The debate on the resource curse is not new and there is a rich literature on that topic. There are also examples of countreis that have avoided negative side effects of a resource boom by prudent management of revenues. The paper below discusses such an example, Chile's copper sector, and provides a summary of the resource curse debate in a text box:

Korinek, J. (2013), "Mineral Resource Trade in Chile: Contribution to Development and Policy Implications", OECD Trade Policy Papers, No. 145, OECD Publishing.

doi: 10.1787/5k4bw6twpf24-en

Dear David

Think of the political organizational culture disposed by elites in these countries and you may find certain enlightening elements as far as their ability to take advantage of their wealth. I refer to political culture and not culture.

Thanks a lot Frank and George for your respective suggestions...Your points are well noted

oh ok, thanks a lot George for the wonderful opinion shared. Your point is well noted and very much appreciated

May be the "growth path" that a country follows in the name of "development" ............

There are a variety of factors that contribute to the resource curse, both economic and political in nature. As far as economic problems go, resources are an unstable source of income at best, prone to changes in price. They also tend to encourage irresponsible behaviour on the part of policymakers, in particular corruption, political instability and unsustainable spending policies. I would personally recommend reading Michael Ross' work "The Political Economy of the Resource Curse". Additionally, I have recently finished and submitted my master's thesis, and the resource curse was actually the topic of my work. If anybody is interested in having a look, let me know.

Thanks a lot Bassam, Christopher and Balaji for the wonderful opinions shared. Your respective points are well noted and very much appreciated

My study finds corruption and lack of institutional development as the primary reason behind resource curse and the sensitivity is higher for South Asian countries.

I think the theories developed by CEPAL and the theory of dependency (and of course its nowadays defenders in world systems theory) were never proven wrong - their decline has more to do with a profound change in the intellectual panorama in the 1980s. I am referring, above all, to the Singer–Prebisch thesis of the deterioration of terms of trade between primary resources and industrial products.

To be a little bit more easy-going, I would recommend "The Open Veins of Latin America" by Eduardo Galeano who explores just this in layman's terms. The first part of the book has the title "Mankind's poverty as a consequence of the wealth of the land" - I think that is what you were inquiring about.

Mr. Boansi,

I think your question is well developed in many studies. I encourage you to take a look into this world bank report, which is quite accurate in terms the analysis and implications about the commodity abundance in many less developed countries.

The report addresses the reasons of the "curse" (actually it uses the same word referred to this phenomena). Additionally, I consider that the issue it not the abundance per-se, the issue is the management ability in less developed economies to extract the surplus generated by the availability, by encouraging the investment in develop well-skilled human capital and adding value in other industries.

http://siteresources.worldbank.org/INTLAC/Resources/257803-1284336216058/FlagshipReport.pdf

Although there is a lot of literature on the "resource curse", it is far from empirically established in the literature. Please see recent papers of Christa Brunnschweiler (2008) and Brunnschweiler & Bulte (2008), as well as Alexeev & Conrad (2009).

I was also working on this issue: re-running the regressions of, e.g. Sachs & Warner (1995) or Papyrakis & Gerlagh (2004) using 2FE estimation on the panel (instead of the cross-section) already shows that the "resource curse" does not really hold.

In particular, Cuddington et al have argued that a resource curse per se does not exist. Granted, there do seem to be problems with the regressional models such as that developed by Sachs and Warner. If you're looking for a correlation between economic growth and resource dependency, then it becomes harder to argue that point. However, there does appear to be a link, albeit more on the basis of a case-study type analysis between resource dependency and the integrity of governmental institutions. Elisabeth, if the "resource curse" theory does not hold, then what can be seen to account for poor economic growth and social development in resource producing economies? Granted, there are some exceptions to this rule.

do have a glance at the "dutch disease" literature for energy related resource curse. however when LDCs are concerned I do agree with George and Christopher that the main role in the curse is played by badly managed economic policy.

However there is also another specification of the resource curse, related to precious resources (gemstones, gold, diamonds, etc) ore, more generally, to "lootable resources" which may explain poor economic performance via an increase in the likelihood and severity of civil wars. As far as this issue is concerned, insittutional and ethnical issues and variables linke the frationalisation index should also be taken into account!

