213–
41.

8
would be more likely to develop fastest and furthest. This could be assumed because natural
resources in a country would be likely to stimulate trade at first within that country, and later
to outside countries. Large areas of arable land would stimulate population growth, and the
presence of minerals such as gold or copper can be traded for industry.7 Resources such as oil
and coal are vital to stimulate industrialism within a country. With industrialism, goods can
be produced solely for trading with other countries that lack the resources to make them.
With industrialism comes the tertiary employment industry, providing healthcare, sanitation
and education. This would lead the way to social, political and economic development. This
theory can, however, not be applied to all countries.8

Zambia is an example of a country that when we look at it now we can see is clearly not an
MEDC. The GDP per capita of Zambia is $870, compared to Britain’s $22,800. It has a
national GDP of only $8.5billion, compared to Britain’s $1.36trillion. Britain has a death rate
of 10.35 deaths/1,000 population and Zambia has 21.97 deaths/1,000 population. Zambia also
has a literacy rate of only 78%.9 But if we look at Zambia’s resources, we would expect it to
be more developed. Zambia’s largest natural resource is a huge copper belt down the middle
of the country. Copper is a commodity that can be used to stimulate industry inside Zambia
and could also be traded outside for huge profit, as it is a resource that many countries lack.
The profit from this trade could be put back into developing Zambia’s economy. It would
also be thought that the multiplier effect from this single economy would stimulate
development in other industries, for example: an influx of workers to copper mines would
create the need for new houses to be built, education for children in the area and food for the
families.

It is not the case that Zambia exploited its natural resource. The copper belt remained fairly
untapped until the British South Africa Company (BSA), created by Cecil Rhodes, gained the
mining rights from the King of the Lozis in 1890, in return for providing protection to his
people. The BSA set up mines and transport in the region. The creation of a mining industry
provided a huge amount of jobs (some taken up by Europeans), however these were only in
the copper belt down the middle of Zambia. This created a division between a Core (in the
direct vicinity of the copper belt) and a Periphery (outside the economic “reach” of the
7
Lipset, S., Political Man: The Social Bases of Politics, New York: Doubleday (1960).
8
Mehlum, H., K. Moene, and R. Torvik, “Institutions and the Resource Curse,” Economic Journal 116
(2006):1–20.
9
UNCTAD, Handbook of Statistics, online database, Geneva: UNCTAD (2002)

9
copper belt). The core was far more developed than the periphery, with the periphery mostly
consisting of subsistence farmers. Zambia did not charge a huge tax on the British exporting
copper, so they made little money from it. Most of the European workers who came to
Zambia either came for a short while only to make money then leave, or sent most of their
money home, only 20% of the money made from the copper industry went back into Zambian
economy, meaning that it improved it very little.10

When Zambia gained independence from British colonial rule on the 24th of October 1964,
the copper industry was nationalised to try and stimulate the economy. Poor management of
the industry and a growing national debt led to mammoth losses in the copper industry, so the
government started the process of privatisation. Many of the private companies controlling
the copper industry will be rich western companies, bringing Zambia back to the stage it was
at before and continually preventing development.11

Japan is another example of a country that does not follow the hypothesis that natural
resources lead to development. Japan is arguably one of the most developed countries in the
world today, with trade reaching out all over the globe. It is certainly one of the richest
countries in the world, the GDP per capita is $24,900 and the country’s GDP is $3.15trillion.
The death rate is only 8.34 deaths/1,000 population and the literacy rate is 99%. With this
extremely high level of development, we would expect Japan to be a country rich of
resources12. This is not the case, Japan has no oil, no coal, very few minerals and is extremely
mountainous and made up of islands, so there is very little building area.13

Japan has developed in a way different to most other countries. Japan has cultural values that
differ greatly from the west, the value of hard work and responsibility mean that many typical
Japanese people work very hard for what they want to achieve and failure will only mean that
they try harder again. Japan has had long periods of political stability, under the rule of an
emperor. This means that there is a stable economy and society, giving space concentration

10
World Bank, World Development Indicators 2002, CD-ROM database, Washington, DC: World Bank (2002).
11
Lane, P. and A. Tornell, “Power, Growth and the Voracity Effect,” Journal of Economic Growth 1
(1996):213–41.
12
G. Meir (ed.), From Classical Economics to Development Economics, New York: St. Martin’s Press
(1994):68–93.
13
Collier, P. and B. Goderis, “Commodity Prices, Growth, and the Natural Resource Curse: Reconciling a
Conundrum,” CSAE working paper 2007-15 (2007).

