Class 6 – Natural resources abundance and conflict
The resource curse
- The paradox of plenty: an abundance of natural resources leads to lower economic
growth
o Economists have called this phenomenon the ‘resource curse’ or ‘governance
curse’
o Abundance of natural resources also associated with
§ Higher corrup,on rates
§ Higher poverty rates
§ More authoritarian rule & lower levels of democracy
§ Armed conflict
o Concept or ‘resource curse’ is some,mes used to refer to both the economic
and poli,cal consequences
- How can an abundance of natural resources damage economies and turn out to be a
‘curse’?
o Economic disrup,ons lead to economic growth failure and ins,tu,onal failure:
created by the resource abundance and all of it as a result leads to conflicts
o Several mechanisms have been suggested to explain the rela,onship between
resource abundance & growth failure
§ Vola,lity in government revenues could lead to macroeconomic
instability
• When more dependent on resources, income will fluctuate:
nega,ve rela,onship natural resources and growth rates
• The more dependent on natural resources, the less democracy
• More dependent on export of natural resources, higher risk of
conflict
§ Remove incen,ves to develop good ins,tu,ons
§ Proclivity for armed conflicts
§ Dutch disease
• Discovery of natural resources and its abundance increases
exports of these resources and the value that they have to pay
for other products increases as well
§ GRAPHS
Dutch disease
= a situa,on where an expansion of the natural resource sector leads to the shrinkage of other
tradable industries through an overvalua,on of a country’s exchange rate
27
, - Economic term for the nega,ve consequences that can arise from a spike in the value
of a na,on’s currency
o Associated with new discovery or exploita,on of valuable natural resource and
unexpected repurcussions
- Two economic effects:
o Decreases price compe,,veness of exports of affected country’s manufactured
goods
o Increases imports
- Example: the Netherlands
o The Netherlands has a lot of gas. The Netherlands started to export gas
interna,onally. The export of the gas led to the overvalua,on of the currency.
Gulden became more expensive for other countries to buy. As a result, the
products became more expensive, which led to all kinds of social and economic
problems. E.g. having oil will led to the massive increase in primary export
revenue. Apprecia,on of exchange rate leads to more expensive exports.
Decrease in world demand for non- oil products: as a result, exporters of non-
oil products produce less. Reduc,on in the income and employment of the
non-oil export industries.
Resource abundance and conflict
- Since mid-1990s natural resources have also been associated with a higher risk of
armed conflict
o Natural resources played an important role in a number of armed conflicts in
the 1990s
o Research by Collier and Hoeffler
- Natural resources and conflict
o Ongoing debate
§ Academic debate about the link between NR and violent conflict
§ Central ques,ons
28
The resource curse
- The paradox of plenty: an abundance of natural resources leads to lower economic
growth
o Economists have called this phenomenon the ‘resource curse’ or ‘governance
curse’
o Abundance of natural resources also associated with
§ Higher corrup,on rates
§ Higher poverty rates
§ More authoritarian rule & lower levels of democracy
§ Armed conflict
o Concept or ‘resource curse’ is some,mes used to refer to both the economic
and poli,cal consequences
- How can an abundance of natural resources damage economies and turn out to be a
‘curse’?
o Economic disrup,ons lead to economic growth failure and ins,tu,onal failure:
created by the resource abundance and all of it as a result leads to conflicts
o Several mechanisms have been suggested to explain the rela,onship between
resource abundance & growth failure
§ Vola,lity in government revenues could lead to macroeconomic
instability
• When more dependent on resources, income will fluctuate:
nega,ve rela,onship natural resources and growth rates
• The more dependent on natural resources, the less democracy
• More dependent on export of natural resources, higher risk of
conflict
§ Remove incen,ves to develop good ins,tu,ons
§ Proclivity for armed conflicts
§ Dutch disease
• Discovery of natural resources and its abundance increases
exports of these resources and the value that they have to pay
for other products increases as well
§ GRAPHS
Dutch disease
= a situa,on where an expansion of the natural resource sector leads to the shrinkage of other
tradable industries through an overvalua,on of a country’s exchange rate
27
, - Economic term for the nega,ve consequences that can arise from a spike in the value
of a na,on’s currency
o Associated with new discovery or exploita,on of valuable natural resource and
unexpected repurcussions
- Two economic effects:
o Decreases price compe,,veness of exports of affected country’s manufactured
goods
o Increases imports
- Example: the Netherlands
o The Netherlands has a lot of gas. The Netherlands started to export gas
interna,onally. The export of the gas led to the overvalua,on of the currency.
Gulden became more expensive for other countries to buy. As a result, the
products became more expensive, which led to all kinds of social and economic
problems. E.g. having oil will led to the massive increase in primary export
revenue. Apprecia,on of exchange rate leads to more expensive exports.
Decrease in world demand for non- oil products: as a result, exporters of non-
oil products produce less. Reduc,on in the income and employment of the
non-oil export industries.
Resource abundance and conflict
- Since mid-1990s natural resources have also been associated with a higher risk of
armed conflict
o Natural resources played an important role in a number of armed conflicts in
the 1990s
o Research by Collier and Hoeffler
- Natural resources and conflict
o Ongoing debate
§ Academic debate about the link between NR and violent conflict
§ Central ques,ons
28
