Lecture 3.2

The Resource Curse

Emmanuel Teitelbaum


Central Questions

  • What is the resource curse?
    • “Dutch Disease”
    • “Four S’s”
  • Policy solutions
  • Breaking down the resource curse
    • Democracy, accountability, gender, conflict
  • Much of the discussion will focus on oil
    • But many of the arguments also apply to other resources

The “Resource Curse”

What is The Resource Curse?

  • The combined political and economic effects of natural resource wealth
    • Low growth, particularly in industry
    • Low accountability and high corruption
    • Volatility in government revenues
    • Entrenched patriarchy
    • Political instability and conflict (civil wars)
    • Adverse implications for democracy and democratic transitions (our main focus)

Exceptions to Modernization Theory

Oil and Electoral Democracy

Ross Discussion

  • What is a “fiscal theory of democracy” and what does it have to do with the oil curse?
  • See graph on previous slide
  • Which country cases support Ross’s theory?
  • Which countries are exceptions?

Oil and the “Four S’s”

  • Source (rentier effect)
    • Non-tax revenues
    • Lack of accountability
  • Scale
    • Spending
    • Repression
  • Secrecy (corruption)
  • Stability (revenue)

Dutch Disease

  • Decline of export sectors when a natural resource is discovered
  • Deindustrialization
    • Poor allocation of resources (investment)
    • Government crowds out private sector
  • Higher exchange rates
    • Hurt competitiveness of industrial sector
    • May lead to protectionist policies

Resource Geography

Where are the Resoruces?

  • Follow the links to the U.S. Energy Information Agency website above
  • For the first link, play the ranking animation
  • For the second, select heat map and play the map animation
    • Data Options > Heat Map > View Data > Show Animation
  • Discuss with a neighbor. Any surprises?

Resource Production as % of GDP

Policy Alternatives

Policy Discussion

  • Leaving oil in ground
  • Barter contracts (oil for public goods)
  • Distribute more oil revenues to citizens
  • Transfer more money to regional or local governments
  • Privatize (and tax) oil sector
  • Stabilization funds
  • Borrowing counter-cyclically
  • Enhancing transparency

Heterogeneous Effects

Oil and Democracy by Region

Heterogeneous Effects

  • Oil may have destabilizing effect in some regions but not others
  • Theories
    • Degree of resource dependence

    • Levels of inequality (Dunning)

    • Experience with democracy (Ross)

    • Industrial policy (Brooks and Kurtz)

Latin American “Exceptionalism”

  • Oil wealth and democracy are both endogenous to industrialization
    • Oil exploration requires investments in human capital

    • These investments are made as part of ISI policies (e.g. Brazil)

      • ISI = Import Substitution Industrialization
    • Industrialization, in turn, leads to democracy

  • Extension of modernization theory
  • What about Venezuela?


Oil and Patriarchy (Theory)

Source: Ross, The Oil Curse, Chapter 4

Oil and Patriarchy (Evidence)

Source: Ross, The Oil Curse, Chapter 4

Oil and Conflict (Theory)

  • Costs vs. benefits of rebellion
    • Costs: repression; opportunity costs
    • Benefits: winning power; patronage from new leaders (if you win)
  • Expected benefits > costs in oil-producing regions
    • Incentives frequently lead to separatist wars
    • Spoils of war greater for aspiring leaders

Oil and Conflict (Evidence)

Source: Ross, The Oil Curse, Chapter 5

Where Does Oil Cause Conflict?

Source: Bell and Wolford 2015

Mediating Effects of Poverty

Source: Ross, The Oil Curse, Chapter 5