10
on development rather than fighting.14

Japan had a policy of isolationism until the World War II, meaning that it concentrated on
developing its own economy before going abroad. Japan has never been invaded, so it can
exploit its own resources. In World War II, Japan had two nuclear bombs dropped on two
major cities by the USA when it refused to surrender, making it the only country to ever have
nuclear weapons used against it. Japan used this as a new start, and it worked on rebuilding
the economy from scratch to make it one of the most advanced in the world.15

The Japanese invested in research and development, keeping ahead of the competition with
hi-tech products. They built good communication links with an excellent railway system that
allowed for transport between remote areas. They worked on their trade links, which provides
a market and allows for a huge increase in export earnings. The Japanese created nuclear
power stations, so they make their own power and it does not need importing. The two
resources that Japan has, iron ore and steel, were used to create machines and ships to
develop the technology industry and international trade. In the 1950s, Japan sold military
vehicles to be used in the Korean War, which boosted their economy hugely. The USA
heavily invested in Japan after World War II, to stop communism spreading over from China.
This aid boosted the economy greatly and provided a start-up capital for the Japanese
economy, which had been shattered by the effects of the war. The Japanese import a huge
amount of oil, which is used for creating plastics and running machines, this is costly, but the
Japanese can afford it with their wealthy economy. A trade surplus of extra goods that are
being sold overboard means that huge wealth is created for the country, which is ploughed
back into education, sanitation and healthcare, creating a very high standard of living.

Japan and Zambia are examples of two different countries that have developed at very
different rates. Whilst Zambia is rich in resources, it has hardly developed at all compared to
Japan, which has a severe lack of many resources. This shows that the path to development is
not as simple as to say that a large amount of resources will create a developed country; there

14
Isham, J., L. Pritchett, M. Woolcock, and G. Busby, “The Varieties of Resource Experience: Natural Resource
Export Structures and the Political Economy of Economic Growth,” World Bank Economic Review 19
(2005):141–74.
15
Lane, P. and A. Tornell, “Power, Growth and the Voracity Effect,” Journal of Economic Growth 1
(1996):213–41.

11
are many more individual differences in culture and history of a country that must be taken
into account. 16

SCHEMATIC REPRESENTATION OF THE ROLE OF ECONOMIC

RESOURCES IN ECONOMIC GROWTH.

16
ibid

12
Our general schematic framework is laid out in Figure 1 and explained in this section;
Appendix A provides a more technical discussion of it. Since our focus is on investments by
society, we emphasize the presence of various forms of capital and possibilities for (net)
investment in these forms. We recognize of course that the supply and employment of labor
also is a critical part of the economic growth process, but to simplify the diagram we do not
develop this part of the economic system in much detail. Another simplification of the
presentation is that we do not distinguish (as Pezzey did) a stock of technological knowledge
separately from the basic capital stock. Investments in knowledge embedded in machines or
increased human capacities (human capital) certainly are crucial to economic development. In
our framework, knowledge is implicitly embedded in capital, and investment in technical
progress is reflected as an increase in the flow of productive services generated by physical
capital. Both technological knowledge and human capital stocks could be added explicitly to
the wiring diagram, at the cost of considerable complication of the picture. One other
simplification to note at the outset is that the framework in Figure 1 focuses on the links
between the natural and economic worlds without attempting to elaborate in detail the
allocation of resources within the economic sphere. In particular, we recognize that produced
final output in the economy takes many forms – agriculture, manufacturing, household
production, and commercial services for example – and that final output results from the
production and application of numerous intermediate goods. In practice growth and
development policies must be concerned with these issues of the composition of economic
activity – the efficiency of specific sectors, the impacts of trade liberalization, and so forth.
Again, the framework can readily be extended to address a richer composition of economic
activity, but the substantial complication of the diagram does not add much to the broad
understanding of environment-economic linkages at the economy-wide level. Environment
economic linkages for various sectors are elaborated in subsequent parts of the paper.

