Economists increasingly discuss a phenomenon with potential to keep companies away from international exploration and production opportunities.
They call it the resource curse.
It's indicated by lack of a positive relationship between a nation's natural resources and other forms of economic wealth, according to William C. Gruben, vice-president and senior economist, and Sarah Darley, research assistant, of the Federal Reserve Bank of Dallas.
In an article about Venezuela for the Dallas Fed's Southwest Economy newsletter, Gruben and Darley point out that resource-rich countries grow slower on average than resource-poor ones.
How can this be?
Focusing on economic aspects of the resource curse, Gruben and Darley explain that a boom from development of natural resources creates a sudden inflow of money, which raises prices of nontradable goods and services. At some point in the price escalation, domestic businesses needing those goods and services find themselves unable to compete internationally. Export-based agricultural production declines, and export-based manufacturing doesn't develop as it should. Governments channel some of their new bounty into subsidies for the affected industries, creating dependency and distorting markets.
Economists cited by Gruben and Darley say educational achievement seems to be negatively related to the resource share of national wealth. So, in effect, wealth from petroleum development can hurt a country by crowding out nonpetroleum industries and discouraging education essential to economic diversification.
While all this is happening, governments focus tax collection on energy. Fiscal stability then vacillates with oil and gas prices. For nearly every economic theory, of course, there is an equally persuasive theory that works in the opposite direction. The resource-curse theory no doubt has its detractors. One problem with it is the difficulty of isolating economic phenomena from the effects, abundant as they are, of poor governance. Whatever the reasons, too many countries blessed with oil and gas reserves don't prosper from development.
The failure detracts from the legitimacy of international work by the oil and gas industry, the future profitability of which depends in some measure on its ability to turn the alleged curse of resource development into the blessing it should be.
(Online June 25, 2004; author's e-mail: [email protected])