What’s the resource curse theory?

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The resource curse theory is a theory in economics that, simply put, suggests that nations that have rich, but limited, natural resources may fail to develop in other industries, eventually causing financial problems. There is some debate about how much role resource curse theory plays in economic development, with many economists pointing to African nations as an excellent example of the myriad paths developing nations can take. As with other economic theories, it’s helpful to remember that this idea is just a theory and not a law set in stone.

Several factors come into play in the resource curse theory. The first is quite obvious. If a country has a large supply of a natural resource such as timber, the temptation is to invest all energy and resources in developing the timber industry, at the expense of other industries. This causes a series of chain reactions which can hinder or even block economic development.

In the example above, a nation that invests all of its energy into timber development could run into serious problems if timber prices drop dramatically. By investing heavily in an asset, a country or region exposes itself to the risk of developing a very volatile market. A focus on extraction can also prevent a company from making money on finished, refined products; for example, exporting all of your teak locks you out of the market for teak furniture, teak oil, teak upholstery, and other teak products, thereby hurting the economy.

Under the resource curse theory idea, a country will also fail to develop infrastructure and other industries, instead focusing on a handful of industries as cash cows. Wealth is often concentrated in the hands of a few, enduring ferocious inequalities that can become a serious social problem. By failing to develop a more diverse economy, a country is also forced to rely on other nations for a wide variety of goods and services, and could in fact end up with a net loss at the end of the year.

In one sense, the resource curse theory is an abundance paradox; although a country may seem well rooted and endowed with abundant natural resources, it can actually be very fragile. Abundance of resources can paralyze a country, encouraging very isolated investment and development, ignoring the need for diversity. When the market for a product declines, or the resource is depleted, the results can be economically devastating.

Economists believe that combating the resource curse theory is as simple as encouraging balanced and diversified investment and development. If a country has rich oil resources, for example, in addition to extracting and refining oil, it should also pursue other methods of making money, to ensure a more stable market.

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