13
Figure 1: Links Connecting Natural and Environmental Resources, Economic Growth, and
Social Well-Being: The Importance of Various Investments Investments in Various Forms of
Physical Capital Supply of Labor Services Combined with Various Forms of Capital Natural
Resource Stocks Environmental Quality Extracted Natural Resources Environmental Services
Consumption Household WellBeing Waste Byproducts (Agriculture, Manufacturing,
Household Production, Services) Produced Outputs (Agriculture, Manufacturing, Household
Production, Services) Environmental Remediation Natural Resource Extraction Byproducts
Management Final Goods Production Natural Resource Management.17

Figure-1

17
UNCTAD, Handbook of Statistics, online database, Geneva: UNCTAD (2002).

14
The large box in the center of Figure 1 represents the production in the economy of both
valued goods and services and the inherent co-production of wastes. In this framework,
"waste" is not a purely physical concept (based for example on materials balance – what goes
in must come out). We conceive of waste as flows that reduce environmental quality as
broadly defined above.18

As shown in Figure 1, production of goods depends on (a) flows of capital services (and
associated labor services), (b) flows of extracted natural materials (biological and geological,
renewable and depletable), and (c) environmental services provided by natural systems. The
volume of wastes released to the environment depends on the volume of material output and
on the flow of services derived from another form of investment by society, that which is
applied to manage the byproducts of production generated within the economic system. We
use the shorthand "byproducts management capital" to summarize these services. Byproducts
management refers both to pollution prevention (reduction in unwanted harmful byproducts
relative to desired goods), and to end-of-pipe treatment that reduces the damage caused by
physical discharges. At this level of generality, "environmental services" incorporate a
number of productive inputs.19 Climatic conditions, including temperature and rainfall, are
more or less conducive to agricultural and silvicultural production. Water bodies (rivers,
lakes, estuaries, wetlands) of certain water quantity, turbidity, flow rate, temperature, and
chemical composition provide more or less fruitful habitat for valued aquatic organisms
(shrimp, fish, plant life) as well as water resources for human consumption and
manufacturing.20 Biodiversity contributes to ecological stability as well as to tourism, long-
term agricultural productivity, and possibly pharmaceuticals. Air quality and broader climatic
conditions affect ambient temperatures, health conditions, and variability of weather in ways
that affect the productivity of inputs in various household and manufacturing activities.
"Environmental quality" then can be understood generally as the capacity of the natural
system to provide a sustained flow of these various environmental services. 21We make the
simplifying assumption in this graphical framework that extracted natural resources and the
services of capital are the only produced intermediate inputs. Other intermediate inputs, such
as environmental quality, are supplied by nature. In practice, of course, the economy has a

18
World Bank, World Development Indicators 2002, CD-ROM database, Washington, DC: World Bank (2002).
19
Ross, M., “Does Oil Hinder Democracy?” World Politics 53 (2001):325–61.
20
Mehlum, H., K. Moene, and R. Torvik, “Institutions and the Resource Curse,” Economic Journal 116 (2006):1–
20.
21
Sokoloff, K. L. and S. L. Engerman,“Institutions, Factor Endowments, and Paths of Development in the New
World,” Journal of Economic Perspectives 14 (2000):217–32.

15
number of intermediate goods. The flow of extracted natural resources depends on the
effective stocks of those resources, as well as on the flow of capital services (and associated
labor services) applied to their development and extraction. This is another point of
connection between the economic and ecological domains. "Effective" natural resource
stocks also are not a purely physical phenomenon. Society also can invest what for simplicity
we call "natural resource management capital" to enhance the natural or economic
productivity of those resources. Such investments can range from technical progress that
enhances the use of lowergrade ores to improved management of biological resources to
enhance their regenerative capacity.22

