Resource curse

Based on Wikipedia: Resource curse

The Devil's Excrement

In 1976, Juan Pablo Pérez Alfonzo—Venezuela's oil minister and one of the founders of OPEC, the Organization of the Petroleum Exporting Countries—issued a dark prophecy about his nation's most valuable export. "Ten years from now, twenty years from now, you will see," he warned. "Oil will bring us ruin. It is the devil's excrement."

He was right.

This is the story of one of the strangest and most counterintuitive phenomena in economics: how striking it rich can make you poor. How discovering vast reserves of oil, diamonds, gold, or natural gas—the kind of windfall that should transform a struggling nation into a prosperous one—can instead trap it in poverty, corruption, and authoritarianism for generations.

Economists call it the resource curse. Some call it the paradox of plenty. Either way, it upends everything we think we know about wealth and development.

When More Becomes Less

The observation that natural abundance might breed economic misery goes back surprisingly far. In 1711, the British publication The Spectator noted that "it is generally observed, that in countries of the greatest plenty there is the poorest living." But the idea didn't gain serious academic traction until the middle of the twentieth century, when economists began puzzling over why so many resource-rich developing nations remained stubbornly poor.

The term "resource curse" itself was coined in 1993 by the economist Richard Auty, who documented a troubling pattern: countries blessed with abundant mineral wealth seemed systematically unable to convert that wealth into economic growth. Two years later, Jeffrey Sachs and Andrew Warner published a landmark study confirming what Auty had observed. They found a strong negative correlation between natural resource abundance and economic growth.

The more resources a country had, the slower it grew.

This defied basic economic logic. Resources are valuable. Having valuable things should make you richer, not poorer. Yet the data kept telling the same uncomfortable story.

Think of it like winning the lottery. Studies of actual lottery winners reveal a disturbing pattern: many end up worse off than before their windfall. They spend recklessly, alienate friends and family, make disastrous investments, and sometimes end up bankrupt. The sudden influx of wealth, rather than solving their problems, creates entirely new ones they're unprepared to handle.

Countries, it turns out, can suffer the same fate—just on a much larger scale, with consequences measured in generations rather than years.

The Dutch Disease

The first mechanism of the resource curse has an almost whimsical name that belies its destructive power: Dutch disease.

In 1959, the Netherlands discovered an enormous natural gas field near Groningen. This should have been cause for celebration. The Dutch had struck it rich. They began exporting gas as fast as they could extract it, and money poured into the country.

Then something strange happened. Dutch factories started closing. Exports of everything except natural gas began to decline. Unemployment rose. The economy, paradoxically, seemed to be getting worse even as the nation got richer.

Here's what happened, mechanically. When foreign countries bought Dutch natural gas, they needed Dutch guilders to pay for it. This increased demand for the guilder, which drove up its value relative to other currencies. A stronger guilder meant that every other Dutch export—machinery, textiles, agricultural products—became more expensive for foreign buyers. Dutch products that had been competitive in world markets suddenly weren't.

Meanwhile, cheap imports flooded in. Why buy a Dutch-made product when imported goods had become so affordable? Dutch manufacturing contracted. Skilled workers left industries that had taken decades to build. The expertise and infrastructure that sustained a diverse economy began to wither.

The country was becoming a one-trick pony, increasingly dependent on a single commodity whose price it couldn't control.

This same pattern has repeated itself across the globe. Venezuela with oil. Angola with diamonds and oil. The Democratic Republic of the Congo—which has been called a "classic victim" of the resource curse—with diamonds. Each discovered riches. Each watched its broader economy hollow out as a consequence.

Riding the Rollercoaster

If Dutch disease were the only problem, resource-rich countries might be able to manage it with careful policy. But there's a second curse: volatility.

Natural resource prices are wildly unpredictable. Consider oil. In 1973, crude oil sold for about three dollars per barrel. A year later, after the OPEC oil embargo, it had quadrupled to twelve dollars. During the 1986 glut, prices collapsed from twenty-seven dollars to under ten. Then came the dramatic decade from 1998 to 2008, when oil soared from ten dollars to one hundred forty-five dollars per barrel—only to crash by more than half within months.

For a country whose government revenue depends almost entirely on oil exports, this isn't just inconvenient. It's catastrophic.

Imagine trying to run a government when your income might double in a good year or collapse by two-thirds in a bad one. How do you plan a budget? How do you fund schools and hospitals when you don't know whether you'll have money next year? How do you maintain roads and bridges when revenue swings wildly from one quarter to the next?

