42
resources such as diamonds and precious metals. The resource curse is, however, not cast in
stone. Resource rich countries with good institutions, trade openness and high investments in
exploration technology seem to enjoy the fruits of their natural resource wealth. On the other
hand, the curse seems more severe in presidential democracies. Resource rich countries are
also vulnerable to the notorious volatility of commodity prices, especially if their financial
system is not well developed. Recent research, taking account of the endogeneity of resource
dependence, suggests that volatility may be the quintessence of the resource curse. Of course,
there is also cross-country and panel-data econometric evidence that natural resource
dependence may undermine the quality of institutions. And there is an interesting quasi-
experimental study on Sao Tomé, using Cape Verde as control, which suggests that
announcements of oil discoveries lead to corruption. Resource bonanzas also reinforce rent
grabbing, especially if institutions are bad, and keep in place bad policies (debt overhang,
building a too generous welfare state, etc.). There is also evidence that dependence of point-
source resources makes countries prone to civil conflict and war, although these results fail to
convincingly take account of the effect of conflict on natural resource production. A recent
quasi-experimental study on the districts of Columbia offer evidence that capital-intensive
resources such as oil are much more prone to civil conflict than labour-intensive resources
such as coffee, rice or bananas.
Although from a normative perspective countries should invest their natural resource
rents into reproducible assets such as physical capital, human capital, infrastructure or foreign
assets, World Bank data suggest that resource rich economies do not fully reinvest their
resource wealth and therefore have negative genuine saving rates. But resource rich countries
may grow less simply because they save less than other countries. However, if these countries
anticipate a positive rate of increases in future resource prices or continual improvements in
exploration technology, it may make sense for them to borrow. Rival factions competing for
control of resources will speed up extraction and may well lead to over-investment. To
explain negative genuine saving more is needed; for example, rapacious resource extraction
being associated with erosion of the legal system, inefficient rent seeking, investment in
‘white elephants’, and short-sighted politicians. In well developed economies it may be
optimal to put natural resource revenues in a sovereign wealth fund. In contrast, developing
countries often face capital scarcity in which case it is more appropriate to use the windfall to
pay off debt and lower interest rates to boost private and domestic capital accumulation and
speed up the process of economic development. Many countries find it hard to absorb a
substantial and prolonged windfall of foreign exchange, since it takes time for the non-traded
sectors to accumulate ‘home-grown’ capital. Whilst these Dutch disease bottlenecks are being
resolved, it is optimal to park the windfall revenue abroad until there is enough capacity to