Most developing countries are quite rich in natural resources. Some of them are utilising these sources to finance public spending, while others are setting on it and waiting for foreign investors to help them in exploration.
Besides other issues, natural resource curse can also come into play and disturb the economic growth.
What is the natural resource curse and why it is not affecting developed countries?
Ayesha
When a country becomes solely dependent on natural resources and neglect more advanced sectors, then the resource starts turning to a curse. The resource curse is a ‘paradox of plenty’, where countries with plenty of natural resources tend to have less economic growth and eventually poor macroeconomic fundamentals as compared to countries with less natural resources.
One of the cause is that sometimes countries heavily depended on natural resources and started neglecting investment in other major sectors of the economy, leaving the country economy less diversified. Resource dependency makes the economy vulnerable to price volatility and declining terms of trade.
Further to this, revenues from the natural resources may tend to give rise to monopolies, i.e., Dee Beers in diamonds. So, a small percentage of wealthy shareholders (often multinationals) takes the most of the profit and do not directly benefit the economy. Taxes paid by multinationals are often set low due to incentives, corruption etc.
In some cases, appreciation in the exchange rate due to resource effect makes imports relatively cheaper. At the same time, appreciation also damages the export sector and makes it less competitive. If such a situation continues in the long run, where one sector performing better while other sectors performance declines, the country growth can be negatively affected. This situation is known as “Dutch Disease”.
The resource curse is a sceptical concept and cannot always to be true; for instance, Australia is a resource-rich country still listed as an advanced economy. Many other countries are enjoying the benefits of having resources through a diversified economic structure.
Australia has a strong industrial footprint, and its robust macroeconomic policy framework is resilient to cope with instability and volatility coming from the resource sector. Australia is committed to promoting anti-corruption activities and transparency.
It financially supports Extractive Industry Transparency that enables citizens to pressure governments into spending money on much-needed infrastructures such as hospitals, schools and roads. Australia has a history of fairly allocating natural resources.