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.
I have an analogous and rather wooly hypothesis to offer – a financial resource curse. The U.S. financial sector owes a lot to Richard Nixon and Ronald Reagan. I say this because traders from the before times have told me so. They were there when sleepy trading desks became money printing operations for banks. Fixed exchange rates return more or less fixed profits. Flexible exchange rates create the risk of FX losses, the need for hedging, thd opportunity for speculation. Large deficits turn primary dealers into financial giants. And then we have thr expansion of derivative markets, repo trade collateralized with Treasury securities on a grand scale, complex financial structures, off-balance-sheet financing, hedge funds, CTAs, private equity, private credit, family offices… Much of this grows out of flexible exchange rates and large Treasury deficits.
Yes, we export commodities, but we also export debt on a massive scale because of oit trade and budget deficits and there is little question that trade deficits have reduced the size of the manufacturing sector in the U.S.
There have long been claims that many of our best minds are funnelled into finance and so are not available to other, productivity-increasing professions, a symptom of Dutch disease. Is there, in theory, any difference in the curse from heavy reliance on resource extraction and heavy reliance on overseas finance? Does it matter that the U.S. is heavily reliant on both foreign borrowing and commodity exports?
Dude, the trade deficit is just excess growth. Without it, the US economy would be far smaller. Debt is debt and indeed the US economy is a scam. Its why pro immigration mouth breathers need to figure it out. The next crisis will be the last. Capital markets will be nationalized and the dollar ended as any mode of transmission. The result will be epic. American businesses bankrupting will be like the Roman legions pulling out of Britain. Governments who whored to Bucky will die and be replaced by traditional tribal peoples. Think of south America after 100 years. The rain forest will start growing again!!
Wow, you really have a lot of opinions. It would be great if you could try to justify maybe just one of them.
Read through the blog and get a feel for the quality of evidence offered here. Then give it a try.
Off topic – is the Strait of Malacca really a strategic risk for China? I’m seeing claims that it is, and that the U.S. is working to gain the potential to control the Strait to put China under stress:
https://www.firstpost.com/explainers/is-us-eyeing-the-strait-of-malacca-after-hormuz-why-does-this-route-matter-to-india-14000832.html
https://www.timesnownews.com/world/asia/us-strait-of-malacca-indonesia-defence-partnership-is-china-the-real-target-article-154080768
I can see why there would be concern, but…
Here’s a map representing the most important oil choke points, along with a graphic showing that the Strait of Malacca carries more oil traffic than any other choke point:
https://www.visualcapitalist.com/mapped-the-worlds-oil-chokepoints/
To my eye, that’s not the only thing that sets Malacca apart from the others; there’s a whole ocean of other options should Malacca get clogged up. That’s not true for Hormuz or the Suez Canal or Bab el Mandeb or the Danish Straits. Even the Panama Canal is circumventable, as Panama’s drought has demonstrated.
Here is a somewhat less breathless assessment, which notes that China is working to limit the risk from bottlenecks should the Strait be shut down or throttled:
https://www.ismworld.org/supply-management-news-and-reports/news-publications/inside-supply-management-magazine/blog/2023/2023-11/the-strait-of-malaccas-global-supply-chain-implications
Anybody know more than is in these articles? Is the “blockade China’s oil” story just cheap scare journalism, piggybacking off of the double blockade of Hormuz?
Professor Frankel makes a good case for a dynamic and minimally manipulated free market… whether by corporations or the government. The government had hoped that early incentives for solar power and electric vheicles would create momentum that would continue without incentives. But once the early adopters took advantage of the subsidies/credits the government offered, the enthusiasm significantly waned, although there are indications that there is a portion of the buying segment that have been convinced that EVs make sense for them. Likewise, homeowners opted for solar panels and storage batteries because of credits and a deal they could sell excess electricity to the utilitiy companies (whether or not they could use that excess electricity).
This was all felt to be worth the cost and market manipulation in order to “save the planet”.
U.S. electric vehicle sales fell by 27% year-over-year in the first quarter of 2026, totaling 216,399 units, largely due to the end of federal EV incentives. This decline was less severe than previous quarters, indicating a potential stabilization in the market.
