The Paradox of Plenty?

The Paradox of Plenty?  –  Are natural resources a blessing or a curse?

The intuitive answer is that they should be a blessing. All things being equal, one would rather live in a country rich in energy, minerals, and other wealth than in a poor country. But if you study the “resource curse” you see that all things are not equal. Countries with lots of energy or mining resources tend to grow more slowly than other countries. Why should this be?

Wealth in one commodity tends to focus the economy on that product, to the detriment of having a balanced, diversified production base. Commodities tend to experience boom/bust cycles, leading to over and under-investment. And resource-rich regimes tend to fund themselves from their wealth, not taxes, weakening the social bonds that ties citizens to their governments.

The result is poor governance and a narrow, boom/bust economy. As a result, from 1965 to 1998 the oil-rich OPEC countries shrank by 1.3% per year on a per-capita basis, while in the rest of the developing world grew by 2.2%. One of the founders of OPEC called oil “the Devil’s excrement.”

So are North Dakota and Saskatchewan doomed? Probably not. The resource curse comes into play when governance is weak. There are plenty of countries like Norway and Australia where those who develop the resources are subject to checks and balances, and their democratic institutions are highly transparent 

As in many other areas of life, money isn’t the problem; managing it is. Abundant resources should be a good thing, and can be, if they’re managed well.

Douglas R. Tengdin, CFA
Chief Investment Officer

Follow me on Twitter @tengdin

Leave a Reply

Your email address will not be published. Required fields are marked *