Module: Innovation and Economic Development 923N1

Candidate Number: 259850

Word Count: 3257

The Resource Curse: Economic Growth and Human Rights Implications in Natural Resource-
Rich Countries

Chapter 1: Introduction

Natural resources can be a source of wealth and well-being, but in reality, this is not the case.
According to studies, countries rich in natural resources suffer from slow economic growth, little
development (Sachs and Warner 2001, Frankel 2010), misuse of the profits obtained from selling
them (NRGI 2015), to develop a welfare state and diversify the economy from one of
exploitation and export of primary materials to one of manufacturing, export and
industrialization (Sachs and Warner 2001, Romer 2018, Auty 2001). This condition is called
Resource Curse. I will also discuss the human rights implications of an economy rich in natural
resources, such as corruption (Sachs and Warner 2001, Gylfason 2001, NRGI 2015, Auty 2001),
conflicts (NRGI 2015, Auty 2001) and the impact the have on democracy (Gylfason 2001, NRGI
2015). Likewise, in order to transition to renewable energies, these are dependent on natural
resources (Marín and Goya 2021, Klare 2021, Kirsten et al. 2020, IEA 2021). This means that
natural resources will have to continue to be extracted in the long term, which can provide
economies rich in these resources with an opportunity for rapid economic growth.

I will discuss the concept of the Resource Curse and analyse the causes of slow economic growth
in resource-abundant countries in Chapter 2, followed by the human rights implications of such
in an economy in Chapter 3. In Chapter 4, I will look at possible solutions for making good use of
the profits obtained from the extraction and sale of natural resources for accelerated economic
development. Subsequently, in Chapter 5, I will analyse the opportunities and challenges to be
faced when making the energy transition to renewable energy. Finally, in Chapter 6, I will draw
the conclusions from the analysis of the literature used as a reference for this essay.

Chapter 2: Slow economic growth in resource-rich countries and the Resource Curse

In this chapter, I will analyse the causes of slow economic growth in most resource-rich countries
and the concept called Resource Curse and the causes that generate this phenomenon. For this
essay, I will refer to natural resources such as minerals and metals only (such as copper, lithium,
among others) and to a lesser extent oil and gas. Let us start by defining what the Resource
Curse is. According to Sachs and Warner (2001), his analysis of literature from various authors
shows evidence that resource-rich countries perform poorly economically. Similarly, the Natural
Resource Governance Institute (2015) explains that the Resource Curse is the inability of many
resource-rich countries to take advantage of the benefits obtained from their natural wealth
and adds that governments fail to meet the public welfare needs of the population. Finally,
Frankel (2010) defines the Resource Curse as the inability of resource-rich nations (such as
Angola, Nigeria, Sudan, and the Congo) to grow economically and compares them with resource-
poor nations that have nevertheless experienced rapid and accelerated economic growth (such
as Japan, Korea, Taiwan, Singapore and Hong Kong). In this sense, the Resource Curse can be
defined as the phenomenon that causes poor economic performance and slow growth in
resource-rich nations. Although there are no exact or defined causes for this phenomenon,
different authors agree that the Resource Curse, and its implications, are caused by the following
factors: Dutch Disease (Gylfason 2001, NRGI 2015), Incompetent authorities, corruption, misuse
of the profits obtained, Weak Institutions (Sachs and Warner 2001, Gylfason 2001, NRGI 2015),
lack of industrialization and innovation in national economies (Sachs and Warner 2001 and
Romer 2018) and the failure to develop an economy that exports non-primary inputs (Sachs and
Warner 2001, Auty 2001). In the following paragraphs of this chapter, I will delve deeper into
these causes.

One of the main problems of a country that finds natural resources is the desire to exploit them
and sell them on the international market for profit. This results in an overvaluation of the
national currency (Gylfason 2001), the non-development of other sectors of the national
economy and the transfer of all investment and labour to the natural resources sector from
other sectors of the economy (NRGI 2015). This is known as Dutch Disease. Also, since the
economy is only focused on one sector, this makes it more vulnerable to changes in commodity
prices on the international market, which can lead to economic collapse as there is less income
from the sale of the same resources (Auty 2001). According to these definitions, Dutch Disease
is the symptom that generates that, in a national economy, all the focus is on the extraction
sector. This in turn causes other sectors of the economy, such as the manufacturing industry, to
become less competitive in the international market because their products become more
expensive compared to those of other countries due to the overvaluation of the currency.
Therefore, this generates a decline in these sectors and makes them less resilient to external
shocks due to the change in the price of resources sold because they are only focused on a single
economic activity.

