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CID Working Paper No. 195

The Natural Resource Curse: A Survey

Jeffrey Frankel

May 2010

Abstract

It is striking how often countries with oil or other natural resource wealth have failed to grow more rapidly than those without. This is the phenomenon known as the Natural Resource Curse. The principle is not confined to individual anecdotes or case studies, but has been borne out in some econometric tests of the determinants of economic performance across a comprehensive sample of countries. This paper considers six aspects of commodity wealth, each of interest in its own right, but each also a channel that some have suggested could lead to sub-standard economic performance. They are: long-term trends in world commodity prices, volatility, permanent crowding out of manufacturing, poor institutions, unsustainability, and cyclical Dutch Disease.

Skeptics have questioned the Natural Resource Curse, pointing to examples of commodity-exporting countries that have done well and arguing that resource endowments and booms are not exogenous. Clearly, the relevant policy question for a country with natural resources is how to make the best of them. The paper concludes with a consideration of ideas for institutions that could help a country that is endowed with, for example, oil overcome the pitfalls of the Curse and achieve good economic performance. The most promising ideas include indexation of oil contracts, hedging of export proceeds, denomination of debt in terms of oil, Chile-style fiscal rules, a monetary target that emphasizes product prices, transparent commodity funds, and lump-sum distribution.

Keywords: commodities, Dutch Disease, energy, minerals, natural resources, non-renewable, oil

JEL subject codes: O13, O1 , O, Q01

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