Venezuela sits atop the world's largest proven oil reserves, yet its citizens face chronic shortages of basic goods and medicine. Nigeria has earned over $400 billion from petroleum since independence, yet most of its population lives in poverty. Meanwhile, resource-poor Singapore and South Korea transformed into wealthy industrial economies within a generation.

This puzzle—that natural abundance often correlates with slower growth, weaker institutions, and greater instability—has preoccupied development economists for decades. The pattern is robust enough to have earned its own name: the resource curse. Yet it isn't inevitable. Norway, Botswana, and Chile have converted natural wealth into sustained prosperity.

Understanding why resources help some countries while devastating others requires examining both economic mechanisms and political dynamics. The story involves exchange rates and manufacturing collapse, but equally involves accountability structures and the incentives facing political leaders. Getting this analysis right matters enormously for the dozens of developing countries whose futures depend on managing extractive industries.

The term 'Dutch Disease' originated in the 1970s when natural gas discoveries in the Netherlands paradoxically damaged the broader Dutch economy. The mechanism works through exchange rates: when a country exports valuable commodities, foreign currency floods in, driving up the local currency's value. This appreciation makes all other exports less competitive on world markets.

Consider a country that discovers oil while also producing textiles for export. Oil revenues strengthen the currency by 30%. Suddenly, textile factories that were profitable at the old exchange rate cannot compete internationally. They shrink or close. Workers and capital migrate toward the booming resource sector and non-tradeable services like construction and real estate. Manufacturing withers.

This matters because manufacturing drives long-term development in ways that extraction rarely does. Factory production generates learning-by-doing, technology spillovers, and productivity improvements that spread throughout the economy. Extractive industries typically employ few workers, import most of their sophisticated inputs, and create isolated enclaves disconnected from local production networks. When manufacturing disappears, these growth engines disappear with it.

The boom-bust volatility of commodity prices compounds the damage. Oil might triple in price over five years, then collapse by half. Each boom draws resources into extraction; each bust creates unemployment and fiscal crisis. This volatility makes long-term planning nearly impossible and discourages investment in industries requiring stable conditions. Countries find themselves trapped on a roller coaster they cannot escape, with their entire economic fate tied to prices set in distant commodity markets.

Takeaway

Resource booms can destroy the manufacturing base that drives long-term development by appreciating exchange rates and creating volatility that discourages patient investment in productive industries.

Economic mechanisms tell only half the story. The political dynamics of resource wealth often prove even more destructive. When governments derive revenue primarily from taxing citizens, they must maintain some responsiveness to public demands—people who pay expect services in return. But when revenue flows directly from oil wells or copper mines, this accountability link weakens dramatically.

Resource rents enable what political economists call patronage politics. Leaders can maintain power by distributing wealth to supporters without building the administrative capacity to actually govern. Why invest in education systems or regulatory agencies when you can simply buy loyalty? This dynamic explains why many resource-rich countries have bloated public payrolls, extensive subsidy programs, and weak state capacity in areas that don't involve collecting resource revenues.

The stakes become so high that resources often fuel conflict. Control of diamond mines financed brutal civil wars in Sierra Leone and Angola. Oil wealth has sustained authoritarian regimes from Equatorial Guinea to Turkmenistan. When capturing the state means capturing resource revenues worth billions, the incentive for violent competition intensifies. Academic research consistently finds that countries dependent on point-source resources—those extracted from specific locations rather than widely distributed—face significantly higher conflict risk.

Even without violence, resource wealth tends to concentrate power. The small number of decision-makers controlling resource revenues face tremendous temptation, and accountability mechanisms struggle to constrain them. Norway's government manages its oil fund transparently; Equatorial Guinea's rulers have allegedly siphoned billions into personal accounts. The difference lies not in the resource itself but in pre-existing institutional strength and the political coalitions that either demand or prevent accountability.

Takeaway

Resource wealth fundamentally alters political incentives by allowing governments to finance themselves without citizen taxation, weakening the accountability relationships that typically constrain rulers and build capable states.

Norway's approach to oil wealth offers the most celebrated example of escaping the resource curse. When petroleum production began in the 1970s, Norway already possessed strong democratic institutions, an educated population, and established rule of law. Crucially, policymakers deliberately insulated the domestic economy from oil revenues through the Government Pension Fund Global, which invests virtually all petroleum income abroad.

This sovereign wealth fund—now exceeding $1.4 trillion—serves multiple purposes. By investing overseas, it prevents the currency appreciation that causes Dutch Disease. By saving for future generations, it extends resource benefits beyond the extraction period. Strict rules governing withdrawals (limited to roughly 3% annually) prevent politicians from raiding the fund for short-term popularity. The fund's transparency—its holdings are publicly disclosed—enables citizen oversight.

Botswana presents an equally instructive but different path. When diamonds were discovered shortly after independence in 1966, the country was desperately poor with minimal infrastructure. Yet it achieved the world's fastest growth rate over the subsequent four decades. Key factors included pre-colonial institutions emphasizing consultation and accountability, a fortunate partnership with De Beers that provided technical expertise, and leaders who genuinely prioritized development over personal enrichment. Diamond revenues funded education, healthcare, and infrastructure rather than Swiss bank accounts.

Chile's copper management demonstrates that even countries with weaker initial institutions can build effective resource governance. Chile established a structural balance rule requiring the government to save during copper booms and allowing spending during busts. This counter-cyclical approach, enforced by an independent fiscal council, has dramatically reduced economic volatility compared to other commodity exporters. The lesson across all three cases: institutional arrangements that constrain political discretion and separate resource decisions from short-term pressures can transform potential curses into genuine blessings.

Takeaway

Successful resource management requires institutional arrangements that separate resource revenues from immediate political pressures—whether through sovereign wealth funds, fiscal rules, or strong pre-existing accountability structures that constrain how leaders can use natural wealth.

The resource curse is real but not inevitable. Countries fail not because nature endowed them generously, but because their institutional environments allowed abundance to become poison. Understanding this distinction matters enormously for the many developing nations now discovering oil, gas, or minerals.

The policy implications are clearer than implementation. Sovereign wealth funds, fiscal rules, and transparency requirements can all help—but only when political conditions allow their genuine enforcement. Technical solutions cannot substitute for underlying political commitments to broad-based development.

For practitioners working in resource-rich countries, the priority should be building coalitions that demand accountability and designing institutions with enough independence to resist capture. The window for establishing good practices often opens briefly during initial resource discoveries. Once bad patterns entrench, they prove remarkably difficult to reverse.