The answer, for many resource-dependent nations, is that you don't. You borrow heavily during boom times, when bankers are eager to lend against your vast natural wealth. Then when prices crash, you can't repay your debts. Banks stop lending. Interest penalties accumulate. The debt spiral accelerates.

Nigeria and Venezuela both experienced this during the oil boom of the 1970s. They borrowed against their petroleum wealth as if prices would stay high forever. When oil collapsed in the 1980s, both nations found themselves trapped in debt crises that would take decades to escape—if they ever fully did.

The Enclave Economy

Here's something that might not be obvious: extracting natural resources doesn't actually employ very many people.

A massive oil field might generate billions in revenue while employing only a few thousand workers. The industry operates as what economists call an enclave—an isolated pocket of activity with few connections to the broader economy. The oil gets pumped out of the ground, loaded onto ships, and sent overseas. Most of the money flows to the government and to international oil companies. Very little trickles down to create jobs or opportunities for ordinary citizens.

Compare this to manufacturing, which creates dense webs of economic activity. A car factory needs suppliers of steel, glass, rubber, electronics, and dozens of other components. It needs mechanics, engineers, designers, accountants, and marketers. It creates demand for restaurants and shops and housing near the plant. Each manufacturing job supports several additional jobs throughout the economy.

Oil drilling creates almost none of this. It's lucrative but lonely.

Worse, the astronomical profits available in resource extraction actively undermine other industries. Why would a talented engineer design consumer products when she could earn far more working for an oil company? Why would an investor fund a risky manufacturing startup when he could put money into guaranteed petroleum revenues? The best talent and capital get sucked into the resource sector, leaving other industries starved of both.

Economic diversification—developing multiple industries so the country isn't dependent on a single commodity—becomes nearly impossible when one industry is so much more profitable than all the others.

Why Bother With Schools?

The resource curse extends beyond economics into something even more fundamental: human capital, the skills and education of a nation's people.

Consider two countries facing the challenge of development. One has no natural resources to speak of. The other sits on vast oil reserves.

The resource-poor country has no choice. If it wants to grow, it must invest heavily in education. It needs skilled workers, engineers, scientists, entrepreneurs. Human minds are its only asset, so it pours resources into schools and universities. Singapore, Taiwan, and South Korea all followed this path, becoming economic powerhouses through sheer investment in human potential.

The resource-rich country faces different incentives. Why spend decades building a world-class education system when you can simply pump money out of the ground? The returns from education are slow and uncertain. The returns from oil are immediate and enormous. Government officials, thinking in terms of their own careers and the next election cycle, consistently choose the easy money.

The effects show up in unexpected places. Research on Texas during the early twentieth century found that counties experiencing oil booms didn't improve their schools. Student-teacher ratios didn't fall. Attendance didn't rise. The money flowed, but education stayed stagnant.

In West Virginia, a state whose economy has long depended on coal mining, researchers found something even more troubling. When coal prices rose, poverty actually increased. The state consistently ranked last on measures of physical health, emotional health, and overall well-being—despite the supposed economic benefits of its natural resources.

Part of the explanation is straightforward: when resource extraction pays well, young people drop out of school to take those jobs. Studies of coal mining regions and areas experiencing fracking booms have documented exactly this pattern. Why stay in school when you can earn good money right now?

But the long-term consequences are devastating. When the boom ends—and booms always end—those workers find themselves without credentials in a changed economy. They've traded their futures for a few years of high wages.

The Dictator's Best Friend

Perhaps the most insidious effect of the resource curse is political. Natural resources, it turns out, are an authoritarian's dream.

The political scientist Bruce Bueno de Mesquita has developed what he calls selectorate theory to explain this phenomenon. His insight is elegant and disturbing.

A ruler's primary goal is staying in power. To do this, he needs to keep certain key supporters happy—the military leaders, party officials, and power brokers whose loyalty keeps him in office. The question is how to pay for that loyalty.

In a country without natural resources, the ruler has a problem. The only way to generate enough revenue is through taxation, and taxation requires a productive economy. A productive economy requires educated workers, functioning infrastructure, and at least some basic freedoms. You can't squeeze much tax revenue from impoverished peasants. So even a dictator in a resource-poor country has incentives to develop the economy, educate the population, and allow some degree of liberty.

But a ruler sitting on oil wealth faces no such constraints. He doesn't need tax revenue. He doesn't need a productive populace. The money comes out of the ground regardless of whether his citizens are educated, healthy, or free. All he needs is enough military force to control the oil fields and enough money to keep his key supporters loyal.

In fact, from the ruler's perspective, education and liberty are actively dangerous. Educated citizens can organize opposition movements. Free speech and free assembly make rebellion easier. A healthy middle class demands political participation.

