What Is the Resource Curse Hypothesis Can It Be Overcome What Is the Role of Investment and Government in the Effort to Avoid Resource Curse

Introduction

Nations with high natural resources are always envied by poor natural resources nations because it considered a blessing endowment form God donated to those countries. Countries with high natural resource supposed to be the richest countries in the world, but is that the current situation? The answer come form Gylfason and Zoega who stated that Natural resources are an important source of national wealth around the world but the world's richest countries are not countries with high natural resources, such as Hong Kong, Japan, Luxembourg, Singapore and Switzerland1. So why and what is the reason behind that? Again we get the answer from Gylfason and Zoega, who stated; relying too much on natural resources may reduce saving, investment and growth, then lowering the consumption and output per capita in the long run2. This is called resource curse hypothesis, Natural resources have been more of a curse than a blessing for many countries3.

Resource cures hypothesis is paradoxical but it is an important finding of a negative and significant relationship between natural resource and the growth rate of per capita gross domestic product (GDP)4. Another question raised itself to be answered, why natural resources cause less economic growth and less GPD? Natural resources are an essentially exogenous factor that can hamper economic growth through macroeconomic channels as well as through institutions5. So then, why this happen, is the problem is within the natural resource itself or there are other exogenous factors cause this problem. There are many theories which are suggested that they may cause natural resource curse. In those resources abundant countries should pursue a policy of prudently saving and investing the rents from resource extraction otherwise it might lead to the

1 Gylfason, T. and Zoega, G. Natural Resources and Economic Growth: The Role of Investment

2 Gylfason, T. and Zoega, G. Natural Resources and Economic Growth: The Role of Investment

3 C. N. Brunnschweiler. Cursing the Blessings? Natural Resource Abundance, Institutions, and Economic Growth

4 Giles A. and Hamilton K. Savings, Growth and the Resource Curse Hypothesis

5 Gylfason, T. and Zoega, G. Natural Resources and Economic Growth: The Role of Investment

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mismanagement of the wealth or assets of resource by depending totally on it6.

In turn it leads to rent seeking behavior, weaken private and public accumulation of capital and less human capital accumulation due to government and institutional inequality and faults. Abundant Natural resources lead also to two other curses, Dutch disease and capital diminishing returns7. That means the resource curse is not form natural resources but form the institutions and other exogenous factors. The government should know how to invest and distribute the natural resource prudently and properly to avoid and overcome the natural resource curse or at least dampen the effects of natural resource cures.

Resource Curse Hypothesis

Auty and Micksell argued that if other things are equal, resource abundance or natural wealth should increase the level of per capita economic welfare. Because of two reasons, first it increases the short term of the rate of economic growth. Second it raises the exploitation of resources increase the income in the future8. Natural resources considered as a fixed factor of production and by definition it impose a restriction on economic growth potential. There many correlated reasons of why natural resources hamper the economic growth and be a curse on the growth of economy. The key factor of resource cures is bad quality of governmental institutions. The absence of effective institutions to reinvest productively the resource depletion leads to aiming extraction just for income with very low rate of saving. Economic growth sustainability is achieved by a policy to invest the rents from resource depletion in various forms of wealth to ensures the change in the real value of assets is non negative. Thus it leads to the institutional corruption and rent seeking behavior which everybody wants to get his share of the rent income9.

6 Giles A. and Hamilton K. Savings, Growth and the Resource Curse Hypothesis

7 Gylfason, T. and Zoega, G. Natural Resources and Economic Growth: The Role of Investment

8 Giles A. and Hamilton K. Savings, Growth and the Resource Curse Hypothesis

9 9 Christian N. Brunnschweiler. Cursing the Blessings? Natural Resource Abundance

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Historians, political scientists, and economists generally agree that the presence of abundant natural resources leads to rent seeking behavior and corruption, thereby decreasing the quality of government, which in turn negatively affects economic performance10. For example, Tornell and Lane stated that natural resource booms may trigger political interaction among powerful interest groups that result in current account deficits, disproportionate fiscal redistribution and reduced growth thus diverting resources away from more socially fruitful economic activity11. In extreme cases, it causes civil wars and foreign government invading such Africa's diamond wars and US invasion of Iraq. Knight argued that Military expenditures tend to inhibit growth through their adverse effects on capital formation and resource allocation12.

Paldam Svendsen confirmed that abundant natural capital may crowd out social capital in a similar manner as human capital . Dependence on natural wealth resources might somehow diminish incentives for resource abundant economies to accumulate human capital via investments in education or knowledge sectors13. It cause rent seeking behavior, may weaken private and public incentives to accumulate human capital due to a high level of non wage income e.g. dividends, social spending and low taxes. This matters because more and better education seems good for growth14. As well as It imbue people with a false sense of security and lead governments to lose sight of the need for human capital accumulation as well as good growth of economic management, including free trade, bureaucratic efficiency, institutional quality and sustainable development as Sachs argued 15. Gylfason has emphasized that resource abundance might have the effect of crowding out the accumulation of one key engine of economic growth; namely, human capital16.

10 10 Christian N. Brunnschweiler. Cursing the Blessings? Natural Resource