This type of problem is often observed in developing economies that have recently discovered large natural resource deposits.
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, offering attractive wages, and encouraging citizens to invest their savings in the new industry. In the long run, this dynamic can lead to countries becoming very dependent on the price of that particular commodity , subsequently making it difficult to continue developing the economy.
Consider the case of Angola. Located on the west coast of Southern Africa, Angola is home to some 30 million citizens. Another country that relies heavily on selling oil to other nations is Saudi Arabia.
Fortunately, unlike Angola, Saudi Arabia has taken steps to steadily diversify its economy away from crude oil exports. In the intervening years, Saudi Arabia succeeded in increasing its exports of various manufactured goods that are related to crude oil but lie further up the value chain. In doing so, Saudi Arabia was able to reduce its reliance on crude oil and take steps toward developing its economy, making it less vulnerable to the resource curse.
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Appreciation in the exchange rate. A country which finds natural resources will tend to have an appreciation of the exchange rate due to the resource effect. This has a benefit of making imports relatively cheaper important if the country is net food importer. However, the appreciation of the exchange rate can damage other export industries and make them less competitive.
This results in an unbalanced economy where only sectors which can thrive are the resources. For example, in the mini-oil boom of countries like Mexico, Venezuela and Nigeria saw rapid appreciation in the exchange rate due to the discovery of oil, but this meant virtually no other industries remained internationally competitive.
A damaging effect in the long-term. Income elasticity of demand. Primary products tend to have a lower income elasticity of demand than services and manufactured goods. With rising global growth, there is a relatively smaller percentage increase in demand for primary products. This means countries producing primary products experience declining terms of trade.
Monopoly ownership. Natural resources tend to be owned by firms with significant degrees of monopoly and monopsony power. Often they are global multinationals, e. This means that the profits from selling natural resources are taken primarily by a small percentage of wealthy shareholders often foreign.
This means profits flow back to the country of the multinational and do not directly benefit the developing economy. Furthermore, the level of tax paid by multinationals is often set at low level to attract investment. Developing economies with weak legal structures and history of business also see profits syphoned off by corruption. Mining companies do provide employment, but the percentage of earnings going to workers is often low.
Resources are not necessarily an impediment to economic growth. Norway has made effective use of natural resources. Acemogluet al. Sachs and Warner found A negative correlation between resource abundance and rates of economic growth. They suggested rent-seeking activity from the abundance of raw materials can adversely affect political and economic structures. Sachs, Jeffrey D. Reasons for resource curse Civil war in control of ownership. If the resource runs out, the economy is left with only small industrial sector and scope for growth Appreciation in the exchange rate.
A damaging effect in the long-term Income elasticity of demand. Empirical studies on the Resource Curse Sachs and Warner found A negative correlation between resource abundance and rates of economic growth. Related Policies for developing economies. We use cookies on our website to collect relevant data to enhance your visit. Our partners, such as Google use cookies for ad personalization and measurement. However, you may visit "Cookie Settings" to provide a controlled consent.
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Cookie Duration Description bcookie 2 years This cookie is set by linkedIn. The de-facto variation in local democratic institutions in Nigeria provides interesting insights. Under the Nigerian Constitution, local government councils are supposed to be elected by the people, but in many instances, they are appointed by state governors see figure 1b. This variation allows us to study the effects of different power-sharing regimes at the local government level on political violence, using monthly tax revenue allocations as an exogenously determined measure for contested resources.
Notes: Panel a Monthly variation in overall revenue allocations made to local governments right scale , and monthly prices of Brent Crude oil left scale. Panel b : Share of months with an elected local government for each local government area in the period to Panel B: Monthly time series variation in the share of local government areas with an elected government council over time.
Do elected local governments promote peace? Do differences in the cohesiveness of local government institutions explain these effects and if so, why? Revenues highly correlate with global oil prices, as displayed in figure 1 a. We find a significant and economically sizeable link between resource rents and the incidence of political violence this is consistent with a theoretical prediction by Besley and Persson.
These effects are driven by positive shocks to resource rents. The ensuing low-intensity conflict is highly institutionalized, involving government repression and militias using targeted violence, though not broad, open rebellions involving riots or protests.
Looking at idiosyncratic variation in whether local governments are elected or appointed, we find that having an elected local government systematically weakens the link between rents and the incidence of political conflict. Rather than focusing on any individual election—which may be prone to violence directly affecting its outcome —we contrast consecutive periods over which local governments are elected as opposed to appointed and study the systematic link between shocks to rents and violence across such periods.
Our identification strategy allows us to tackle many plausible endogeneity concerns, while providing sharp results that match key theoretical predictions in Besley and Persson. We also turn to individual-level micro data to corroborate our findings, documenting that fear of political violence, actual victimization, and even engagement in conflict broadly follow the pattern suggested by the aggregate data.
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