that this element of the curse, too, merits closer scrutiny and might be a figment of our statistical imagination.

# **II.  The Mechanics of the Curse**

Numerous channels through which the curse might operate have been offered. Here we discuss only a few.

First, Prebisch (1959), among others, popularized the idea that terms of trade of natural resource exporters would experience a secular decline over time relative to those of exporters of manufactures. However, Cuddington, Ludema and Jayasuriya (2007) find that they cannot reject that relative commodity prices follow a random walk across the 20<sup>th</sup> century with a single break in 1929. That is, there is no intrinsic force driving the observed decline and prices could as easily rise tomorrow as fall further. While commodity by commodity important mean reverting components are evident and are, in fact, necessary for stabilization funds to be viable, the notion that long run prices have a strong unpredictable and permanent component appears more relevant today than at any time across the last half century. Paul Krugman (2008), taking exactly the opposite position from Prebisch, argues that continued growth by China and India, combined with simply “running out of planet” will lead to continued strong excess demand such that “rich countries will face steady pressure on their economies from rising resource prices, making it harder to raise their standard of living.”<sup>4</sup> Second, beginning with Smith, observers have argued that natural resources are associated with lower human and physical capital accumulation, productivity growth, and spillovers. This case is far from proven, however. Consistent with Viner’s (1952) early assertion, Martin and Mitra (2001) find total factor productivity growth to be higher in agriculture than in manufactures in a large sample of advanced and developing countries. Wright and Czelusta (2006) and Irwin (2000) have argued that, contrary to Smith’s prejudice, mining is a dynamic and knowledge intensive industry in many countries and was critical to US development. Blomstrom and Kokko (2006) have argued the same for forestry in Scandinavia.

Several authors stress the complementarity of essential factors, particularly human capital (see Gylfason and Bravo Ortega and de Gregorio 2007). Relatedly, Maloney (2002, 2007) argues that Latin America missed opportunities for rapid resource-based growth due to deficient technological adoption driven by two factors. First, deficient national “learning” or “innovative” capacity, arising from low investment in human capital and scientific infrastructure, led to weak capacity to innovate or even take advantage of technological advances abroad. Second, the period of inward-looking industrialization discouraged innovation and created a sector whose growth depended on artificial monopoly rents rather than the quasi-rents arising from technological adoption, and at the same time undermined natural-resource-intensive sectors that had the potential for dynamic growth. Røed Larsen (2004) argues that Norway’s surge from Scandanavian laggard in the 1960s to regional leader in per capita income was based largely on the opposite strategy and

> 4 Krugman, Paul, “Running Out of Planet to Exploit,” _The New York Times,_ March 21, 2008.

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