The curse of natural resources: 'more likely a resource drag'.

• Author: James, Alex
• Position: ECONOMY

The idea that natural resources--like timber, agriculture, coal, and oil--are harmful for economic growth runs counter to our conventional wisdom, perhaps especially so in a place like Alaska where oil revenue finances so much of our state budget and accounts for about one-third of employment statewide. But a significant number of economists and political scientists believe that natural resources are capable of stunting economic growth, leading to a so-called "resource curse."

The idea that natural resource-rich economies tend to, on average, grow slowly is well understood and generally accepted among researchers that work in this area. What is less understood is the cause of this negative relationship.

'Dutch Disease'

One commonly referenced (potential) explanation of a resource curse is named after the Dutch experience and is aptly named the "Dutch Disease." In short, during a resource bonanza, the natural resource sector offers relatively high wages and this pulls labor out of an existing manufacturing sector and pushes it into the resource and service sectors. An economy that is "suffering" from Dutch Disease is likely characterized by a large service sector, a small manufacturing sector, and high wages. A common misconception is that a Dutch Disease is in-and-of itself a bad outcome. In fact, such labor market responses to a resource boom reflect optimal economic behavior. A Dutch Disease only becomes a "disease" if once the resource boom has subsided, the economy is unable, for some reason, to return to its optimal, pre-boom allocation of labor.

Political Corruption

Other research has shown that resource rich economies suffer from political corruption--and the policies that corrupt governments implement. There are a couple of reasons to think an oil-rich government may be susceptible to corruption. The first is that taxation may actually be necessary for representation. A constituency that is not taxed may become acquiescent and fail to provide the government with adequate oversight. Natural resource sectors also generate rents that can be embezzled by public elites. Some of my ongoing research tests whether this relationship between oil wealth and political corruption holds true across the United States. Some of my preliminary results suggest so, but more work ultimately needs to be done. And there are meaningful consequences of political corruption. Among other things, the economics literature has linked corruption to greater income...