Large natural resource deposits are often considered a blessing, but can become a "resource curse" for developing countries. There are several reasons for this natural resource trap, including risks of political conflicts over resources, vulnerability to volatile global prices, rapid depletion of finite resources, and currency appreciation that damages other domestic industries. Countries can avoid this trap through policies like improving governance, establishing sovereign wealth funds, taxing resource profits, diversifying their economies, and investing resource revenues into areas like education and infrastructure.

1. A2 Macro: The Natural Resource Trap
“Although large deposits of
key resources such as oil
would usually be considered
a blessing for the
development prospects of a
country, it often turns out to
be a ‘resource curse’”
Professor Paul Collier
08/10/2013 12:43:55

2. A2 Macro: The Natural Resource Trap
“Although large deposits of
key resources such as oil
would usually be considered
a blessing for the
development prospects of a
country, it often turns out to
be a ‘resource curse’”
Professor Paul Collier
08/10/2013 12:43:55
“Close to one third of the
wealth of low-income
countries comes from their
“natural capital” which
includes forests, protected
areas, agricultural
lands, energy and minerals”
World Bank

3. Resource Curse
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4. Marginal Revolution University
08/10/2013 12:43:55

5. Causes of the Natural Resource Trap
1: Risk of political conflict and
corruption / conflict / land grabs
2: Vulnerability to changes in
world prices which causes high
levels of macro volatility
3: Danger of over-rapid
extraction of finite and
renewable resources
4: Rising prices can lead to a
currency appreciation –
damaging domestic industries
A handful of countries produce
the bulk of global resources.
The three largest producers for
19 commodities account for
56% of total production.
08/10/2013 12:43:55

6. Causes of the Natural Resource Trap
1: Risk of political conflict and
corruption / conflict / land grabs
2: Vulnerability to changes in
world prices which causes high
levels of macro volatility
3: Danger of over-rapid
extraction of finite and
renewable resources
4: Rising prices can lead to a
currency appreciation –
damaging domestic industries
A handful of countries produce
the bulk of global resources.
The three largest producers for
19 commodities account for
56% of total production.
08/10/2013 12:43:55

7. Civil Wars
Country Dates Resources
Afghanistan 1992-2001 gems, opium
Angola 1975-2002 oil, diamonds
Burma 1983-1995 timber, tin, gems, opium
Cambodia 1978-1997 timber, gems
Congo Rep. 1997 oil
DR Congo 1996 oil, diamonds, gold, cobalt
DR Congo 1997-1999 oil, diamonds, gold, cobalt
Liberia 1989-1996 timber, diamonds, iron, oil palm
Peru 1982-1996 coca
Sierra Leone 1991-2000 diamonds
Sudan 1983 oil
08/10/2013 12:43:55

8. Violent Conflicts
Region Participants Date Resources
Cabinda Angola, Congo 1975 oil
Congo War DRC, Chad, Namibia,
Rwanda, Angola,
Zimbabwe, Uganda,
Burundi, Sudan
1990s minerals, diamonds,
timber
Kashmir India, Pakistan 1947 water
Palestine Israel, Palestine 2007 water
Baluchistan Pakistan, Iran 2004 natural gas
Somali civil war Somalia, US, UK 1991 oil
Afghanistan Afghanistan, US + allies 1980 gems, gold, copper, coal,
opium, natural gas
Iraq Iraq, US + allies 2001 oil, natural gas,
phosphates, sulphur
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9. Land Grabs
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10. Causes of the Natural Resource Trap
1: Risk of political conflict and
corruption / conflict / land grabs
2: Vulnerability to changes in
world prices which causes high
levels of macro volatility
3: Danger of over-rapid
extraction of finite and
renewable resources
4: Rising prices can lead to a
currency appreciation –
damaging domestic industries
08/10/2013 12:43:55

11. Causes of the Natural Resource Trap
1: Risk of political conflict and
corruption / conflict / land grabs
2: Vulnerability to changes in
world prices which causes high
levels of macro volatility
3: Danger of over-rapid
extraction of finite and
renewable resources
4: Rising prices can lead to a
currency appreciation –
damaging domestic industries
08/10/2013 12:43:55

12. Causes of the Natural Resource Trap
1: Risk of political conflict and
corruption / conflict / land grabs
2: Vulnerability to changes in
world prices which causes high
levels of macro volatility
3: Danger of over-rapid
extraction of finite and
renewable resources
4: Rising prices can lead to a
currency appreciation –
damaging domestic industries
08/10/2013 12:43:55

