The resource curse, which is also known as the paradox of plenty, is the phenomenon whereby economies that are well endowed with natural resources experience less favourable development outcomes than their resource-poor counterparts. This, according to traditional textbooks, is due to demand for their exports triggering an inflow of income which bids up the exchange rate.
- Despite being well endowed with natural resources, countries such as the Democratic Republic of Congo tend to struggle, a phenomenon known as the resource curse.
- According to the resource curse theory, demand for commodities bids up the exchange rate and stifles other sectors of the economy. Abundant natural resources in poorly-governed countries can also lead to increased violence.
- In the case of the Democratic Republic of Congo, these mechanisms mean that rather than its economy benefiting from rises in the prices of its key commodities, it suffers, with outbreaks in violence harming economic activity and weighing on GDP.
This exchange rate appreciation stifles other sectors of the economy, making it impossible to manufacture products that can compete with the cost competitiveness of manufactured imports, for example. As a consequence, resource-rich economies risk becoming overly specialised in one field, rendering them sensitive to swings in commodities prices and the economies of commodity price makers such as China, as well as becoming underdeveloped in other industries.
As we examine this issue through the lens of the Democratic Republic of Congo (DRC), we can see that there is an even bigger factor at play — poor governance.
The DRC is undoubtedly suffering from the so-called resource curse.
It is well endowed with natural resources such as cobalt (commonly referred to as the blood diamond of batteries), coltan (a key ingredient for the electronics industry) and copper (used for wiring in electrical equipment and motors), with its export share of natural resources and energy almost four times that of the world. In other words, it is highly specialised, as confirmed by data from Fathom’s proprietary RiCArdo database. This database contains detailed export data for over 200 countries and regions, with that data categorised into sectors of interest, such as those shown in the chart below.
True to the resource curse thesis, despite being resource rich, and with the extraction of those resources having risen sharply over the last 20 years, the DRC remains one of the poorest countries in the world. Its GDP per capita lags behind that of other resource-rich economies, such as Norway and Chile, which have successfully avoided the resource curse, but is not dissimilar to the likes of Equatorial Guinea and Zambia.
At the heart of the DRC’s problem is poor governance.
Without good institutional frameworks in place, valuable and abundant natural resources can lead to increased violence. Worse still, that relationship is dynamic, meaning that when the prices of those natural resources rise, it merely fosters that violence. In other words, as the marginal benefit of owning the resources increases, so too does the incentive to forcibly appropriate them in order to extract the associated rent for oneself. In underdeveloped economies, with mass inequality, that incentive will be greater still.
In the case of the DRC, this mechanism means that rather than its economy benefiting from rises in the prices of its key commodities, it suffers, with outbreaks in violence stifling other economic activity and weighing on GDP. The chart below plots the number of deaths due to conflict in any given year against the annual GDP growth rate for the DRC, with the latter inverted. The grey shaded areas are illustrative of sharp rises in the price of some of the DRC’s key commodities — coltan, copper and cobalt. In each of these episodes, conflict-related deaths rose and GDP growth either deteriorated in that year or the next.
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