Natural Resources: Curse or Blessing?

some evidence in support thereof. Section 3.4 discusses the hypothesis that presidential
democracies are more likely to suffer a negative effect of resources on growth. Section 3.5
reviews econometric and quasi-experimental evidence for the hypothesis that resource
windfalls increase corruption, especially in countries with non-democratic regimes. Section
3.6 offers econometric support for the hypothesis that volatility of resource windfalls is the
quintessence of the resource curse and also for the hypothesis that the negative effect on
growth is less in countries with well developed financial systems. Section 3.7 puts forward the
hypothesis that resources induces voracious rent seeking and armed conflict, and examines
cross-country, panel-data and quasi-experimental evidence for this hypothesis. Section 3.8
discusses the hypothesis that resource windfalls encourage unsustainable and unwise policies.
Section 4 is entirely devoted to two hypotheses that might explain why many resource rich
developing countries experience negative genuine saving. Of course, there may be other
hypotheses which we do not touch upon.³

3.1. Dutch disease: natural resource windfalls cause de-industrialization

Early policy contributions highlight the appreciation of the real exchange rate and the
resulting process of de-industrialization induced by the increase in oil exports in Britain
(Forsyth and Kay, 1980, 1981). There has also been a relative decline of Dutch manufacturing
as a result of worsening of competitiveness associated with the export of natural gas found in
Slochteren (Ellman, 1981). The idea behind this Dutch disease is that the extra wealth
generated by the sale of natural resources induces appreciation of the real exchange rate and
an ensuing contraction of the traded sector (Corden and Neary, 1982; Corden, 1984).

We illustrate this with the Salter-Swan model of a two-sector economy with a
resource windfall, abstracting from capital accumulation, international investment and
financial assets. Export of resources thus equals net imports of traded goods, that is
HTQE= CT-H_tF(L_t) where Q denotes the world price of natural resources, E the volume of
exports of natural resources, CT consumption of traded goods, LT employment in the traded
sector, HT productivity in the traded and natural resource sectors and HTF(LT) output of the
traded sector (with F'>0, F"≤0). Non-traded goods market equilibrium requires CN=HNG(LN),
where CN denotes consumption of non-traded goods, LN employment in the non-traded sector,
HN productivity in the non-traded sector and HNG(LN) output of the non-traded sector (with
F'>0, F"≤0). With exogenous labour supply of one unit and labour mobility between traded

³ For example, resource dependence seems to be correlated with a bigger Gini index of inequality and
less political liberties, which in turn are correlated with lower growth (Gylfason and Zoega, 2003).
Empirical evidence suggests that resources increase income inequality only in ethnically polarized
societies, after controlling for GDP, schooling, and constraints on the executive (Fum and Hodler,
2010). Income inequality also reduces immediately after an oil or mineral boom and increases

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