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Natural Resource Abundance and Economic Growth: A Case Study of Pakistan

Article  in  International Journal of Research · October 2017

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 International Journal of Research e-ISSN: 2348-6848
p-ISSN: 2348-795X
Available at https://edupediapublications.org/journals
Volume 04 Issue 11
October 2017

Natural Resource Abundance and Economic Growth: A

Case Study of Pakistan

Hani Fatima,Fatima Jinnah Women University Rawalpindi,Pakistan

Zainulabiden Malik, Shaanxi Normal University, Xian, China

hani-fatima1@hotmail.com

zainulabidenmalik786@gmail.com

ABSTRACT

Natural resources, including both renewable and nonrenewable when being abundant are

generally considered to have a positive relation with a county’s economic growth. This paper

examines the effects of natural resource abundance on economic growth. It measures the

trend that resource-poor areas are better off than resource-rich areas. The story behind the

effect of natural resources on economic growth is a complex one, which typical growth

regressions do not capture well. Mostly evidence suggests that resource abundance has a

negative effect on economic growth of any country. This study will help us to explain why the

above mentioned negative relationship between natural resources and economic growth

exists and how this negativity can be controlled.

KEY WORDS:Economic growth,Natural resources,Relation

INTRODUCTION
Natural capital is one of the important
pillars of good economic performance and
development. It has been strongly believed
from the time of Adam Smith and David
Ricardo that the countries endowed with
natural resources have an edge over
countries that are not. Natural resource
endowments can help countries to grow
and diversify. Natural capital is considered
an important source of wealth around the
world but some studies found that
abundance of natural capital is neither
necessary nor sufficient for prosperity
and economic development. The
Available online: https://edupediapublications.org/journals/index.php/IJR/
experience shows that natural resources
played minor role in the development of
the countries like United States and
United Kingdom. Most of the Western
European countries have few natural
resources but developed on the basis of
manufacturing and services . Another
example of the experience of Asian
economies called Asian tigers that do not
possess natural resource endowments. It
can also be clearly observed that the
countries enriched with natural capital
could not sustain their economic growth.
Natural resources seem to have been more
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 International Journal of Research
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of a curse than a blessing for many
countries. Numerous researchers have
supported the view that resource-poor
countries often outperform resource-rich
countries in economic growth. Typical
examples include the Netherlands versus
Spain in the 17th century, and Switzerland
and Japan versus Russia in the 19th and
20th centuries. Natural resources serve as
important capital in economic
development. In principle, revenues
generated from the natural resource sector
should be good for the economy.
However, many resource-rich countries
have worse economic performance than
their resource-poor counterparts, a
phenomenon known as the “resource
curse”.
The idea that natural resources
might be more of an economic curse than a
blessing began to emerge in the 1980s. In
this light, the term resource curse thesis
was first used by Richard Auty in 1993 to
describe how countries rich in natural
resources were unable to use that wealth to
boost their economies and how, counter-
intuitively, these countries had lower
economic growth than countries without
an abundance of natural resources.
Pakistan is situated in a region
where bulk of natural resources is found in
its surroundings. Pakistan is one of those
countries which are endowed by the
natural resources. In spite of the
presence of vast natural resources,
Pakistan could not make significant
achievements to improve the exports
related to natural resources. Point-source
type natural resource endowment does
retard democratic and institutional
development, which in turn hampers
economic growth. Institutions and
institutional functioning are the crucial
link between resource endowments,
geography and policies, on the one hand
and economic outcomes on the other hand.
In Pakistan there is no optimal allocation
of natural resources due to improper
polices natural resources wasted to a large
extent. Natural resources are related to
agriculture and mining and these both
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sectors are of primary nature which
includes raw material which generates
little amount of foreign exchange earnings
and if natural resources will utilizes
properly they help in generating a huge
foreign exchange in the country.
Hypothesis:
Ho: There is a negative impact of resource
abundance on economic growth.
H1: There is not a negative impact of
resource abundance and economic growth.
H2: There may exist a negative or a
positive impact of resource abundance on
economic
growth.
LITERATURE REVIEW
The natural resource abundance
and economic growth is addressed in the
light of literature. An important number of
both theoretical and empirical studies have
tried to explain why natural resources are a
“curse” rather than a “blessing” for
economic development.
Theoretical Framework
Natural resources are a fixed factor
of production and hence, almost by
definition, impose a restriction on
economic growth potential. Dependence
on natural resources affects current
institutions as well as macroeconomic
outcomes (Gylfason and Zoega n.d).
According to them natural resources cause
a growing labor force and a growing stock
of capital to run into diminishing returns.
Moreover, huge natural resource rents may
create opportunities for rent-seeking
behavior on a large scale on the part of
producers, thus diverting resources away
from more socially fruitful economic
activity.
Matsuyama (1992) derives a formal
