Blog
Managing Resource Abundance

by Richard Auty

At first sight, countries that are abundant in minerals and other natural resources should enjoy faster development. But between 1960 and 1990 the per capita incomes of the resourcedeficient countries grew two to three times as fast as those of the resource-abundant countries despite the latter ’s apparently greater development potential. This performance gap widened significantly from the 1970s onwards. Understanding this paradox is a key focus of the UNU/WIDER project on ‘Environmental, Export and Human Development Problems in NaturalResource Based Growth Models’.

Resource-deficient countries are less prone than resource-abundant countries to policy failures that lead to growth collapses. Successful resource-deficient countries have pursued a sequenced industrialization path (for example South Korea). This is characterised by early movement into labour-intensive manufactured exports. Such growth absorbs surplus labour and accumulates skills; this in turn changes their comparative advantage and they shift into capital-intensive and skill-intensive goods and then into R and D intensive products. Genuine saving (a measure of environmental sustainability) is usually strongly positive in countries that successfully take this path. These economies are resilient to external shocks and usually sustain rapid and equitable growth. Basically, a meagre natural resource endowment constrains policy choice and provides less scope than resource abundance does for cumulative policy error.

In contrast, many resource-abundant countries leapfrog the labourintensive stage of industrialization and move earlier into capitalintensive industry. The inflow of mineral and other revenues causes their currencies to appreciate thereby reducing their competitiveness in foreign and home markets. Fears of unemployment encourage tradepolicy closure to protect domestic producers. Growth becomes dependent upon a few staples that must provide foreign exchange and transfers to the burgeoning ‘infant’ industries (which are often capital-intensive).

Vested interests in trade closure capture policy so that governments resist the politically unpopular currency depreciation that is required to sustain growth (especially in labour-intensive exports). Instead they either borrow from abroad or squeeze the primary sector further so that incentives are depressed and competitiveness wanes. Investment efficiency declines, human capital accumulates slowly, and economic diversification is retarded. Resource-abundant economies therefore become highly vulnerable to even mild external shocks (such as a fall in the terms of trade). A growth collapse results, even in capital surplus countries like Saudi Arabia that did not close their economies.

In transition economies (the countries of the Former Soviet Union, for example), resource abundance may inhibit the creation of a market economy. Revenue inflows make economic reform appear less urgent and the associated appreciation of the currency retards diversification into competitive job-intensive activities. Moreover, resource rents often feed corruption when institutions are weak and when the resource rents accrue mainly to the government, as in the cases of the mineral economies and the transition economies. Such economies eventually experience deep output losses. It may take at least a generation to recover from the collapse in growth associated with mismanagement of resource abundance. In particular, social and economic infrastructure and institutions must be rebuilt and this takes considerable time. Growth collapse can have especially acute social effects in the smaller resourceabundant economies, and may trigger violent conflict in ethnically diverse societies when one group captures most of the resource rents.

However, resource abundant Malaysia demonstrates that policy counts and that a growth collapse is avoidable. Concern for income inequality in Malaysia led to a tacit agreement between the two dominant ethnic groups that economic growth was a prerequisite for poverty alleviation. A conscious effort was therefore made to diversify the economy and to avoid both trade policy closure and the repression of economic incentives. Malaysia displayed a capacity to manage latent social tensions that is rare in resourceabundant economies where all too often the resource rents have been used to buy short-run political support at the cost of long-term development.

​Richard Auty, from the University of Lancaster (UK), is a UNU/ WIDER Senior Research Fellow and the director of the project on ‘Environmental, Export and Human Development Problems in Natural-Resource Based Growth Models’.

The financial contribution of the Government of Sweden to this project is gratefully acknowledged.