As shown in the previous paragraph, one of the effects of having an economy dependent on
natural resources is that there is no development in other sectors and that capital and labour
are transferred to this sector. Since there is only one economic sector, this can lead to a shift of
entrepreneurial activity and innovation to this single sector (Sachs and Warner 2001). As the
wage increase is an effect of Dutch Disease in the mineral resources sector (Sachs and Warner
2001), this generates incentives for potential innovators and entrepreneurs to work in that
sector and not generate new companies or innovate in new technologies, products and services.
This seriously affects growth, since, according to Fagerberg (2006), innovation is an extremely
important factor in explaining the differences in the economic performance of different
companies, regions and countries. Likewise, productivity and income are higher in innovative
countries or regions than in non-innovative ones (Fagerberg 2006). On the other hand, Romer
(2018) indicates that economic growth occurs when nations take advantage of their resources
and transform them into a product or service that has more value. In this sense, rapid growth
can be achieved by allowing companies to innovate and create new ideas on how to create value
(Romer 2018). In this sense, focusing only on one economic activity leads to a lack of innovation
and entrepreneurial activity in other sectors. By focusing all the labour force and capital
investment in the natural resources sector, potential innovators or entrepreneurs are
encouraged to work in that sector, thus stopping innovation or the creation of new companies.
Thus, there is no economic growth in the region, since innovation and transformation of
resources is an important factor to achieve this.
Another problem afflicting resource-dependent economies is the lack of industrialization,
manufacturing and export of non-primary products. Resource-rich countries that depend on the
export of primary resources mainly delay their labour-intensive phase of competitive
industrialization (Auty 2001). This is because all labour capital is focused on only one economic
sector as mentioned by the Natural Resource Governance Institute (2015). In addition, the
development of industry usually goes hand in hand with the development of technology and
innovation. If a nation focuses primarily on exporting natural resources, it may not invest as
much in the research and development needed to develop a strong technological base (Sachs
and Warner 2001). This may limit the nation's ability to develop more advanced and
sophisticated industries. Additionally, in the absence of industrialization, an economy based on
the export of manufactured products cannot develop (Sachs and Warner 2001), as they only
focus on the export of primary products.

As stated in this chapter, slow economic growth and the Resource Curse are due to the
phenomenon known as Dutch Disease. This causes a country's entire economic activity to focus
on natural resources and generates negative effects such as economic collapse in the face of
external shocks, lack of innovation and entrepreneurship and, finally, slow industrialization and
lack of exports of manufactured products. However, the problems generated by economies
focused on natural resources are not only economic, but also social. In the following chapter, I
will mention and explain some of them.

Chapter 3: Implication on Human Rights

In addition to generating slow economic growth in the country, economies that depend on
natural resources also suffer from human rights implications for their inhabitants. One of the
main implications is rent seeking by government officials (Sachs and Warner 2001, Gylfason
2001, Auty 2001) and poor public institutions (NRGI 2015, Auty 2001) that do not properly use
the earnings from the exploitation and sale of natural resources for economic development or
to create a welfare state. Rent seeking is when an organized group spends resources on political
activities to increase its existing wealth (rents) without creating new wealth. Rent seeking can
waste resources and talent, reduce economic growth, inhibit innovation (Olson 1982) and
increase inequality (Stiglitz 2013). In that sense, since natural resource rents are concentrated
in one activity, it is easy for government officials to appropriate them, which generates
corruption. Corruption distorts the redistribution and allocation of resources, resulting in
economic inefficiency and social inequity (Sachs and Warner 2001), benefits to minority political
groups and powerful actors (Auty 2001) and distorts the economy as politicians focus only on
rent-seeking (Auty 2001). Likewise, it is estimated that the political state of a nation rich in
natural resources tends to be a predatory state that uses the rents obtained from the
exploitation and sale of resources (between 13% and 23% of GDP) to promote its own interests
instead of developing coherent economic policies or to develop a welfare state (Auty 2001).
Rent-seeking also makes public institutions weaker, as it generates institutional damage because
politicians or government officials create new regulations that facilitate this type of activity
(NRGI 2015). Recent theory indicates that the revenues obtained can be managed outside the
national budget and are easily acquired by powerful elites (NRGI 2015). In this sense, a resource-
rich economy causes powerful and governmental actors to seek to acquire the greatest amount
of rent from the exploitation and sale of these resources, which generates corruption,
misallocation of resources, inequality and inequity and only the most powerful benefit. Thus,
politicians and decision makers fail to develop policies to develop economic growth, a welfare
state and do not invest in the development of human resources, such as education (Gylfason
2001).

