Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version was published in Project Syndicate. Thanks are due Sohaib Nasim for research assistance.
The Natural Resource Curse [NRC] refers to negative effects that a booming commodity sector can have on a country’s overall economic growth. (Commodities are defined to include oil and natural gas, minerals, and often agriculture.) Many oil-rich producers in the Mideast and Africa, for example, have failed to achieve the prosperity that some resource-poor rocky islands and peninsulas in East Asia have.
Some are now applying the idea of a NRC to the US, which is said to be acting like a petrostate in that a revival of the oil and gas sector is crowding out technologically advanced manufacturers of renewable energy equipment.
Let us go back to the beginning. The negative correlation between natural resource exports and economic performance is statistically significant in a sample of 113 countries. In an average country where fuels and minerals constitute half of exports, GDP growth over the period 1970-2024 is lower by an estimated 0.9 % per year, or 49 % cumulatively, as compared to a country without resources.
How could resource wealth ever be bad economically? A survey of research on the NRC features four possible channels of transmission for this negative relationship.
- Volatility of commodity prices brings costs from frequent switching among sectors in response to ever-changing price signals and thereby discourages investment.
- A natural resource boom causes a general macroeconomic shift out of non-commodity internationally tradable goods, specifically manufactures, and into non-traded goods and services, like housing and government activities. The crowding out of industry is channeled particularly through real appreciation of the currency. Since manufacturing is where dynamic gains are situated (learning by doing; technological progress; innovation spillovers), the effect on overall economic growth is negative, a phenomenon known as Dutch Disease.
- Commodity endowment can lead to anarchic institutions, resulting in excessively rapid depletion of non-renewable resources and to political instability, even civil war.
- On the other hand, institutions in extractive economies are prone to become autocratic, oligarchic, rent-seeking, and corrupt. If the government controls oil or minerals, it is freed from the need to raise tax revenue and hence has no need to foster democracy and decentralized private-sector growth.
History illustrates. Originally, Spain’s colonies in Latin America were considered more valuable than England’s colonies in North America, because they had minerals like gold and plantation crops like sugar. But that resource wealth gave rise to institutions of rent-seeking, oligarchy, and a stratified social structure. Government in the United States (where essentially no gold was discovered in colonial times), had little alternative but to foster conditions conducive to a competitive private sector, which turned out to be the most suitable structure for economic growth when the Industrial Revolution arrived in the 19th century.
The recent suggestion that the resource curse might describe the US pertains to the energy sector. Globally, manufacturers are achieving near-miraculous productivity gains in the production of renewable energy equipment such as solar panels, windmills, EVs and batteries. As a result, costs of renewable energy have come way down, making it competitive with more traditional energy sources. Lately, however, this progress has been stalled among US manufacturers and has instead taken place elsewhere, especially in China (and, to some extent, Europe).
Three factors have worked to revive American oil and gas production (which, 15 years ago, seemed to be peaking). First, an also-impressive technological revolution in fracking took off around 2009. Second, since he came to office, President Trump has worked to raise subsidies to fossil fuels (for example, offering below-market leases for drilling on federal lands and waters) and reduce subsidies to renewables (for example, those that Joe Biden had enacted. Most recently, with the war on Iran and the de facto closing of the Strait of Hormuz, the price of oil has doubled since March 1, giving US oil companies a further incentive to step up production.
Paul Krugman (my MIT classmate, whom incidentally I consider a national treasure) argues that the revival of US fossil fuel production since 2010 is crowding out manufacturing in general and renewables in particular. His back-of-the-envelope calculation is that the fracking boom has surprisingly left US manufacturing around 10 percent smaller, and manufacturing employment about 1.3 million fewer, compared to what would have otherwise been.
Is this an instance of the natural resource curse? I am not so sure. Of the four NRC channels, the ones that are said to apply to the US energy sector are, firstly, crowding out of those sectors — renewables — that otherwise might be enjoying more dynamic gains from learning by doing; and, second, the corrupting political influence of wealth among fossil fuel owners. (Think corporate campaign contributions.) Fair enough. But oil and gas and agriculture enjoy dynamic gains from technological spillovers and learning by doing, just as much as has manufacturing or, more recently, renewable energy. The enormous productivity increases in farming and mining that the US has experienced in its history — helped, incidentally, by federal support for technology research and dissemination — did not foreclose productivity increases in manufacturing. Similarly, with Australia, Norway, Chile, and increasingly, Southeast Asia.
Policies that facilitate flourishing of the natural resource sector need not come at the expense of manufacturing or other sectors. What is wanted are conditions conducive to growth in all sectors. The conditions include: rule of law, freedom from corruption, checks on the executive, an independent judiciary, macroeconomic stability, free trade, and support for research.
At the same time, a small silver lining of the current Iran war, which is awful in all other respects, is that the Strait of Hormuz disruption is good for the green energy transition. Energy users will respond to the price rises in oil and gas by further shifting into renewables and, yes, stimulate further productivity gains there.
This post written by Jeffrey Frankel.