The Poverty Paradox
The poverty paradox, more commonly known as the “resource curse,” is a phenomenon of countries with abundant resources but lack economic growth, democracy, and development relative to resource-poor countries. Mentioned for the first time back in 1711 in a popular publication, “The Spectator” noted the following statement: “It is generally observed that in countries of the greatest plenty, there is the poorest living.” However, the phenomenon gained popularity in mainstream media and academia only in the 1950s and 1960s.
Since then, hundreds of studies have been conducted to study this paradox, such as the 1995 influential study by Jeffrey Sachs and Andrew Warner, which found a strong correlation between natural resource abundance and poor economic growth. Most studies have likened the resource curse to the difficulties that occur in lottery winners who struggle to manage their newfound wealth and the side effects that come with it. In this article, we will look at examples and explanations for this phenomenon.
The first factor would be “Dutch disease,” which is the relationship that occurs with the growth of one sector, causing a decline in another industry. It first became apparent in 1959 when the Netherlands discovered a vast natural gas field in Groningen and started exporting the gas for profit, which caused an appreciation in the national currency and a decline in the competitiveness of other Dutch exports. This snowballed the Dutch economy into a recession. There are many more examples of the “Dutch disease,” such as Venezuela (oil), Angola (diamonds and oil), and the Democratic Republic of Congo (diamonds). These countries became over-reliant on exporting one sector, and the absence of currency manipulation led to a balance of trade disasters and recessions. Furthermore, as imports become cheaper, it leads to unemployment because demand for domestic firm products falls.
Another factor is revenue volatility; prices for some natural resources are subject to significant fluctuations, which leads to problems for governments where the primary source of revenue is natural resources (for example, 99.3% of Angola’s exports came just from oil and diamonds), this volatility disrupts government plans and debt service. Furthermore, lack of diversification is another reason for the poverty paradox; authorities may neglect and delay economic diversification projects due to the lucrative high profits that can be obtained with natural resources, which also makes it difficult to diversify because the lucrative high profits attract the best human capital and capital investment, this often leads to the country becoming increasingly dependent as investment in this industry is necessary for the country’s financial stability.
The last factor we will discuss in this article is the lack of investment in human capital. Countries that rely on natural resources may need to pay more attention to investing in human capital because there is no immediate need. Conversely, resource-poor countries such as Taiwan, South Korea, and Singapore prioritize it, contributing heavily to their economic success. Education is always valuable as it makes workers more skilled, productive, and versatile; it is not scarce and can’t be taken away. on the other hand, natural resources are scarce and volatile in monetary value, thus making it an unreliable long-term solution to economic success.
In conclusion, the resource curse remains a complex challenge for resource-rich nations. The Dutch disease phenomenon, insufficient human capital investment, and extractive industries' inherent revenue volatility underscore the need for comprehensive and forward-thinking policies. Addressing these issues is imperative to ensure sustainable development and economic diversification in resource-dependent countries. Only through a holistic approach can we break free from the resource curse's grip and unlock the full potential of these valuable natural assets to benefit their societies.
Written by Islam Buleshov | Proofread by Yasmin Uzykanova
