Related links: http://www.richmondfed.org/publications/research/region_focus/2010/q4/research_spotlight_weblinks.cfmEconomic development ; Natural resources

Becky Johnsen

English

Research Papers in Economics

T
he management of natural resources is important
for all countries, but perhaps especially so for 
developing countries. From rare earth minerals to
oil to diamonds, certain countries have been endowed with
resources that theoretically should bestow wealth and
trading leverage. Nonetheless, many countries that possess
these riches still suffer from poor economic conditions.
This phenomenon was labeled the “natural resource curse”
by economist Richard Auty in 1993. Since then, researchers
have done considerable work on this topic. 
Among the most recent 
of these articles, Harvard
University Economist Jeffrey
Frankel consolidates the often-
times opposing conclusions on
the resource curse into a single
survey. In his essay, Frankel cites
potential causes of the natural
resource curse, as well as examples of both poor and prudent
policy decisions to counteract the phenomenon. Finally,
Frankel proposes various policies that have never been
implemented, but according to much of the existing 
literature, should be effective.
According to Frankel, the term “natural resource curse” is
relatively self-explanatory, that “… the possession of oil, 
natural gas, or other valuable mineral deposits or natural
resources does not necessarily confer economic success.” 
He admits that the term seems counterintuitive, but points
to one particular natural resource to help illustrate the term: 
“… it is best to view oil abundance as a double-edged sword,
with both benefits and dangers.”
Frankel then identifies the six “channels” which suggest
that “possession of natural resources … can confer negative
effects on a country, along with the benefits.” He begins with
one channel that has been much debated among economists,
the downward long-term trend in commodity prices.
Frankel frames the debate as one between “Malthusianism,”
the idea that population growth comes at the cost of dimin-
ishing stores of natural resources, versus “cornucopianism,”
the belief that resources are renewable or replaceable. 
In the end, Frankel concludes that both sides have their
shortcomings. “Malthusians do not pay enough attention to
the tendency for technological progress to ride to the rescue.
On the other hand, the fact that the Malthusian forecast has
repeatedly been proven false in the past does not in itself
imply the Panglossian forecast that this will always happen
in the future.” Because of this, Frankel does not believe that
there is conclusive evidence for this to be a factor in the 
natural resource curse. “[I] largely rejected the hypothesis 
of a long-term negative trend in world prices, while 
accepting the hypothesis of high volatility.”
Nonetheless, Frankel identifies five other channels that
he perceives as plausible reasons for the natural resource
curse. The first three are the high volatility of commodity
prices, the crowding out of the manufacturing sector as a
result of resource specialization, and the fact that “mineral
riches can lead to civil war.” The final two are that endow-
ments of natural resources can lead to poor institutions, and
the Dutch Disease, which suggests that a commodity boom
can lead to real appreciation of the domestic currency and
increased government spending.
Once the boom dies down it is
difficult to readjust from appreci-
ation and high spending.
Frankel cites policies that
national governments have tried
to combat the resource curse,
including marketing boards, 
taxation of commodity production, producer subsidies,
other government stockpiles, price controls for consumers
and international cartels.
Frankel proposes that some institutions may succeed in
a variety of ways and offers three examples that should 
effectively share risk. These are price-setting in contracts
with foreign companies, hedging in commodity futures 
markets, and denomination of debt in terms of commodity
price. He also promotes two means of effective monetary
policy: managed floating and alternative nominal anchors. 
Finally, Frankel points to several historical examples
where governments were successful in mitigating harms
associated with the resource curse. First, he cites reserve
accumulation by central banks. Next, he discusses Chile’s
rules for the budget deficit, and then Sao Tome and
Principe’s sovereign wealth funds. He then points to Alaska’s
practice of lump-sum distribution in booms. His final two
examples are the process of reducing net private capital
inflows during booms and the effort to impose external
checks. Frankel demonstrates that there are several ways to
fall victim to the natural resource curse, but also that a 
variety of institutions are at a government’s disposal. 
Frankel avoids generalizations by addressing different
channels and institutions in existence by various resource-
rich nations. Frankel has a cautiously optimistic conclusion
about the natural resource curse. “Needless to say, policies and
institutions are influenced by local circumstances, country 
by country. But with innovative thinking, there is no reason 
why resource-rich countries need fall prey to the curse.”
Essentially, through understanding the potential externalities
of resource wealth, countries can implement effective policies
to escape the resource curse, he concludes.  RF
Region Focus | Fourth Quarter | 2010  11
Do Natural Resources Support Economic Growth?
BY BECKY JOHNSEN
R ESEARCHSPOTLIGHT 
“The Natural Resource Curse: 
ASurvey.” Jeffrey A. Frankel. 
National Bureau of Economic Research
Working Paper no. 15836, March 2010.

Research spotlight : Do natural resources support economic growth?

http://www.richmondfed.org/publications/research/region_focus/2010/q4/pdf/research_spotlight.pdf

Research spotlight : Do natural resources support economic growth?

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Research Papers in Economics