April 13, 2003
Resources and Growth

A recent article in the Boston Globe argues that middle eastern countries have faired poorly because of the easy money they get from oil makes them complacent about development, and even cite famous economists who believe it. But it's not true.

It's hard to see, even on the face of it, why having no resources could be an advantage. Suppose you are a poor country with few resources. Much of your income will be spent on basic necessities, leaving little for investment in development, so you are likely to stay poor. With some exportable resource, you have export earnings with which to finance development. In fact this is the path that a great number of economies have taken and are taking: they start by selling raw goods or agricultural products, then use the export earnings to develop low-skill manufacturing and then move on to higher value added products and services. This process is much harder if you don't have a local income source for the early stages of development.

The evidence is also against it. For openers, the US is a major counterexample. There is much careful empirical work demonstrating that the USs vast natural resources were a huge benefit to its growth over the past two centuries. (In particular, the US has vast oil reserves, but has a variety of other resources.) Norway is another counterexample. The example of the development of Japan and Korea are sometimes held out as examples of how development occurs better without resources. In fact, these countries are the exception rather than the rule. In general, countries with greater oil reserves, or with greater amounts of other resources tend to be richer than other countries without them. In my next blog I will provide some basic statistics to support this.

Posted by ethan at April 13, 2003 12:07 PM