1. Introduction
Many recognise the opportunities natural resources provide for economic growth and
development and thus the challenge of ensuring that natural resource wealth leads to sustained
economic growth and development. Still, many countries are cursed by natural resource
wealth. The key question is why resource rich economies such as Botswana or Norway are
more successful while others perform badly despite their immense natural wealth. Is it
because resource booms induce appreciation of the real exchange rate and makes non-
resource sectors less competitive (Dutch disease)? Are learning by doing and other spill-over
effects strong enough in those non-resource traded sectors to warrant government intervention?
Or do the riches of a resource bonanza induce a shift from profit-making entrepreneurship
towards socially inefficient rent seeking? How much of this depends on the quality of
institutions, the rule of law and the degree of financial development? Is resource wealth
plundered by corruption, rent grabbing and civil war at the expense of widespread inequality
and poverty? Does a resource boom maintain unsustainable, bad policies for too long? Is
depleting natural wealth sufficiently reinvested in other productive assets?
To shed light on these important questions, we first present in section 2 the relevant
stylized facts (case studies, historical and statistical) on the heterogeneous experiences of
resource rich economies. We then put forward in section 3 eight hypotheses and offer
supporting theory and the best cross-country, panel-data and quasi-experimental evidence that
is available on each hypothesis. What transpires is not only how much the experiences of
resource rich economies differ from other economies, but also the wide variety of experiences
of different resource rich economies. In section 4 we give detailed attention to the question
why so many resource rich developing economies deviate from the so-called Hartwick rule
and do not fully reinvest their resource rents in foreign assets or productive capital (e.g.,
buildings, roads, machines, human capital or health) even though saving is an essential part of
economic development. The puzzle is why observed and optimal saving rates do not seem to
differ much in non-resource economies, but differ sharply in resource rich economies. We put
forward the ‘anticipation of better times’ and the ‘voracious rent seeking’ hypotheses to help
explain this puzzle. Section 5 offers welfare-based fiscal rules for harnessing resource
windfalls in developing economies paying special attention to capital scarcity, absorption
problems and volatile revenue streams. Section 6 concludes.
2. Stylized facts: is the natural resource curse inevitable?
Although some resource rich countries benefit from their natural wealth, others are in a
terrible state. We discuss some well-known examples of countries whose dependence on
natural resources have gone together with bad macroeconomic performance and growing
inequality among its citizens and contrast these with others which have benefited from their