13. Causes of the Natural Resource Trap
1: Risk of political conflict and
corruption / conflict / land grabs
2: Vulnerability to changes in
world prices which causes high
levels of macro volatility
3: Danger of over-rapid
extraction of finite and
renewable resources
4: Rising prices can lead to a
currency appreciation –
damaging domestic industries
Extraction tends
to be capital
intensive
Risk of higher
unemployment
with limited
welfare safety net
Rent extraction
worsens
inequality
Wealthy
resources
increase rewards
to being in power
08/10/2013 12:43:55

14. Causes of the Natural Resource Trap
1: Risk of political conflict and
corruption / conflict / land grabs
2: Vulnerability to changes in
world prices which causes high
levels of macro volatility
3: Danger of over-rapid
extraction of finite and
renewable resources
4: Rising prices can lead to a
currency appreciation –
damaging domestic industries
Extraction tends
to be capital
intensive
Risk of higher
unemployment
with limited
welfare safety net
Rent extraction
worsens
inequality
Wealthy
resources
increase rewards
to being in power
08/10/2013 12:43:55

15. Causes of the Natural Resource Trap
1: Risk of political conflict and
corruption / conflict / land grabs
2: Vulnerability to changes in
world prices which causes high
levels of macro volatility
3: Danger of over-rapid
extraction of finite and
renewable resources
4: Rising prices can lead to a
currency appreciation –
damaging domestic industries
Extraction tends
to be capital
intensive
Risk of higher
unemployment
with limited
welfare safety net
Rent extraction
worsens
inequality
Wealthy
resources
increase rewards
to being in power
08/10/2013 12:43:55

16. Causes of the Natural Resource Trap
1: Risk of political conflict and
corruption / conflict / land grabs
2: Vulnerability to changes in
world prices which causes high
levels of macro volatility
3: Danger of over-rapid
extraction of finite and
renewable resources
4: Rising prices can lead to a
currency appreciation –
damaging domestic industries
Extraction tends
to be capital
intensive
Risk of higher
unemployment
with limited
welfare safety net
Rent extraction
worsens
inequality
Wealthy
resources
increase rewards
to being in power
08/10/2013 12:43:56

17. Causes of the Natural Resource Trap
1: Risk of political conflict and
corruption / conflict / land grabs
2: Vulnerability to changes in
world prices which causes high
levels of macro volatility
3: Danger of over-rapid
extraction of finite and
renewable resources
4: Rising prices can lead to a
currency appreciation –
damaging domestic industries
Extraction tends
to be capital
intensive
Risk of higher
unemployment
with limited
welfare safety net
Rent extraction
worsens
inequality
Wealthy
resources
increase rewards
to being in power
08/10/2013 12:43:56

18. More from Paul Collier on
the Natural Resource
Revenue Issue
08/10/2013 12:43:56

19. More from Paul Collier on
the Natural Resource
Revenue Issue
The revenues from exhaustible natural
resources are distinctive in two key respects:
since they are derived from depleting a finite
stock of resources they are intrinsically
temporary, and since commodity prices are
highly volatile they are unreliable. Both
exhaustibility and volatility potentially give
rise to unsustainable increases in consumption
08/10/2013 12:43:56

20. More from Paul Collier on
the Natural Resource
Revenue Issue
The revenues from exhaustible natural
resources are distinctive in two key respects:
since they are derived from depleting a finite
stock of resources they are intrinsically
temporary, and since commodity prices are
highly volatile they are unreliable. Both
exhaustibility and volatility potentially give
rise to unsustainable increases in consumption
Investing resource revenue in capital assets
abroad makes sense for a capital-intensive
economy like Norway, but most African
economies need a lot of capital themselves.
So they need something like sovereign
investment funds, institutions that contribute
to building infrastructure, raising education
levels and so on.
08/10/2013 12:43:56

21. What policies might help a country
avoid a natural resource trap?
Better government – including
more transparency &
accountability to tax payers
Stabilisation Fund / Sovereign
Wealth Fund – e.g. to fund human
capital and critical infrastructure
Higher taxes of natural resource
profits (extracting resource rents)
Diversification to reduce
dependency and build new
competitive advantages
“Resource-rich countries often do not pursue
sustainable growth strategies. They fail to
recognise that if they do not reinvest their
resource wealth into productive investments
above ground, they are becoming poorer.
Conflict over access to resource rents gives rise
to corrupt and undemocratic governments”
Professor Joe Stiglitz
08/10/2013 12:43:56