model of what is called the “linkages
approach” to the analysis of the role of
natural resources for growth. He
investigates the role of agriculture in a
model in which manufacturing is
characterized by learning-by-doing. He
concludes that forces that push the
economy away from manufacturing and
towards agriculture lower the growth rate
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 International Journal of Research
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of the economy, by reducing learning-
induced growth of manufacturing. Since
the learning effects are external to the firm,
market equilibrium is not efficient.
Sachs and Warner (1995)
generalize Matsuyama's model using the
framework of the “Dutch disease” model.
In the Dutch disease model, named after
the disappointing economic experience of
the Netherlands (and the U.K.) following
the discovery of North Sea oil in the
1970s, the economy has three sectors: a
tradable natural resource sector, a tradable
(non-resource) sector, and a non-traded
sector. The greater the natural resource
endowment, the higher is the demand for
non-tradable goods, and consequently, the
smaller will be the allocation of labor and
capital to the manufacturing sector. This
“Dutch disease” is an actual problem for
the economy if there is something special
about the sources of growth in
manufacturing, such as the learning by
doing stressed by Matsuyama.
Many countries in the world
depend heavily on natural resource
endowments and usually suffer from a
high degree of macroeconomic instability
which in turn might have negative
implications for their GDP per capita
growth. It may reduce saving, investment
and growth, as well as lowering the level
of output per capita in the long run.
Countless studies document the correlation
between abundant mineral resources and a
series of negative economic and political
outcomes, including poor economic
performance, unbalanced growth, weakly
institutionalized states, and authoritarian
regimes across the developing world.
Empirical framework
Empirical work in this area has
suffered from data limitations. Data on
past natural resource is often unreliable,
especially in historically poor and less
developed countries.
Firstly, Sachs and Warner (1995a)
made a major contribution when they
found a negative association between
natural resource abundance and growth in
a large cross-country study and a
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substantial number of papers have since
considered the natural resource curse
hypothesis from different points of view.
They also show that economies with a high
ratio of natural resource exports to GDP in
1971 tended to have low growth rates
during the subsequent period 1971-89.
This negative relationship holds true after
controlling for variables found to be
important to economic growth, such as
initial per capita income, trade policy,
government efficiency, and investment
rates. The consequences of the Sachs and
Warner paper for economic development
are far reaching. They concluded that “one
of the surprising features of modern
economic growth is that economies
abundant in natural resources have tended
to grow slower than economies without
substantial natural resources.”
Ding and Field (2005) used single-
equation model to explain growth and
found the negative impact of resource
endowment but a significant positive effect
of natural resource endowment. They
explored two more complete models to
sort out these effects. A two-equation
model in which resource dependence is
first determined by resource endowment
and other factors, and then applied
recursively in a growth equation. The
impact of natural resource endowments
and resource dependence are still
significant in the growth equation, but
their impact is substantially smaller than in
the single-equation model. They then used
a three-equation model, in which human
capital is linked recursively through its
impacts on resource dependence. In this
model they found that the impacts of
natural resources on growth have
disappeared.
Norman (2008) examines the
„resource curse‟ using new data on historic
resource stocks and an improved
econometric methodology. He
distinguishes between resource abundance
(stocks) and extractive intensity (flows),
focusing on relationships between
resources and rule of law. Previously
unavailable information on past resource
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stocks is estimated and find that
economically large initial natural resource
stocks are associated with subsequent
lower levels of rule of law and do not
directly affect growth, while raw resource
exports do not have a significant effect on
rule of law when stocks are included in the
analysis but do affect average growth
rates.
Glfason and Zoega (n.d) in their
study says that relying too heavily on
natural resources may reduce saving,
investment and growth, as well as
lowering the level of output per capita in
the long run. Prevalence of natural
resources among developing countries to
some extent reflects their
underdevelopment. They divide 85
countries into two groups which are
distinguished on the basis of saving and
investment. They propose that natural
resources may be viewed as an exogenous
factor that hampers economic development
and investment as well as institutions.
Malik, Chaudhry and Hussain
(n.d.) provides evidence of the
contribution of natural resources to
economic growth for Pakistan, using time
series data from 1975 to 2006. There is
statistically significant but adverse
relationship between natural resources and
economic growth during this sample
period. First, they estimated this
relationship in the presence of additional
variables only but when they included
some variables relating to human
development like total expenditures on
education as percentage of GDP and total
expenditures on health as percentage of
GDP, the result of the association between
natural resources and economic growth
remained the same. It is also apparent that
indicators of investment in human capital
made no contribution towards positive
direction. Findings also indicate that
inadequate attention has been paid to
human resource development in Pakistan
