Ever wondered that if you ignore the regions rich in Oil and Gold, then why are the regions that are rich in natural resources are actually poorer and more politically unstable than those regions without any natural resources/minerals?
Its because of Dutch Disease. You can also read a short paper on “Why Mining could bust us” (Australia) to get a simpler answer.
The gist is:
Discovery/exploitation of natural resources leads to a lot of capital inflow in a short period of time. This wealth from outside creates appreciation of local currency which renders domestic manufacturing uncompetitive. Also these industries now get limited attention of the policy makers and reduced access to the best minds and incentives of the government which further hastens their demise.
Usually any economic activity involving mining, tree felling etc does not require much investment in technology or human capital (viz a viz the same amount of revenue generated from manufacturing) As a result, the bulk of the profit goes to the owners (rich foreign corporates, land owners and governments) and bulk of the workers (miners, plantation workers, tree fellers etc.) work on minimum wages. This increased inequality means that the masses are not rich enough to spend and give a boost to the local economy, while the rich want a luxurious life. Luxury means that there would be an increased amount of imports of the best in the world (and not local produce) and an increased spending in non economic activities like maids, chauffeurs, gardens, ornate buildings which do not give much economic boost to the country as a whole. Also most countries are not able to manage this easy and substantial wealth properly. This gives rise to the civil wars, political instability and corruption, and which further increases the misery of the masses.
Finally minerals and natural resources are a depleting asset. Over a long period of time, the inflation adjusted value of almost all of the natural resources fall (oil and gold included) decline. Plus existing reserves gets depleted and new reserves in far off land gets discovered. Hence any economy which neglects on its human capital and banks its entire future on a few natural resources is never bound to see a glorious future.
6 replies on “Natural Resources and Poverty”
You reminded me of Black Diamond.
@jayan..
care to elaborate.
it was a typo ankur :). the first thing i could think of after reading your post was the hollywood movie blood diamond. It centers around the diamond trade in rich countries. It depicts how the african countries which are the source of these stones remain in political and economical instability.
in Africa this is very predominant… even in india you can see that the eastern India (Jharkhand, Chattisgarh Orissa, West Bengal etc.) which are rich in mineral resources are among the poorest of the Indian states
Interesting. But countries in the middle east have made most out of oil available there. On a long run, it is indeed human capital which could give substantial and consistent revenue. But you never know what could happen, all the asian and african countries could become hot places to live simply because of the amount of heat and light received in a world totally deprived of conventional sources of energy.
Destination Infinity
if you look at the Middle east before the 1970s, it followed this theory… but looks like the govt has now changed and a substantial part of the oil revenue is being diverted for upliftment… hence it does not follow the model…
About africa.. oil or no oil…. natural resourses is only leading to poverty