Resource Curse


DEFINITION of 'Resource Curse'

A paradoxical situation in which countries with an abundance of non-renewable resources experience stagnant growth or even economic contraction. The resource curse occurs as a country begins to focus all of its energies on a single industry, such as mining, and neglects other major sectors.

As a result, the nation becomes overly dependent on the price of commodities, and overall gross domestic product becomes extremely volatile. Additionally, government corruption often results when proper resource rights and an income distribution framework is not established in the society, resulting in unfair regulation of the industry. The resource curse is most often witnessed in emerging markets following a major natural resource discovery.

Also known as the "paradox of plenty".

BREAKING DOWN 'Resource Curse'

A commonly cited example of the resource curse is the Dutch disease, a situation which occurred in the Netherlands following a large natural gas find. The steps of the Dutch disease include:
1. A nation finds ample natural resource reserves
2. Economic focus begins to target this high-income industry
3. Skilled workers from other sectors transfer to the resource sector
4. Higher wages make the national currency less competitive
5. Other industries, especially the manufacturing sector, begin to suffer

Both, the Dutch disease and the resource curse have a paradoxical impact on the overall economy following the discovery of large natural resource reserves.

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