Step 6: Natural Resources and the Resource Curse
MatchesA-level primary product dependency · IB Economics barriers to development · undergraduate resource economics
In 30 seconds
- The resource curse: countries rich in oil, gas or minerals often grow more slowly and govern worse than resource-poor ones.
- Dutch disease: a resource boom raises the real exchange rate, making manufacturing and farm exports uncompetitive.
- Volatility: commodity revenues swing with world prices, causing boom-bust budgets.
- Institutions: easy resource rents can fuel corruption, conflict and weak accountability.
- Remedies: sovereign wealth funds, fiscal rules, transparency (EITI) and diversification, as in Norway and Botswana.
Why can riches be a curse?
Key termsDutch disease: the decline of other tradable sectors after a resource boom, named after the Netherlands’ gas discoveries in the 1960s. Resource rents: income from natural resources above the cost of extracting them. Sovereign wealth fund: a state fund that saves and invests resource revenues, often abroad.
Three channels work together. Economically, resource export earnings push up the currency and draw labour and capital into the resource and non-traded sectors (construction, services), so other exporters shrink. Fiscally, governments spend in booms and cut in busts. Politically, rulers who can fund the state from resource rents need less tax from citizens, which weakens the link between taxation and accountability.
Worked example
Oil is discovered. Exports rise by $20 billion a year and the currency appreciates 25%. A garment exporter sells shirts at $10 each, with costs fixed in local currency equal to $8 at the old exchange rate. What happens?
1After a 25% appreciation, local costs are worth \( 8 \times 1.25 = \$10 \) in dollars.
2The world price is still $10, so profit falls from $2 to zero.
3Garment firms cut output or close; workers move to oil-funded services.
ResultDutch disease: the non-oil export base shrinks, leaving the economy more dependent on oil when prices later fall.
Avoiding the curse
| Policy | How it helps | Example |
|---|---|---|
| Sovereign wealth fund | Saves revenue abroad, limits appreciation, smooths spending | Norway’s Government Pension Fund Global |
| Fiscal rule | Caps spending of resource revenue each year | Chile’s structural balance rule for copper |
| Transparency | Publishes payments, reducing corruption | Extractive Industries Transparency Initiative |
| Invest in people | Turns natural capital into human capital | Botswana’s diamond revenues and schooling |
Case studies for this step (in the 100 Case Studies pack)
- Case 1: Venezuela’s Oil Curse (1999–2019). When having the world’s largest oil reserves leads to complete economic collapse: Dutch disease, price volatility, hyperinflation and institutional decay.
- Case 2: Singapore’s Land Constraint. The opposite story: how a city-state with no resources became one of the world’s wealthiest economies.
Contrast Venezuela and Singapore with full data: 100 Economics Case Studies for $9 (was $15).Get the 100 cases · $9
Common mistakeTreating the curse as automatic. Norway, Botswana and Chile show resource wealth can support development. The curse is about weak institutions and policy, not the resource itself.
Exam tipName the channel you are using (exchange rate, volatility or institutions) and match each to a policy fix. Examiners reward the link from cause to remedy.
Practise: 6 questions
Try each one on paper first, then check the worked answer.
EasyQ1. Define Dutch disease. Show worked answer
The decline of other tradable sectors, especially manufacturing, after a natural resource boom raises the real exchange rate and draws resources into the booming sector.
EasyQ2. What is a sovereign wealth fund? Show worked answer
A state-owned investment fund that saves and invests revenues, often from natural resources, for future use.
MediumQ3. Explain how resource rents can weaken institutions. Show worked answer
Governments funded by resource rents rely less on taxing citizens, so citizens have less leverage to demand accountability. Rents also reward capturing the state rather than producing, encouraging corruption and sometimes conflict.
MediumQ4. Why did the 2014 oil price fall hit Venezuela so hard? Show worked answer
Oil was around 95% of export earnings and a large share of government revenue. With little non-oil production and no savings buffer, the price fall cut imports and revenue; the government printed money, leading to hyperinflation.
MediumQ5. How does a sovereign wealth fund reduce Dutch disease? Show worked answer
Investing revenue abroad means foreign currency is not converted into local currency, limiting appreciation. Spending only the fund’s returns keeps domestic demand and the real exchange rate stable.
ExamQ6. Evaluate the view that natural resources are a barrier to development. [10] Show worked answer
Barrier: Dutch disease, volatility, corruption; Venezuela’s collapse [4]. Not a barrier: Norway, Botswana and Chile used funds and rules well; Singapore shows success is possible without resources [3]. Judgement: resources raise the stakes of governance; with strong institutions they help, with weak ones they harm [3].
Check yourself
1. Dutch disease mainly works through
Appreciation makes other exports uncompetitive.
2. Which country is the classic resource-curse success story?
Botswana used diamond revenue prudently and grew fast for decades.
3. EITI aims to
Transparency makes it harder to divert resource revenue.
Your score: 0 out of 3
The short version
- Resource wealth can slow growth through the exchange rate, volatility and institutions.
- Funds, fiscal rules and transparency can neutralise the curse.
- Venezuela (case 1) and Singapore (case 2) show both sides.
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