In Figure 1, these investments are referred to as “natural resource management.” Resources

for the Future Toman . Once final outputs are produced, they are allocated between
immediate consumption and various forms of investment. As in standard growth analysis,
society can sacrifice some current well-being by reducing immediate consumption to gain
greater future well-being through augmentation of capital. Here, however, we recognize
multiple forms of investment that are possible, each of which can contribute to future well-
being. Investment can increase capacity for final goods production; enhance natural resource
extraction; reduce wastes (byproducts management) through pollution prevention and end-of-
pipe neutralization; enhance the productivity of natural resource stocks (natural resource
management); or remediate environmental harms that do occur, thereby upgrading the part of
society's wealth reflected in environmental quality.23

This diagram describes pathways and linkages; it does not describe how an actual economic
system performs in terms of overall economic efficiency and investment in natural capital in
particular. In any economic system, these outcomes depend on what we can call the effective
prices faced by agents in the system. These prices depend on the effective scarcity of the
resources in question, which in turn depends on the state of technology (including human
capital as well as technical knowledge); knowledge levels and preferences of the population;
DATA ON DEPENDENCE OF NATURAL RESOURCE ON ECONOMIC
GROWTH

22
Tullock, G., “The Welfare Costs of Tariffs, Monopolies and Theft,” Western Economic Journal 5 (1967):224–
32.
23
Isham, J., L. Pritchett, M. Woolcock, and G. Busby, “The Varieties of Resource Experience: Natural Resource
Export Structures and the Political Economy of Economic Growth,” World Bank Economic Review 19
(2005):141–74.

16
 TABLE-2

The table indicates that good growth performance appears incompatible with a share of
natural resources in excess of 15 percent of national wealth.. There are also quite a few
countries, with slow economic growth and a small endowment of natural resources, including
several countries in Central and South America and the Caribbean.24

An important limitation of our data is a lack of observations on the share of natural resources
in national wealth at the beginning of the sample period. While economic growth is measured
as an average from 1965 to 1998, our measure of the importance of natural resources – their
share of total wealth – applies to the year 1994.25 This may explain, in part, why some
formerly resource-dependent countries such as Botswana, China, Malaysia, Mauritius and
Thailand are counted as relatively resource-poor. However, when alternative measures of
natural-resource dependence – their share of exports, national output, or the labor force – are
used at the beginning of the period or as period averages, we also find an inverse relationship
between natural resource intensity and economic growth

24
Gwartney, J. and R. Lawson, Economic Freedom of the World: 2005 Annual Report, Vancouver: Fraser
Institute. www.freetheworld.com (2005).
25
Brunnschweiler, C. N. and E. H. Bulte, “The Resource Curse Revisited and Revised: A Tale of Paradoxes and
Red Herrings,” Journal of Environmental Economics and Management 55 (2008):248–64.

17
Among developing countries, natural resources are relatively more prevalent. This may to
some extent reflect their underdevelopment: the modest size of the modern sector of the
economy makes agriculture and other natural-resource-based economic activity relatively
more important. But there are also clear examples of countries that are genuinely rich in
terms of natural resources but still have not been able to sustain economic growth. It thus
appears that the generosity of nature may sometimes – although by no means always – turn
out to be a mixed blessing. Take Botswana and Sierra Leone, both of which produce
diamonds for export. By and large, Botswana has managed the revenue and rent stream from
its main natural resource in ways that have contributed to impressive economic growth since
independence in 1966 – in fact, the world’s highest recorded rate of growth of gross national
product (GNP) per capita from 1965 to 1998, even if it slowed down after 1990. Meanwhile,
Sierra Leone has remained mired in poverty, ravaged by crippling internal warfare as local

warlords have continued to fight for control over the diamond trade. Sierra Leone was the
world’s poorest country in 1998 according to the World Bank (2000). Apparently, the rich
supply of diamonds has turned out to be a source of domestic strife that has both diverted
precious national resources towards rent seeking of the most destructive kind and destroyed

18
the infrastructure and social institutions that are so important for economic life. This example
shows that the existence of natural resources can be both a blessing and a curse to economic
growth and development.26

CONCLUSION

Our theoretical model encapsulates macroeconomic growth collapse as a consequence of

resource dissipation resulting from a wasteful rent-seeking contest, where the object of the
contest is the capture of resource rents. The novelty here is that the institutional environment

26
Collier, P. and A. Hoeffler, “Testing the Neo-Con Agenda: Democracy in Resource-Rich Societies,”
European Economic Review 53 (2009):293–308.
Acemoglu, D., S. Johnson, and J. A. Robinson, “Institutions as the Fundamental Cause of Long-Run Growth,”
in P. Aghion and S. Durlauf (eds), Handbook of Economic Growth, Vol. 1, Amsterdam: Elsevier (2005):385–
472.

