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.

RELATED TERMS
  1. Nonrenewable Resource

    A nonrenewable resource is a resource of economic value that ...
  2. Assignment Method

    Assignment method is a way of allocating organizational resources ...
  3. Severance Tax

    Severance tax is a state tax imposed on the extraction of non-renewable ...
  4. Scarcity

    Scarcity refers to the basic economic problem, the gap between ...
  5. Upstream

    Upstream is a term for the exploration and production stages ...
  6. Declining Industry

    A declining industry is an industry where growth is either negative ...
Related Articles
  1. Investing

    Natural Resource Investing

    Learn more about ETFs and futures, two of the many investment options available to natural resource investors.
  2. Investing

    Mine For Profits With Natural Resource Sector Funds

    These funds allow everyday investors to get in on the action in this promising sector.
  3. Investing

    Natural Resources ETF: IGE or GNR?

    Explore a comparison between IGE and GNR, and learn about the differences between the two ETFs, and their top holdings and sector allocations.
  4. Insights

    Is Infinite Economic Growth on a Finite Planet Possible?

    While the finite nature of Earth's resources limits the direction of economic growth, it does not mean that infinite economic growth is impossible.
  5. Insights

    House Votes to Kill Dodd-Frank Provision Affecting Energy Companies

    U.S. companies may no longer have to disclose payments to foreign governments in the near future.
  6. Financial Advisor

    Top 5 Natural Resources Mutual Funds (FSCHX)

    Discover which mutual funds in the natural resources category are top-rated, and understand why these funds may be suitable as part of a portfolio.
  7. Investing

    Pioneer Natural Trades Ex-Dividend Wednesday

    Pioneer Natural Resources will send its dividend payment on April 12 to shareholders of record as of March 31.
  8. Investing

    Popular Resources for Equity Research and Analysis: A Tutorial

    This tutorial offers details on the most popular resources for equity research and analysis.
RELATED FAQS
  1. Why are the factors of production important to economic growth?

    Find out why the factors of production are critical for real economic growth, where wages rise and consumer goods costs fall ... Read Answer >>
  2. How do "factor endowments" impact a country's comparative advantage?

    Find out how factor endowments – namely labor, land and capital – affect a country's comparative advantage and how that advantage ... Read Answer >>
  3. How are capitalism and private property related?

    Capitalism is built on the free exchange of goods and services between different parties; private property is a crucial part ... Read Answer >>
  4. What role does the government play in capitalism?

    Take a deeper look at the role of government in a capitalist economic system and about competing ideas about the proper amount ... Read Answer >>
Trading Center