NCPA - National Center for Policy Analysis

Natural Resources: a Boon or a Burden?

September 21, 2001

Oil and other natural resources were once considered a boon to countries that possess them. But economists have found that abundant natural resources, also called natural capital, may be more of a burden than a boon. For instance, a recent study found that countries with abundant natural resources have less trade and foreign investment, more corruption, less education and less domestic investment, compared with less endowed nations.

Researchers compared natural capital as a share of total capital (physical, human and natural resources) in nearly 100 countries over the period 1965 to 1998. After adjusting for the size of national economies -- which accounts for exports' typically greater share of Gross Domestic Product (GDP) in smaller countries -- they found that, between any two countries:

  • A country in which natural capital's share of total capital was 10 percentage points higher had exports about four percent of GDP lower than the less resource dependent country.
  • And annual per capita GDP growth was 0.3 percent lower, on average, than it otherwise would be.
  • Furthermore, a 15 percentage point higher share for natural capital was associated with a two-point increase in corruption on a 10-point scale developed by Transparency International.
  • And each point increase in the corruption score was associated with a one percentage point lower annual growth, on average.

Similarly, the more natural resource dependent a country is, the less educated its population, with a 25 percentage point higher share for natural resource capital associated with a 45 percentage point lower secondary-school enrollment. Also, it is associated with five percentage point lower gross investment as a percent of GDP.

Only four of 65 countries classified as natural-resource rich managed to achieve long-term investment and per capita GDP growth comparable to less dependent countries. Among the factors that may explain this dismal performance are rent seeking (profiting from government-created market distortions), a failure to pursue growth-oriented policies and ill-defined property rights.

Source: Thorvaldur Gylfason (University of Iceland), "Natural Resources and Economic Growth: What is the Connection?" August 2001, CESifo Working Paper No. 530, Center for Economic Studies & Ifo Institute for Economic Research (CESifo), Poschingerstr. 5, 81679 Munich, Germany, +49 (89) 9224-1410.


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