19
can make rent-seeking outlays subject to increasing returns to scale, and even more
profitable. Our econometric analysis also contains major innovations. First, it has theoretical
foundations. Second, it is one of the few econometric investigations into the resource curse
that includes analysis over time, as it is a panel data estimation. Our proxies for institutional
quality are the degree of democracy and the quality of governance, thus we have attempted to
capture both the effects of how a country is ruled as well as its polity; governance seems to
have a greater impact on development. Finally, our results are more robust than in other cases
in the literature, as a variety of econometric models have been used to test the same
specification. Our general results suggest that both point-source and diffuse-type natural
resource dependence retard the development of democracy and good governance, which in
turn hampers economic growth. So there is a more widespread resource curse, valid for both
types of dependence. Point-sourced economies have a worse impact on governance, which is
more important for growth. The resource curse in point-sourced economies depends on the
quality of institutions, and the quality of institutions may be endogenously affected by
resource dependence. Historically, however, rich mineral resource endowments did not
prevent economic growth in Australia, Canada, and the USA a century ago, as pointed out by
Findlay and Lundahl (1994). Brunnschweiler and Bulte (2008) challenge the notion of
resource curse in their cross-sectional analysis. They distinguish between resource
dependence and resource abundance, finding that resource dependence has no significant
effect on growth. By contrast, they find that resource abundance has significantly positive
effects on growth. A resource-abundant nation may not be very resource dependent, if it has a
diversified production structure. Indeed, resource dependence may be a reflection of the
failure to grow and develop good economic and political institutions, along with the
associated poverty, inequality, and poor human development outcomes. Finally, institutional
improvement is like administering an antibiotic to a patient curing him of a serious infection;
changes in policy are more akin to the ingestion of aspirin that works like a temporary
palliative

BIBLIOGRAPHY

Acemoglu, D., S. Johnson, and J. A. Robinson, “Institutions as the Fundamental Cause of

Long-Run Growth,” in P. Aghion and S. Durlauf (eds), Handbook of Economic Growth, Vol.
1, Amsterdam: Elsevier (2005).

20
Auty, R. M., “Natural Resources, the State and Development Strategy,” Journal of
International Development 9 (1997)

Brunnschweiler, C. N. and E. H. Bulte, “The Resource Curse Revisited and Revised: A Tale
of Paradoxes and Red Herrings,” Journal of Environmental Economics and Management 55
(2008):

Collier, P. and B. Goderis, “Commodity Prices, Growth, and the Natural Resource Curse:
Reconciling a Conundrum,” CSAE working paper 2007-15 (2007).

Collier, P. and A. Hoeffler, “Testing the Neo-Con Agenda: Democracy in Resource-Rich

Societies,” European Economic Review 53 (2009):293–308.

Findlay, R. and M. Lundahl, “Natural Resources, ‘Vent-for-Surplus’ and the Staples Theory,”
in G. Meir (ed.), From Classical Economics to Development Economics, New York: St.
Martin’s Press (1994)

UNCTAD, Handbook of Statistics, online database, Geneva: UNCTAD (2002).

Vargas-Silva, C., “The Tale of Three Amigos: Remittances, Exchange Rates, and Money
Demand in Mexico,” Review of Development Economics 13 (2009)

World Bank, World Development Indicators 2002, CD-ROM database, Washington, DC:
World Bank (2002).

Murshed, S. M., “Civil War, Conflict and Underdevelopment,” Journal of Peace Research 39
(2002)

Isham, J., L. Pritchett, M. Woolcock, and G. Busby, “The Varieties of Resource Experience:
Natural Resource Export Structures and the Political Economy of Economic Growth,” World
Bank Economic Review 19 (2005)

Gwartney, J. and R. Lawson, Economic Freedom of the World: 2005 Annual Report,
Vancouver: Fraser Institute.www.freetheworld.com (2005)

21