Another effect caused by the described problems of a natural resource economy is that they can
generate nations with authoritarian governments and social and armed conflicts (NRGI 2015).
With respect to authoritarian governments, this happens because of the way taxation is applied
(NRGI 2015). Policy specialists explain that a government is democratically strong when its tax
collection depends on the citizens. This makes governments more attentive to the demands of
their citizens (NRGI 2015). However, when the entire source of income comes from a single
activity, in this case the exploitation and sale of natural resources, the opposite is true and the
government tends to become authoritarian (NRGI 2015).

An additional implication of a country rich in natural resources is the armed conflicts generated
by the control of these resources (NRGI 2015). A clear example is what happens in the Katanga
province in the Democratic Republic of the Congo, or better known as the Copper Belt, a region
that has sought to secede from the rest of the country in the past and still has impulses to do so
(Klare 2021). In addition, as many sought-after raw materials are often concentrated in specific
regions, it can generate geopolitical tensions. Institutes such as the International Energy Agency
(IEA) are concerned about future disputes over access to resources that will be necessary for a
transition to renewable energy (Klare 2021).

As a conclusion to this chapter, an economy rich in natural resources also has negative
implications on the human rights. From corruption, rent-seeking, authoritarian governments
and social and armed conflicts. Although there is no formula or framework to follow that
indicates the steps to follow to make good use of natural resources for economic growth and
not fall into the negative effects that an economy rich in natural resources can generate, in the
next chapter I will mention two possible solutions to benefit from the abundance of resources.

Chapter 4: Possible Solutions to Benefit from Resource Abundance

As mentioned in Chapter 2 of this essay, one of the problems that prevent rapid economic
growth is due to the lack of innovation and entrepreneurship by potential entrepreneurs, since
the sale and exploitation of natural resources tends to dominate all the economic activity of a
nation (Sachs and Warner 2001, Romer 2018). Stevens (2005) makes a study of resource-rich
nations and analyses four countries that were the exception to the rule and had an economic
growth despite being countries rich in natural resources. These countries are Botswana, Chile,
Indonesia and Malaysia. By comparing these four nations with each other, Stevens (2005)
identifies that the state functioned as a development agent to provide the necessary conditions
and promote investment and new enterprises that diversify economic activities. To achieve this,
these states created policies to provide and ensure these conditions (Stevens 2005). Likewise,
Gylfason (2001) indicates that the industrialization and diversification of the economies of
Botswana, Indonesia and Malaysia caused the GNP per capita to increase by 4% each year in the
period from 1970 to 1998 and long-term investment of more than 25% of the GNP in the same
period. In this sense, both authors agree that investment and diversification of the economy can
bring benefits to countries rich in natural resources, as is the case of the countries mentioned
above. To achieve this, there must be a developmental state that promotes investment and
ensures the necessary conditions through policies for entrepreneurs to innovate and diversify
economic activities.

