Working Paper
Resource Abundance and Economic Development

Since the 1960s the resource-rich developing economies have under-performed compared with the resource-deficient economies. This paper explains why and outlines the reforms that are required in order to achieve environmentally and socially sustainable resource-rich development. It argues that structural change in the resource-rich countries causes the tradeable sector to shrink vis-à-vis the nontradeables sector (that includes protected manufacturing) in a manner that is not sustainable. This adverse trend in the production structure is associated with policies to close the economy and create discretionary rents behind protective barriers that result in the cumulative misallocation of resources. The build-up of produced capital and skills is slower than in the successful resource-deficient countries. Overall, the inherently slower and less egalitarian economic growth trajectory of the resource-rich countries is intensified and the end result is usually a growth collapse. The collapse causes all forms of capital, including institutional, social and natural capital, to run down. Economic reform is therefore protracted and it may take in excess of one generation to restore sustainable rapid growth. The adverse features of resource-rich development tend to be more pronounced in the smaller countries. They are also heightened where the resource rents accrue mainly to the central government, as in the mineral economies and in the slow-reforming transition economies. Successful reform requires not only appropriate macro and micro policies, but also the construction of institutions to limit the scope for governments to misallocate resources. Part of the explanation for the superior performance of the resource-deficient countries is that their spartan endowment of natural capital acts as a constraint on government failure by placing a premium on the need to nurture scarce resources, including skills, institutions and social capital, and to achieve an efficient allocation of capital.