Natural wealth: Is it a blessing or a curse?

Otaviano Canuto, Matheus Cavallari, 12 October 2012

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An abundance of natural resources is intuitively expected to be a blessing. Nonetheless, it has been argued for some decades that large endowments of natural resources may actually become more of a curse, often leading to slow economic growth and redistributive struggles (Sachs & Warner 1995, and Collier and Hoeffler 1998; Cabrales and Hauk 2011)1.

The empirical literature on the natural resource curse is limited by its reliance on a few proxies of natural resource abundance. The ratio of natural resource exports to GDP is the most common proxy – as, for example, in Sachs and Warner (1995) or Lederman and Maloney (2007). Alternatively, data on production flows in some sectors are also used, because these data are more frequently available.

Sachs and Warner (1995) estimated a negative growth impact of natural resource intensity between 1970 and 1990. They argue that this is the case even controlling for the impact of institutions, trade openness, investment rates, rule of law, and terms of trade. Similarly, Gylfason (2001) used wealth data from 1995 to explain growth figures from 1965 to 1998, and proposed some evidence that natural resource-rich countries seemed not to have invested previously in human capital, which tended to slow the pace of economic growth. In this case, however, one should not lose sight of the fact that the impact of a new discovery is forward looking – that is, it may cause benefits or distortions only after resources are known.

Natural wealth and resource curse: New evidence

So, where can one locate a possible 'natural resource curse'? Brahmbhatt and Canuto (2010) and Brahmbhatt, Canuto and Vostroknutova (2010) explain how certain conditions could lead to a curse.

  • Weak governance and corresponding poor economic policies underlie the misallocation and mismanagement of resources.

In fact, the handling of macromanagement challenges that typically accompany natural resource booms in natural resource-rich countries (volatility, risks of overborrowing and overconsumption, and crowding out of intangible wealth-intensive manufacturing) can in most cases be traced back to governance quality.

To investigate this, we use data released by the World Bank (2011) to investigate in a panel whether natural capital could have a negative impact on future income (Canuto and Cavallari 2012). (See the appendix below for a description of the data set and the broad facts it reveals). Our estimations were based on the countries for which there are data available for both the GDP in 1970 and the wealth estimations. This group is similar to one considered in Sachs and Warner (1995). Wealth stock figures are available only for 1995, 2000, and 2005. The study considered five-year averages of GDP per capita for periods subsequent to each corresponding point-in-time data on wealth stocks2.

A basic model was estimated in a panel data, where GDP per capita is explained by investment ratio, numbers of years of schooling, GDP per capita in 1970, natural resource per capita, and natural capital share. Our analysis replicated the estimations for three cases: (i) the total natural capital per capita and its share of total wealth; (ii) only the subsoil per capita and its abundance; and (iii) similar measures isolating agriculture assets per capita from subsoil assets per capita, but also considering their share in total wealth.

Detailed analysis can be found in Canuto and Cavallari (2012); here are the main findings:

  • Coefficients were significant to all independent variables except for the natural capital share!
  • The higher the levels of education, gross investment ratios, and natural capital per capita, the higher the GDP per capita -- regardless of whether natural resources are dominant.

It seems that in most cases, new capital translates into more income. In fact, there is no regular pattern between relative abundance of natural wealth and income levels, and thus no kind of natural resource curse can be depicted.

Conclusion

Using new data on the natural wealth of countries (World Bank 2011), we do not find evidence of a natural resource curse per se, (i.e. a statistically significant negative effect of natural resources on per capita income). Our results align with others who have stressed that natural resources themselves are not the problem, but rather their indirect impact on governance quality. There is no yes-or-no answer as to whether natural resource abundance is a blessing or a curse.

Three types of policies have been emphasised in the literature as the safest way to make sure the bang from the natural resource buck is maximised (Brahmbhatt and Canuto 2010):

  • Ensuring high transparency and strengthened checks and balances for all phases of natural resource extraction and use (terms of contracts, monitoring of operations, collection and use of taxes) are critical for a favourable outcome, as well as to avoid rent-seeking behaviour.
  • Adopting fiscal rules to ring-fence investments from proceeds of overtime depletion of natural resources and to mitigate the effects of the usual volatility associated with natural resource prices can reinforce the virtuous dynamics of wealth accumulation.
  • Reforms to improve public sector capacities in terms of public investment management, monitoring and evaluation, budget processes, and so forth will also help transform natural wealth into produced capital and intangible wealth.

Editor’s note: This column reflects the views of the authors writing in their personal capacity.

References

Arezki, R, T Gylfason and S Amadou (2012), "Beyond the curse: Policies to harness the power of natural resources", VoxEU, 8 July.

Brahmbhatt, M and O Canuto (2010) "Natural resources and development strategy after the crisis", VoxEU, 2 March.