The optimal strategy for an oil-rich autocrat is to use resource revenues to buy off his inner circle while keeping everyone else poor, uneducated, and politically powerless. Fund the military. Starve the schools. Use secret police to crush dissent before it organizes.

This isn't just theory. The International Monetary Fund classifies fifty-one countries as "resource-rich," meaning they derive at least twenty percent of their exports or government revenue from non-renewable natural resources. Twenty-nine of those countries are low- or lower-middle-income. They share a common profile: extreme dependence on resource wealth, poor economic growth, and volatile government revenues.

Bueno de Mesquita points to Ghana and Taiwan as examples of what happens when rulers don't have resource wealth to fall back on. Both democratized, not out of idealism, but out of necessity. Their rulers needed productive economies, which meant they needed educated citizens, which meant they eventually had to allow political participation. The path to democracy ran through economic necessity.

Resource wealth short-circuits this logic entirely.

Not All Curses Are Created Equal

If the resource curse were absolute and inevitable, Norway would be an impoverished dictatorship. Instead, it's one of the wealthiest and most democratic nations on earth, despite—or rather, while managing—its vast North Sea oil reserves.

The resource curse, most experts now agree, is not a fixed destiny. It's a set of risks that can be managed or mismanaged depending on institutions, timing, and policy choices.

Countries that discover resources after already establishing strong institutions tend to fare much better than those that discover resources before developing effective governance. Norway had a functioning democracy, a competent bureaucracy, and a tradition of political accountability before it became a petroleum state. Those institutions constrained how oil wealth could be used and distributed.

The type of resource matters too. Oil and mining create concentrated wealth that can be easily captured by a small elite. Dispersed resources like agricultural land or timber are harder to monopolize.

How the money is spent matters enormously. Countries that invest resource revenues in education, infrastructure, and sovereign wealth funds for future generations can escape the curse. Countries that allow the money to be captured by corrupt elites or squandered on prestige projects cannot.

Economic openness plays a role. Countries integrated into global trade have more pressure to maintain competitive industries beyond resource extraction. Isolated economies more easily fall into the trap of resource dependency.

Research has increasingly shifted from asking "does the resource curse exist?" to asking "under what conditions do countries escape it?" The answer appears to be: when they're lucky enough to have the right institutions already in place, or smart enough to build them quickly before the money corrupts everything.

The Next Curse?

As the world transitions away from fossil fuels, a troubling question has emerged: could renewable energy create its own version of the resource curse?

The technologies that power the green transition—electric vehicles, wind turbines, solar panels, battery storage—require vast quantities of specific materials. Lithium for batteries. Cobalt for cathodes. Neodymium for the powerful magnets in wind turbines and electric motors. These materials are not distributed evenly around the globe.

The Democratic Republic of the Congo produces about seventy percent of the world's cobalt. Chile and Australia dominate lithium production. China controls most rare earth element processing. As demand for these materials explodes, the countries that possess them may find themselves facing the same dynamics that cursed oil-rich nations in the twentieth century.

There's another possibility too. Some countries are blessed with exceptional renewable energy resources—intense sunshine, powerful winds, strong tides. As the world electrifies, these natural advantages could become economically valuable in ways they never were before. Saharan nations could export solar power. Windy coastal regions could become energy exporters.

Would this wealth prove a blessing or a curse? The historical record suggests reason for caution. The same dynamics that turned petroleum into "the devil's excrement" could easily apply to cobalt, lithium, or exported electricity. Without strong institutions and thoughtful policies, the green transition could create a new generation of cursed nations, wealthy in resources but impoverished in everything else.

Lessons From the Paradox

The resource curse teaches us something profound about the nature of wealth. Money, it turns out, is not the same as prosperity. A society's true wealth lies in its institutions, its human capital, its capacity to innovate and adapt. These assets are built slowly, over generations, through millions of individual decisions to invest in education, to build trust, to create functioning systems of governance.

Windfall riches can actually destroy these assets. Easy money creates perverse incentives. It undermines the painful work of institution-building. It corrupts governments and hollows out economies. It makes rulers rich while keeping citizens poor.

The nations that have escaped the resource curse did so not by being lucky, but by being disciplined—by treating their natural wealth as a challenge to be managed rather than a jackpot to be spent. They understood that the real work of development happens in classrooms and legislatures and small businesses, not in oil fields and diamond mines.

Juan Pablo Pérez Alfonzo saw this clearly, even as his own country rushed toward the ruin he predicted. Oil was the devil's excrement not because it was worthless, but because it was too valuable—so valuable that it blinded nations to everything else that mattered.

That warning, issued nearly fifty years ago, remains as urgent as ever.