Can a country be economically poor, despite being rich in resources? The answer is YES. Resource curse refers to a paradoxical situation in which a country underperforms economically, despite being home to a valuable resource.
So the question is
There are many theories behind what exactly causes the phenomenon. Generally speaking, abundant availability of a very valuable resource may turn decision makers focus on that resource only. They focus on making and improving infrastructure and policy related to that resource only. Whereas, for the economic well being of a country, holistic and inclusive focus on all sectors is important.
So what exactly is the “curse”? Resource curse usually refers to a combination of problems such as:
- Conflict: Natural resources may provoke different groups towards conflict to gain control over the resource.
- Inefficient spending and borrowing: The revenues extracted from such natural resources may be volatile. They may vary a lot from year to year. Since, it is difficult to predict revenues, it is also difficult to plan expenditure based on that revenue. Governments may get trapped in Boom-Bust cycle.
- Dutch disease: Industry around that natural resource flourishes, but, at the cost of decline in other unrelated industries.
- Limited capture of benefits: Governments usually lack expertise to extract these natural resources themselves or may at times not fully realize full value of the resource. Therefore, they have to rely on private sector and foreign owned entities for extraction. In their eagerness to extract resource, they may agree on lower than optimal tax rates or royalties.
- Environmental and social problems: The extraction process may not be well planned. It may result in unintended environmental problems such as pollution or deterioration in balance of nature. It may also cause migration or unequal distribution of benefits among local population groups.
Resource curse is not inevitable. There are many countries which are successfully making use of their natural resources for the benefits of their population and economy as a whole. Resource curse is often indicative of overall weak governance structure of the economy and lack of proper planning around resource utilization.