— CollisionWeek — Yahoo
Now the question is whether the cost difference makes sense for non-commercial customers given upfront incentives are gone.
The average cost of a solar panel system for a 2,500 square foot home is between $21,816 and $30,505, depending on various factors like system size and location. Additionally, including a storage system can increase the overall cost, typically ranging from $8,000 to $15,000 for battery storage options.
— solartechonline.com — bluettipower.com
Certainly, there would be ongoing reduction is electricity bills, but roughly $40,000 upfront to reduce electricity bills is significant given the cost of capital versus payback.
EVs also carry a premium with the promise of saving for fuel and maintenance. They’ve had faster depreciation in addition to the higher upfront or financing costs so the loss of the big tax credit put a dent in buyer enthusiasm.
Now I’m not sure how all of that is influenced by “big oil” as much as “big government”.
On the commercial side, utilities have committed to more solar and wind power investment. China is eating the world’s lunch because they have low (exploited?) labor costs and massive government subsidies for manufacturers to build for export. That same dynamic is in play for EVs. That’s not good for US manufacturing, but it may give US consumers a partial “free ride” courtesy of the CCP. Farmers have been the chief beneficiaries of the alternative energy push through the leasing of their land for solar farms and wind turbine arrays.
The benefits to residential users is more of a mixed bag.
https://mitsloan.mit.edu/press/green-energy-raising-your-electric-bill-or-state-policies-its-complicated
tThat’s sort of hard to pin on the “natural resource curse”.
I agree that there should be a “silver lining” for the “Green” movement because of temporary high oil prices, but strangely the voices from the left are silent about that and more interested in raising holy hell about how Trump is increasing the price of gasoline. There seems to be an ideological and economic disconnect.
https://apnews.com/article/iran-war-warming-climate-change-inflation-prices-767a9aace18b23e7d481cde01f3e0d55
Brucie is up to his usual partisan nonsense. For starters, he mentions subsidies for EVs and renewable energy under Biden, but fails to mention tariffs on imports of EVs and solar panels under the felon-in-chief. Not very honest.
Brucie also spins Professor Frankel’s post as making “a good case for a dynamic and minimally manipulated free market”. Certainly, that is not the main thrust of his post. Frankel lists some of the characteristics generally accepted as supportive of economic growth, but those characteristics are seen in a number of fairly socialistic economies. Again, not very honest of Brucie.
This is the same old stuff from Brucie – dog-pile of assertions, anecdotes and links which he uses to support his own views, but they don’t amount to much. Really just a statement of Brucie’s priors.
Same old; same old from the Quack. You have the only coin in the world with one side to it.
Oh, the links? Well, what’s wrong with that? If I didn’t include them, you’d spout some nonsense about “making it up”.
I recognize that you love socialism (more like strong social support programs) and that’s fine. As Norway has shown, strong social support programs are not incompatible with vigorous capitalism. The test is in the pudding. Does actual socialism provide real economic growth that provides opportunities and freedom for individuals or does it just create an elite class with a lot of cheap, exploited labor? The US or the Soviet Union? The US or Red China?
But I guess my views are “partisan” because I’m not waving the flags of certain countries. By the way, look at US mandatory spending and then complain that there is a lack of government support.
In 2022, the United States allocated approximately 22.7% of its GDP to public social spending, while Norway’s public social spending was around 20.8% of GDP.
— oecdstatistics.blog — compareyourcountry.org
(I just cited sources rather than provide those links you find so onerous)
bruce, i don’t think that macroduck “loves” socialism. he appears to embrace capitalism. he is just smart enough to understand that capitalism does require a set of rules for it to operate efficiently and fairly. capitalism can be exploitive just like your socialist arguments, if it is not an efficient and fair operation. crony capitalism in particular is problematic, the exact type that trump and his acolytes seems to embrace.
and speaking of strong social support programs, do you collect social security and medicare bruce? how did you pay for college, which was heavily subsidized years ago?
Issues with the strait clearly show how the us government has been subsidizing the security cost of oil, for decades. You clearly misunderstand what a subsidy is Bruce.
I pick up my new EV this week.