throughout our sample period.
Quality of institutions also
determines the effect of natural resources
on economic growth. Leong and
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Mohaddes (2011) revisit the resource
paradox and study the impact of resource
rents and their volatility on economic
growth under varying institutional quality.
They empirically test the relationship by
using annual data from 1970 to 2005 on
real GDP per capita, a rent measure based
on the prices, cost of production and
quantities of 13 commodities, and other
determinants of growth such as investment
share of GDP, human capital, trade
openness, government burden and lack of
price stability. They deal with the
simultaneity problem as well as the
omitted variable bias and find strong
evidence for the negative growth effects of
resource rent volatility whereas resource
abundance has a positive impact on output
growth. So volatility rather than abundance
per se, drives the resource curse paradox.
Countries with good institutional
arrangements can offset some of the
negative impacts of rent volatility. So
resource abundance can be a blessing
provided that growth and welfare
enhancing policies and institutions are
adopted.
Some studies also show positive or
constant relation between natural resources
and economic growth. Mehlum, Moene
and Torvik (2006) showed that countries
rich in natural resources constitute both
growth losers and growth winners. They
have shown that the quality of institutions
determines whether countries avoid the
resource curse or not. The combination of
grabber friendly institutions and resource
abundance leads to low growth. Producer
friendly institutions, however, help
countries to take full advantage of their
natural resources. An empirical analysis
using panel estimates over the 1990-2003
periods are also provided. Natural
resources are measured as the share of
GDP. The main result of this paper does
not support the “curse of natural
resources” in transition countries. Instead
of a negative relation, positive robust
impacts of natural resources on economic
growth are found. These positive impacts
even hold for “point resources” and oil
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 International Journal of Research
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which are generally seen as having a
negative effect on economic performances.
Philippot (2010) investigated the
impact of natural resource abundance on
economic growth among transition
countries. Transition countries are those of
Central and Eastern Europe (CEE) and the
Former Soviet Union (FSU), their initial
conditions were the same around 1990
under the communist regimes in centrally
planned economies. After the transition
these countries diverged dramatically.
They considered that natural endowment
can be one of the explanations of the
divergence between transition economies
during the 1990‟s since some are resource-
rich and other resource-poor. They further
provided an empirical analysis using panel
estimates over the 1990-2003 periods.
They measured natural resources by
resource rents as a share of GDP. Their
main results do not support the idea that
there is a “curse of natural resources” in
transition countries. They found a positive
and robust impact of natural resources on
economic growth and this result holds
even for “point resources” and oil which
are generally seen as having a negative
effect on economic performances. On the
contrary, agriculture and forest (“diffuse”
resources) seem to have detrimental effects
on growth.
MAIN BODY
Pakistan is one of the richest
countries in the world in terms of natural
resources but also one of the poorest
among them in their management. The
country is abundant in the vital resources
including that of energy, agriculture,
minerals, population, and geography, but
unlike the developed countries, these have
not been properly exploited due to poor
management. This situation is caused due
to several, both chronic and acute, flaws
which have led to poor governance of
country since its inception except some
brief spells of economic prosperity.
Prevalent political rivalry and instability,
worsening law and order and rampant
corruption have catalyzed the situation to
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e-ISSN: 2348-6848
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resource development. Contrary to
economic potential of its natural resources,
Pakistan is a depending on foreign aid and
debt, it is facing deficit in trade, acute
energy crisis to run industry, and water
stress for agriculture, to name a few
challenges.
Pakistan is affluent in the natural
resources. It has enormous energy surplus
resource potential of both renewable and
nonrenewable, which is greater than that of
oil rich countries of Gulf. Among the
world's 200 plus countries it has the
second largest salt mines, second largest
coal reserves, fifth largest copper and gold
reserves, seventh largest wheat and rice
production capacity. It is the sixth most
populous country in the world having large
share of young population. Had these
resources been properly managed, this
country would have been one of the richest
economies of world.
Pakistan has world's second largest
coal deposits of 185 billion tons. These are
estimated to be equivalent to 618 billion
barrels of crude oil. This is more than
twice if we compare it with oil reserves of
Saudi Arabia. If it is converted into oil by
gasification, it will generate 650 barrels of
crude oil which at an average market rate
of eighty dollars per barrel, would generate
5.2 trillion dollars.
The minerals are also vital natural
resources available in great quantity.
Pakistan has fifth largest copper and gold
reserves in the world. Copper and gold
reservoir, have been estimated to be worth
of 260 billion dollars, which is ten times
the all financial aid received from USA in
last sixty year. But instead of exploiting
own resources for economic independence,
country has been dependent on foreign aid
and there exists negative relationship
between natural resource and economic
growth.
The negative relationship between
natural resource wealth and economic
growth can be seen by looking at an
