How Natural Resources Affect Economic Development

Abstract

Recent studies have established that, since the 1960s, resource-abundant countries have experienced significantly slower growth than resource-poor countries (Lal and Myint, 1996;Sachs and Warner, 1995;Ross, 1999).This conclusion is robust in the light of both sensitivity tests (Sachs and Warner, 1997) and differences in how the natural resource endowment is classified (Wood and Berge, 1997).However, economic theory provides no convincing explanation as to why resource abundance should be inherently disadvantageous.Indeed, the additional rents and foreign exchange obtained from commodity exports should permit higher levels of investment and greater capacity to import capital goods with which to accelerate economic growth (Auty and Mikesell, 1998: 13-31).Moreover, during the first golden age of economic growth from 1870 to 1913, resource-abundant countries experienced rapid growth, and in many cases outperformed the resource-poor countries of that period (Lewis, 1978;Maddison, 1995;Findlay and Lundahl, 1999).Policy differences offer the most plausible explanation (Ascher, 1999;Gelb, 1988;Lal and Myint, 1996).This article argues that variations in economic performance are caused by differences in the quality of governance that are linked through the type of political state and the pattern of structural change to the natural resource endowment.It develops two models to explain the diverging performance of resource-poor and resource-abundant countries.These are described in the following section.They are presented as stylised facts models, rather than mathematical models, in order to be accessible to non-economists.The remainder of the article uses case studies to calibrate the models for differing permutations of the political state and natural resource endowment.More specifically, the third section applies the models to Malaysia and Ghana in order to show why countries with similar and favourable initial conditions but different political states will trace different development trajectories.The fourth section applies the models to a category of resource-abundant country, the mineral economy, which has performed relatively poorly, with reference to Bolivia and Saudi Arabia.The final section draws the conclusions.

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