In addition to the economic issues of "Dutch disease" (currency appreciation or inflation making other exports uncompetitive), the political effects of having a source of cash divorced from the population and labor force is key. Whoever controls the oil, for example, has the money to fund government. There is no (or less) need to tax citizens, who then become the passive recipients of government largesse rather than stakeholders in that government. This is one way in which abundant natural resources promote corruption. See http://www.chathamhouse.org/publications/twt/archive/view/178571

In my thesis I noticed that the symptoms of the Dutch Disease are linked to effective or ineffective government management. For example, competent government management is necessary to push economic diversification forward and sensible spending policies are needed to keep infaltion under control and prevent countries going into debt once a resource boom ends.

We should note that having good governance in place before the boom (think Norway) is the best way to prevent natural resources from becoming a curse. Poor governance before the boom will most likely mean the continuation of poor governance during, as the cash flow divorced from citizen sources (as mentioned) drives on corruption. That corrupt and ineffective government, as Christopher mentioned, is then unable or unwilling to mitigate the effects of Dutch Disease.

Amazing responses....Thanks a lot for the respective and brilliant suggestions made on the issue so far...Your wonderful opinions are well noted and very much appreciated

I discuss Dutch Disease and bad governance as it relates to oil and Libya here: http://the-real-issues.blogspot.co.uk/2011/10/libyan-democracy-islamists-arent.html (it's an informal blog meant for non-specialists). It also discusses how foreign aid can sometimes act like a resource curse.

I agree with Charles. Actually, Bangladesh is a case of study in this sense. Here I quote two authors about the "resource curse" and the effects in economic development. It's interesting the time frame between both and the conclusions.

If the flow of aid is substantial, it can also fail because of the emergence of Dutch disease, that is, the flow of aid may cause the real exchange rate to appreciate and thereby impede the growth of exports. Similarly, aid can fail because it obviates the need for hard choices and genuine reforms, and thus leads to the persistence of bad policies, poor governance, and endemic corruption, which keep countries locked in a state of economic stagnation and extreme poverty. Finally, foreign aid can fail if the cookie cutter approach of donor agencies results in the imposition of inappropriate policies and institutions that are out of step with the country‘s real requirements, and thereby immobilize and/or debilitate the economy. (Quibria & Ahmad, 2008)

Foreign capital appears to have some positive role to play in the process of economic development in Bangladesh although not all of its categories are equally important. Loans and food aid appear to exert a stronger influence on economic growth than other categories. It is also found that domestic resources exert a much stronger effect on growth than foreign resources. As much, government policy needs to focus more heavily on mobilizing resources for the economic transformation of Bangladesh. (Islam, 1992)

Here are the sources:

Quibria & Ahmad (2008): http://mpra.ub.uni-muenchen.de/10299/1/

Islam (1992): DOI:10.1080/00036849200000067

Best

I am a mineral economist and never liked the phrase; it is a misnomer. Most mines are efficient in their operations and run efficiently. They enerate huge revenue The fact that such revenue is not well managed has very little to do with resources. I have yet to find an example of a country that had good policies and effective institutions that suffered a resource curse after it discover an essential resource. What is common is that countries that are already doing bad, do worse when the discover an essential resource. Why is the resource to blame more than corruption, ....?

In land rich economies poorly managed like Argentina for the last 80 years or so, the political arguments behind policies that have extracted land rents mainly thru trade barriers have repeatedly been: 1) that land was initially (mainly first 75 years of the XiX century) distributed in a highly unequal manner uner the leadership of oligarchical governments and, 2) that industry is more productive than agriculture. These ideas are generally held by the citizens and so, they are part of the country's culture,

politics by definition is the manner/way of distributing resources. the greater the resource the higher the tension is in the division/distribution of these resources...political tension. in many of such resource rich countries coming into power becomes no more an issue of service but rather about having the power to decide on who gets what and in what terms. then follows, as many groups contend for power, those already in power have to look for ways of extending their terms which ways include, among others, autocracy, patronage (creating allies though skewed division of public resource,.....All these, coupled with a growing inclination towards rent seeking in many of resource rich countries, lead to bad governance and political unrest - leaving the majority to suffer from such bad governance than enjoying their natural resources.

As noted by Acemoglu et.al (2005), the issue lies not in the endowment of resources but in the kind of economic institutions (and hence incentives) that emerge from the distribution political power, which is influenced by political institutions and the distribution resources. The case of Norway can be put forward and that immediately dismisses the notion of the resource curse and turns attention to the kind of political institutions that are set up in resource endowed countries.

Political institutions that are "extractive" (rent seeking) will lead to suffering from the "dutch disease", while those that are inclusive will create economic institutions that encourage development and hence sustained growth.