example from the petroleum-producing
countries. From 1965–98, in the OPEC
countries, gross national product per capita
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growth decreased on average by 1.3%,
while in the rest of the developing world,
per capita growth was on average 2.2%.
Countries rich in natural resources
constitute both growth losers and growth
winners. One important finding in
development economics is that natural
resource abundant economies tend to grow
slower than economies without substantial
resources. For instance, growth losers,
such as Nigeria, Zambia, Sierra Leone,
Angola, Saudi Arabia and Venezuela, are
all resource-rich, while the Asian tigers:
Korea, Taiwan, Hong Kong and
Table: 03 Growth Rates of Six Oil-Economies:
Countries Year
Bahrain 1975-1988
Iraq 1970-1987
Kuwait 1980-1989
Oman 1970-1989
Saudi Arabia 1970-1989
UAE 1980-1989
Average
Source: Penn World Tables, version 5.6 (update of data in Summers and Heston, 1991)
ANALYSIS
We analyze that that Pakistan is not
poor, but poorly managed country. The
factors which have caused the poor
management of natural resources include
political instability, political indecision
making, lack of vision and planning,
flawed policies, bureaucratic bottlenecks
and corruption, lack of human resource
development, worsened law and order
situation. These factors have led not only
to the poor management of natural
resources but also to the poor governance
of country.
The political instability has been
the main cause of such damage. Since the
independence, no political group in
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Singapore, are all resource-poor. On
average resource abundant countries lag
behind countries with fewer resources. Yet
we should not jump to the conclusion that
all resource rich countries are cursed. Also
many growth winners such as Botswana,
Canada, Australia, and Norway are rich in
resources. Moreover, of the 82 countries
included in a World Bank study, five
countries belong both to the top eight
according to their natural capital wealth
and to the top 15 according to per capita
income (World Bank, 1994).
Growth Rates
-1.2633
-1.8761
-8.0123
0.6910
-0.6820
-6.1937
-2.8894
Pakistan has been given enough time to be
mature. The military interference in
politics and rivalry among political
stakeholders are the key features of brief
history of this country. This inconsistency
has kept the exploitation of natural wealth
unattended. Coupled with this, the flawed
policies of successive governments have
caused tremendous problems despite
availability of adequate resources. The
energy sector is a vivid example of such
poor management.
These factors of poor management
have placed Pakistan in an undesirable
situation domestically and internationally.
The socio-economic situation remains
gloomy as the GDP growth rate is one of
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 International Journal of Research
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the lowest in South Asia at 2.2 percent,
trade deficit is estimated about $16 billion,
inflation rate continues to be in double
digits at 15 percent, population below
poverty line is alarmingly around 35
percent, and unemployment is at 15
percent and if Pakistan utilizes its
resources optimally it can become the
world‟s richest country, as there is need of
reforms in institutional, political, econimc
and social setup.
CONCLUSION AND
SUGGESTIONS
We have come to conclude that
there exists a negative relationship
between natural resource abundance and
economic growth of a country. Ignoring
other factors such as education, training,
awareness and accountability, a negative
relationship will always be seen.
The pragmatic approach and policy
direction can help the country to be able to
rely on its own resources instead of
dependency. Pakistani leadership must
focus on exploration of natural resources
and their scientific management. Properly
managed natural resources can become
instrumental in national income and its
growth. Extensive geological survey is
required to discover the resource potential,
planning and vision is needed to explore
the proved but untapped resources and
effective strategy is essential to fully
exploit the resources under use.
In order to take maximum benefits
from natural resources there is the need of
technical education of people involved in
resource exploitation and management.
The technical education ensures that there
is minimum wastage of the resources.
Hence, such education should be made
compulsory for the people in concerned
areas of activity.
On the other hand, the politicians,
policy makers and all the stake holders
must adopt a rational approach not to
politicize natural resources. It should be
prioritized as the vital national interest and
dealt with as such. The controversies on
the management of water and mineral
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resources must be resolved pragmatically
for best interest of the nation.
Last but not the least, worsened
law and order situation in Pakistan, which
has led to the lack of investment, must be
checked. The private firms engaged in
resource exploration must be protected by
the state. Ensuring the security, would
attract investment in the respective areas
which would subsequently guarantee the
inflow of capital in the national
economy and the resource potential could
be fully exploited.
It needs not to be emphasized that
Pakistan is not poor but poor management
of its natural resources has made it so. The
enormous natural resources of all kinds
like energy, minerals, agriculture, and
human could have made this country a
wealthy economy. Instead, there been
bleak picture of economy and undesirable
image outside due to the chronic flaws in
vision and policies. Thus, the daunting
challenge of poor management of natural
resources direly needs to be addressed not
only to overcome the perils caused due to
it but also to achieve economic self
sufficiency and prosperity of the nation.
By surpassing this challenge, Pakistan is
destined to have eminence place in the
world as a stable, growing and prosperous
nation.
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