What is the 'Resource Curse'

The resource curse is a paradoxical situation in which countries with an abundance of non-renewable natural resources experience stagnant economic growth or even economic contraction. The resource curse occurs as a country begins to focus all of its production means on a single industry, such as mining, and neglects investment in 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 are 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.

Sometimes the resource curse is known as the "paradox of plenty."

BREAKING DOWN 'Resource Curse'

The resource curse gets its name from the binary way in which it affects an economy. Most often the problem is seen in less developed countries with relatively concentrated and undiversified industrial sectors. Once a natural resource is discovered, available investment capital tends to gravitate to this industry. The new industry becomes a source of economic growth and relative economic prosperity, as jobs and disposable income that were previously absent become available.

The curse comes from the fact that this new industry that is bringing economic prosperity begins to negatively impact other parts of the economy by diverting available means of production and investment only to the new industry itself. The concentration of capital, labor and economic resources to a single industry can leave countries vulnerable to a downturn in that industry. Countries with more diversified economies tend to weather global economic cycles better than countries with concentrated economies.

This is particularly the case with oil producing countries like Russia, Saudi Arabia and Venezuela. Saudi Arabia recently announced a new economic plan called Saudi Vision 2030 intended to diversify its economy away from the oil industry and break its resource curse.

Resource Curse Example

A commonly cited example of the resource curse is the Dutch disease, a situation that 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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