Brahmbhatt, M, O Canuto and E Vostroknutova (2010), "Dealing with Dutch Disease", VoxEU, 21 June.

Bulte. E and C Brunnschweiler (2012), "The on-going debate on natural resources and development", VoxEU, 28 May.

Cabrales, A and E Hauk (2011), "Political Institutions and the Curse of Natural Resources", VoxEU, 17 Jun

Canuto, O and M Cavallari (2012), “Natural Capital and the Resource Curse”, Economic Premise n.83, May.

Canuto, O (2011), Navigating the Road to Riches, Project Syndicate, July 12.

Caselli, F and A Tesei (2011). "Oil and democracy: New insights", VoxEU, 22 December.

Collier, P (2010), Plundering the Planet: Why We Must—and How We Can—Manage Nature for Global Prosperity, New York: Oxford University Press. 

Collier, P and A Hoeffler (1998), “On Economic Causes of Civil War”, Oxford Economic Papers 50, 563-73

Gylfason, T (2001), “Natural Resources, Education, and Economic Development.” European Economic Review 45: 847–59.

Lederman, D and W F Maloney (eds.) (2007), Natural Resources: Neither Curse nor Destiny. Washington, DC: World Bank; and Stanford, CA: Stanford University Press.

Sachs, J D and A M Warner (1995), “Natural Resource Abundance and Economic Growth.” NBER 5398, Cambridge, MA.

World Bank (2011), The Changing Wealth of Nations: Measuring Sustainable Development in the New Millennium. Washington, DC.

Appendix: The new capital data set and broad patterns facts

However one defines development, it supposes rising income levels and accumulation of capital broadly defined – produced capital, natural capital, human capital, and institutional capital. These are key sources of income and wellbeing.

Table 1. Wealth and per capita wealth by type of capital and income group, 1995 and 2005

Source: World Bank 2011, 7.

Note: Figures are based on the set of countries for which wealth accounts are available from 1995 to 2005. Data in this table do not include high-income oil exporters. OECD = Organisation for Economic Co-operation and Development.

In an effort to move the study of sustainable development to a more evidence-based approach, the World Bank is undertaking a major effort to expand national accounts to include the whole span of assets. This has lead to the collection and public release of data on wealth accounts for more than 120 countries covering a ten-year period, 1995 to 2005 (World Bank 2011). This includes:

  • Produced capital (machinery, structures, and equipment).
  • Natural capital (agricultural land, protected areas, forests, minerals, and energy).
  • Intangible capital.

The latter is clearly a wealth component requiring much further work. Intangible capital is still measured as a residual, the difference between estimates of total wealth and the sum of natural and produced capitals: “It implicitly includes measures of human, social, and institutional capital, which includes factors such as the rule of law and governance that contribute to an efficient economy” (World Bank 2011, 4).

Table 1 exhibits wealth and per capita wealth by type of capital and income group in 1995 and 2005 (World Bank 2011). From an accountant’s perspective, there are some striking features regarding an archetype of progress up the income-wealth ladder.

  • First, the share of produced capital in wealth moves upward from low levels in low-income countries, but remains reasonably modest thereon.

It appears that cumulative savings used for investments in physical assets accompany and support the rise in income levels, but typically at a less than proportional speed.

  • Second, intangible wealth is the largest single component of total wealth at all levels of income, but increasingly so as it moves to the upper-middle- and high-income levels.

Increased educational attainments, as well as improvements in institutions, governance, and other intangible forms of wealth are imperative if a country is to overcome 'middle-income traps' (Canuto 2011).

It follows that natural assets comprise a substantial portion of total wealth at low-income levels, decreasing in relevance if the economy succeeds in moving up the income ladder. In all cases, however, if the use of non-renewable natural capital supports just consumption, no income-generating assets will be there when the natural resources are exhausted.

One may then guess that abundance of natural capital – as measured by per capita natural wealth – is in principle favourable to raising per capita income levels. Furthermore, the average archetype of wealth-cum-income progression depicted may take place with different shares of natural wealth in different countries. This is illustrated by the different wealth compositions as of 2005 among high-income countries (the US, Japan, Norway, Canada, and Australia), as well as among middle- and low-income countries (Table 2).

Table 2. Shares of natural capital in total wealth per capita (selected countries)

Source: Authors’ calculation, from World Bank (2011), appendix C.


1 For more recent contributions see Brahmbhatt and Canuto 2010, Caselli and Tesei 2011, Buite and Brunnschweiler 2012, and Arezki, Gylfason and Amadou 2012.

2 Data were obtained from the World Bank’s World Development Indicators database.

Topics: Development, Environment
Tags: Dutch disease, natural resources

Vice President and Head, Poverty Reduction and Economic Management Network at the World Bank

Consultant for the Poverty Reduction and Economic Management Network, World Bank Group

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