I think that the notion of resource curse is completely misleading if not wrong. The question one should be asking must relate to the required conditions for countries to prudently manage a sudden inflow of foreign exchange. Most countries are simply overwhelmed by the large inflow and in the process poor management of their economies simply sets in. The more under developed the economy, especially those lacking appropriate institutions, the higher the level of the mismanagement of the resource inflow. Experiences can be found in Nigeria, Angola --where the oil extraction led to poor management of the economies. In the case of some countries in Africa such as Guinea Bissau, large foreign exchange inflows through donor assistance had the same Dutch disease effect.

The solution for developing countries is the necessity of strong leadership that is interested in developing the country and not interested in his/her personal gain. Unfortunately we rarely see that happening in any developing country. The country may have rich mineral resources, but the benefit will come when they are properly exploited and used for the benefit of nation. But what we see most of the time is that it is used to enrich ruler rather than the people. When external aid if it comes in the form of cash again part of that goes into the ruling elite’s pockets and will not reach the people. Leadership of these countries need to analyze what is good for the country and exploit that appropriate technology.

Corruption and lack of institutional development.

Use - aversion and diversion too

I find that different people understand the resource-curse concept in different ways. For the purely trade-theory aspect of the resource curse, my own understanding is as follows: An economy has a "resource-curse" (or "Dutch-disease") problem when it has a strong comparative advantage in a productive activity that uses a very small amount of labor input. (Note, this way of understanding the problem is not at all monetary.) The resource-curse problem has other dimensions, of course, but many of the political and other economic aspects derive in part from the trade pattern it produces.

Lack of state institutions with the capacity to manage and account for the exploitation of the resources.

Non-prioritisation of development policies . Botswana in Africa,Malaysia in South-East Asia,Norway and some other countries in the Gulf region pursued social protection policies from the initial stages in their natural resources extraction.Local capacity to take over the commanding heights of the direct and indirect industries created by such resources were deliberately executed.

Corruption and all forms of rent seeking behaviour were punished.

Asian markets that continue to patronise stolen natural resources expecially from Africa should be named and shamed.

Aftter analysing oil exporting countries, I concluded that there exist quite big differences between countries and in the background we have the quality of public governance that have two essential aspects: the integrity of government (measured by (corruption perception indicator) CPI scores and ease of doing business highlighting the quality of regulations concerning business activities. See page 204-6 in "Missing a Decent Living for Everyone: Success and Failure in 143 countries (available in ResearchGate).

Hi Veli

Good Governance,the Dutch Disease,World Market price volatility and pro-cyclicality of primary products ( non-value adding natural resources),and inability to manage foreign exchange volatility also serve as leakages in the effective management of revenues derived from the exploitation of natural resources.

I've attached a recent published paper related to this topic. Hope it helps.

Summary

We examine the effects of the ‘natural resource curse’ on Chad and find little evidence for Dutch disease. Structural vector auto-regression suggests that changes in domestic output and prices are overwhelmingly determined by aggregate demand and supply shocks, and while oil production and high international prices negatively affect agricultural output, the effects are small. Consistent with empirical evidence for neighboring Cameroon, we observe minimal impact on Chad’s manufacturing sector. We associate our findings with structural underemployment and the inefficient use of existing production factors. In this context, increased public expenditures in tradeable sectors present the opportunity to make oil revenues an engine of national development.

Inefficient and corrupt government-machinery and irresponsible political leaders have looted natural and financial resources for self-development that have created so many economic problems in India. Indigenous-technology to use indigenous-resources to meet the needs of both local and foreign people may reduce this problem.

For economic analysis, it is useful to define "Dutch disease" fairly closely.  The expression "resource curse" can be used to refer to the syndrome of corruption, unemployment, swollen public sectors, and high prices that characterizes economies with massive resource-based export surpluses.  I think, though, that is helpful to define "Dutch disease" more closely -- as a situation in which an economy has a strong comparative advantage in an activity that employs generates negligible amounts of employment.

With this definition there is no question of "shocks" and responses to shocks.  Shocks presumably affect productive sectors.  The whole point about Dutch disease, however, is that it causes sectors simply to disappear or never even come into existence.  If a sector fails to exist, it won't show a response of any kind to a shock.

In Dutch-disease economies, the production costs in non-existent sectors are likely to be far above the relevant import prices.  That's the main reason why the sectors fail to exist.  Well-meaning "diversification" projects may succeed in reducing the gap, by reducing such things as business start-up costs, nuisance taxes, and the like.  But it makes little difference if a sector fails to come into existence because its would-be unit costs exceed the relevant unit import prices by US$1 rather than US$2.