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Why Natural Resources Can Be A Blessing Or A Curse

The ''resource curse'' – which seems to condemn countries with abundant natural resources to lower economic growth – is only relevant for countries with bad institutions. That is the conclusion of new research by three Norwegian economists – Halvor Mehlum, Karl Moene and Ragnar Torvik – published in January 2006 issue of the Economic Journal.

The researchers analyses data on 87 countries to identify why natural resources are a curse in some countries and a blessing in others. They find that:
• Countries with malfunctioning bureaucracy and insecure property rights experience
lower economic growth and more social instability the more natural resources they
have.
• In contrast, resource abundance leads to higher economic growth in countries with
high quality public bureaucracy and where institutions promote secure property
rights.

Countries such as Australia, Botswana, Canada and Norway are all blessed by their resource abundance. Norway, for example, was one of Europe''s poorest countries in 1900 but is one of the richest in the world today. The remarkable transformation was based on timber, fish and hydroelectric power, and later on oil and natural gas. The United States is another example of a country that historically has benefited from exploiting their natural resources. Countries such as Angola, Nigeria, Saudi Arabia, Sierra Leone, Venezuela and Zambia, however, are all cursed by their resource abundance. Oil, diamonds and metals have fuelled economic and social decline in these countries.

But the focus on resources as the explanation of economic and social decline is misplaced, the three economists argue:
''The most interesting question is not why natural resources can harm the economy but why some countries gain and other countries lose. Why does resource abundance contribute to economic success in some countries and to economic failure in others?''
''The key is that resource abundance has the opposite effect in countries with good and bad institutions. Thus, in cursed countries, institutions are to blame – not the resource wealth per se.''
These findings also have implications for debates about foreign aid. Again, the issue is not whether aid works or not, but why it works in some instances but not in others. The authors comment:
''As with natural resources, aid helps economic development when institutions are good but not when institutions are bad.''

''Institutions and the Resource Curse'' by Halvor Mehlum, Karl Moene and Ragnar Torvik is published in the January 2006 issue of the Economic Journal. Halvor Mehlum and Karl Moene are at the University of Oslo. Ragnar Torvik is at the Norwegian University of Science and Technology, Trondheim.