You are here
Find us on:
Facebook Twitter Google Plus Youtube

What are the ‘natural resource curse’ and ‘Dutch disease’?

Image: Oil rig in the North Sea

Oil fields in the North Sea--Dutch curse, Norwegian blessing

The phrase ‘natural resource curse,’ also sometimes called ‘the paradox of plenty,’ was originally coined by economists who found that countries with a rich endowment of natural resources tended, in the long term, to record slower economic growth than countries with fewer natural resources.

It has since come to be used more widely and generally to describe a situation where, rather than bringing widespread benefits, the extraction of a country’s mineral, oil or gas resources causes significant harm.

The ‘curse’ is commonly said to result from:

  • Political conflict over the resources—pitting regional, ethnic or religious communities against each other
  • High inequality in the sharing of benefits—typically, when a narrow band of relatively well-off people benefit, but the poor stay poor or even get poorer
  • Environmental pollution—resulting from lax environmental standards and/or low capacity for environmental monitoring and enforcement of standards
  • Corruption and ‘rent seeking’.  Everyone knows what corruption is.  ‘Rent seeking’  is a term used by economists to describe the behaviour of people who try to profit from gaining privileged access to a resource or market , rather than by adding any value to it
  • Weak government institutions that are unable or unwilling to manage the resources effectively

Most often, several or all of these factors are thought to co-exist and interact in resource-cursed countries.

Most discussion of the natural resource curse has centred on developing countries. African oil exporters such as Sudan, Angola, Chad and Equatorial Guinea are very often said to be suffering from the curse.

Dutch Disease

Whilst ‘the natural resource curse’ is now used to describe a wide range of issues, ‘Dutch disease’ remains a more specific and technical, economic concept. It refers to a situation where growth in national income from natural resource extraction damages other sectors of a country’s economy.

This happens because increased revenues from natural resource exports tend to increase the real value of the exporting nation’s currency.  That makes the country’s other exports, such as agricultural products and manufactured goods, more expensive and therefore less competitive in world markets.  Imports meanwhile become cheaper, and this can undermine local producers and manufacturers.

At the same time, demand also tends to rise for some service industries—such as the construction industry, since resource booms often fuel a building boom. This tends to make those services more expensive, which can hurt poorer citizens.

The economy as a whole becomes over-reliant on the natural resources that it is exporting—and this can be particularly damaging if, for any reason, there is a drop in world price for those natural resources.

Spanish disease?

Dutch disease is named after the experience of the Netherlands in the 1960s, when major gas finds brought a short-lived boom created problems in other areas of the economy.

On a longer, historical view, the economic illness should perhaps be called ‘Spanish disease.’

In the 16th and 17th centuries, gold and silver flowing into Spain from its South American colonies created sumptuous lives for the Spanish gentry and a Golden Age for Spanish culture.  But this influx of natural resource wealth also inhibited the kind of agricultural and industrial development that was taking place in northern Europe. By the time her colonies began to slip away to independence, Spain found herself a second rate power, and has ever since struggled to catch up with more industrialised economies of Europe and America.   The impacts of over-dependence on natural resource extraction can therefore be seen to last not just for decades but for centuries.

Solutions?

For the general problems of the resource curse commentators often recommend an equally general list of ‘governance’ remedies: greater transparency; stronger and more accountable government institutions; curbing corruption; more equitable distribution and social investments; making sure that there are tangible benefits for communities where the resource is found; etc.  These are doubtless worthy recommendations, but they rarely come with suggestions as to the specific processes and mechanisms by which they can be achieved.

More specific remedies are, however, often suggested for Dutch Disease.

In theory, the risks could be avoided by extracting natural resources relatively slowly rather than in a short-lived boom.  But this is rarely possible because modern resource extraction usually depends on large private companies that make huge investments and will not wait for longer than is absolutely necessary before recovering that money and showing a profit.

However, the same effect can be achieved, and the risk of harm to other sectors of the economy reduced, by the government saving some of the earnings from resource extraction, rather than going on a spending splurge.

Norway is repeatedly held up as the shining exemplar of this strategy.

Like the Netherlands, Norway discovered oil and gas in the North Sea in the 1960s.  But when income came on-stream, the government created a Petroleum Fund, later renamed the Government Pension Fund of Norway, into which it deposited up to 80 percent of oil revenues.  That money was in turn invested—for the most part, cautiously—in international stocks and bonds.

Today, the Fund is worth more than US$ 600 billion, and still growing.  This is a comfortable reserve to fall back on in times of urgent need, equivalent to around 120 percent of the country’s GDP. It will likely ensure that future generations of Norwegians have some share of the natural resource wealth that their forefathers extracted.

Over the last ten years the Government of Uganda has received considerable technical assistance from Norway, and it apparently plans to put part of Ugandan oil revenues into a Petroleum Fund, although full details have not yet been revealed.

The differences between Norway and Uganda should not be overlooked, however. Norway has less than five million citizens, a long history of stable, democratic institutions, and when it struck oil in the 1960s it was by no means poor. Its remaining petroleum reserves are also around four times greater than Uganda’s.

Nevertheless, many development economists believe that a Petroleum Fund will be a prudent option for Uganda.

However, there are widespread concerns as to how well it will be managed.

The government may also find it hard to persuade Ugandans of the wisdom of a save-for-later policy.

Understandably, some people will ask “Why are you making overseas investments while our children go barefoot?”