22. What policies might help a country
avoid a natural resource trap?
Better government – including
more transparency &
accountability to tax payers
Stabilisation Fund / Sovereign
Wealth Fund – e.g. to fund human
capital and critical infrastructure
Higher taxes of natural resource
profits (extracting resource rents)
Diversification to reduce
dependency and build new
competitive advantages
“Resource-rich countries often do not pursue
sustainable growth strategies. They fail to
recognise that if they do not reinvest their
resource wealth into productive investments
above ground, they are becoming poorer.
Conflict over access to resource rents gives rise
to corrupt and undemocratic governments”
Professor Joe Stiglitz
08/10/2013 12:43:56
Countries that manage these
natural assets carefully are able
to move up the development
ladder – investing more and
more in manufactured
capital, infrastructure and
“intangible capital” like human
skills and education, strong
institutions, innovation and new
technologies.
Source: World Bank
“The Changing Wealth of
Nations, 2011)

23. What policies might help a country
avoid a natural resource trap?
Better government – including
more transparency &
accountability to tax payers
Stabilisation Fund / Sovereign
Wealth Fund – e.g. to fund human
capital and critical infrastructure
Higher taxes of natural resource
profits (extracting resource rents)
Diversification to reduce
dependency and build new
competitive advantages
“Resource-rich countries often do not pursue
sustainable growth strategies. They fail to
recognise that if they do not reinvest their
resource wealth into productive investments
above ground, they are becoming poorer.
Conflict over access to resource rents gives rise
to corrupt and undemocratic governments”
Professor Joe Stiglitz
08/10/2013 12:43:56

24. What policies might help a country
avoid a natural resource trap?
Better government – including
more transparency &
accountability to tax payers
Stabilisation Fund / Sovereign
Wealth Fund – e.g. to fund human
capital and critical infrastructure
Higher taxes of natural resource
profits (extracting resource rents)
Diversification to reduce
dependency and build new
competitive advantages
“Resource-rich countries often do not pursue
sustainable growth strategies. They fail to
recognise that if they do not reinvest their
resource wealth into productive investments
above ground, they are becoming poorer.
Conflict over access to resource rents gives rise
to corrupt and undemocratic governments”
Professor Joe Stiglitz
08/10/2013 12:43:56

25. What policies might help a country
avoid a natural resource trap?
Better government – including
more transparency &
accountability to tax payers
Stabilisation Fund / Sovereign
Wealth Fund – e.g. to fund human
capital and critical infrastructure
Higher taxes of natural resource
profits (extracting resource rents)
Diversification to reduce
dependency and build new
competitive advantages
“Resource-rich countries often do not pursue
sustainable growth strategies. They fail to
recognise that if they do not reinvest their
resource wealth into productive investments
above ground, they are becoming poorer.
Conflict over access to resource rents gives rise
to corrupt and undemocratic governments”
Professor Joe Stiglitz
08/10/2013 12:43:56

26. What policies might help a country
avoid a natural resource trap?
Better government – including
more transparency &
accountability to tax payers
Stabilisation Fund / Sovereign
Wealth Fund – e.g. to fund human
capital and critical infrastructure
Higher taxes of natural resource
profits (extracting resource rents)
Diversification – investment in
processing and manufacturing –
giving higher value added
“Resource-rich countries often do not pursue
sustainable growth strategies. They fail to
recognise that if they do not reinvest their
resource wealth into productive investments
above ground, they are becoming poorer.
Conflict over access to resource rents gives rise
to corrupt and undemocratic governments”
Professor Joe Stiglitz
08/10/2013 12:43:56

27. Norway
Norway's sovereign wealth fund is the
biggest in the world at £460bn. The fund
generates money from its ownership of
petroleum fields, taxes on oil and gas, and
dividends from a 67% stake in Statoil, the
country's largest energy company. Norway
is the world's second-largest gas exporter
and the seventh-largest oil exporter.
08/10/2013 12:43:56

28. Process – don’t just extract!
Build capabilities to sustain growth
Many African countries with
limited natural capital have
out-performed on the
Continent since 2000
Evaluation Corner
08/10/2013 12:43:56

29. Get help for unit 4 from
fellow
students, teachers and
tutor2u on Twitter:
#econ4
@tutor2u_econ
08/10/2013 12:43:56

30. Tutor2u
Keep up-to-date with
economics, resources, quizzes
and worksheets for your
economics course.
08/10/2013 12:43:56