Another possible solution to make good use of the income obtained from the exploitation and
sale of natural resources is investment in human capital, especially in education. According to
Auty (2001), one of the four conditions necessary to obtain this economic development is
equitable access to primary education. Likewise, Gylfason (2001) also proposes four conditions
for the same purpose. One of them is investment in education. He explains that there is an
inverse relationship between the amount of labour in primary production with respect to the
amount of natural resources, taking the OPEC countries as an example. In them, only 57% of
young people attended secondary school and invested less than 4% compared to 64% in
secondary school attendance and 5% investment in the GNP of the rest of the world (Gylfason
2001). In addition, education improves people's quality of life and promotes economic growth,
since it increases the efficiency of the labour force, promoting democracy (Barro 1997) and
creates better governance, increased health and equality (Aghion et al. 1999). Likewise, Gylfason
(2001) indicates that better education generates a shift from primary production to
manufacturing, which generates diversification in the economy. Finally, Romer (2018) states
that subsidies in education increase the supply of scientists and engineers, which consequently
provides an innovation engine.

In conclusion, there is a relationship between the two proposed solutions to overcome the
Resource Curse and obtain rapid economic growth. Investment in education generates a
diversification of the economy from one of primary production to one of manufacturing (Romer
2018), which means that potential entrepreneurs or innovators do not go to the primary sector.
Likewise, the role of the state as a developmental state is extremely important to create the
necessary conditions for this to happen, as seen in the examples above. It is important to keep
this in mind, as there are still several nations that have the opportunity to improve their
economies due to the requirement of minerals and other components necessary for the
transition to renewable energy. In the next chapter, I will briefly explain the opportunities and
risks of making this transition for the economies that supply the necessary materials.

Chapter 5: Opportunity with materials for the energy transition to renewable energy and
possible complications

According to a study conducted by the World Bank (Kirsten et al. 2020), it is estimated that the
demand for mineral resources for the creation of renewable energy generation technologies,
such as solar panels or wind turbines, will increase significantly until 2050 compared to 2018
levels. According to the model done in their study, they estimate that some materials will have
an increase in demand of up to 500% (Kirsten et al. 2020). This is consistent with a study
conducted by the IEA, which estimates that the demand for the materials needed for energy
storage generated by the technologies mentioned above will be 50 times higher in the case of
lithium and 30 times higher for cobalt and graphite if the switch to electric vehicles is generated
(IEA 2021, Klare 2021). Considering that one of the current goals is to keep the temperature
increase caused by global warming below 2 degrees Celsius, the demand for these materials
necessary for the creation of renewable energy generation technologies will increase (Kirsten et
al. 2020). This transition to renewable energy will have a strong impact on economies dependent
on the exploitation and sale of these necessary resources, as the world economy will be unable
to find alternative materials to generate this transition (Marín and Goya 2021). This means that
the countries that concentrate these resources will have the opportunity to receive significant
income from the exploitation and sale of these resources, thus generating greater investment,
exports, employment and tax revenues (Marín and Goya 2021). However, this is not always a
blessing and has, usually, negative consequences as shown in the previous chapters.

Chapter 6: Conclusions

Countries rich in mineral resources generally suffer from negative effects. The main one of these
is the so-called Resource Curse, which is generated by different economic phenomena, which
include Dutch Disease, misuse of the profits, lack of industrialization and innovation in national
economies and the non-development of an economy exporting non-primary inputs. I also
analysed the effects on human rights. These include rent seeking by political actors and power
groups, corruption, weak democracies and social and/or armed conflicts over the control of
these resources. Next, I determined two methods in which the decision makers of nations can
adopt to make good use of the natural resources they possess to achieve rapid economic
growth. Among these are industrialization and investment in education. Finally, an analysis of
the opportunities and disadvantages of switching to renewable energies and the implications
for the consumption of resources needed to develop them was made.

As a personal opinion, I would like to conclude that the countries that concentrate the resources
needed for renewable technologies would have a great opportunity to grow economically due
to the exploitation and sale of these resources. It is very important that decision makers study
history well and avoid at all costs what other nations did with the natural resources they possess
in order to avoid the Resource Curse. In this essay, I have provided two possible paths to take.
One is the industrialization of the economy, so that they can diversify their economy and sell
manufactured products on the international market, which have a higher value than primary
commodities. The other is investment in education, which has the previous point as its result.
Likewise, the state must assume the role of Developmental State and create policies to create
the necessary conditions for the above to happen.

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