Thursday, April 24, 2014

The Curse of Riches: Resource Wealth and Social Progress

The curse of riches or resource curse has been a staple of development economics for decades. The curse refers to the striking fact that many resource rich states, such as Nigeria and Congo, are conflict-ridden basket cases while some of the world’s best performing economies are islands or city-states, such as Japan, Taiwan, and Hong Kong.

Numerous empirical studies have confirmed the existence of a curse, most famously a 1995 NBER working paper by Jeffrey Sachs and Andrew Warner. Sachs and Warner noted that over the 20-year period from 1970 to 1990, countries with a high percentage of natural resource exports grew systematically slower than did those with few resources. The following chart replots the data from their paper:

Over the years, development economists have suggested several ways in which resource wealth might lead to poor economic outcomes. Two mechanisms seem especially important, one of them focusing on exchange rates and the so-called Dutch disease, and the other on political economy and impediments to social progress. This post uses the recently released Social Progress Index (SPI) to shed new light on their relative importance. >>>Read more

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