# Resource Curse: Economic Impacts and Real-World Examples

## What Is the Resource Curse?

The resource curse describes an economic paradox where countries rich in non-renewable resources, like oil, face stagnation or decline in growth. Investment focused solely in resource-intensive sectors, coupled with potential government mismanagement, can weaken a nation's economy. This situation underscores the need for economic diversification to mitigate reliance on volatile [commodity prices](https://www.investopedia.com/ask/answers/06/commodityprices.asp).

### Key Takeaways

*   The resource curse describes a situation where countries rich in natural resources underperform economically.
*   Countries can fall victim to the resource curse by focusing too much on a single resource sector, neglecting other industries.
*   Diversifying the economy is crucial for countries to avoid dependency on fluctuating commodity prices.
*   Angola heavily relies on its oil and gas sector, making its economy vulnerable to changes in oil prices.
*   Saudi Arabia has taken steps to diversify its economy beyond oil, thus reducing its exposure to the resource curse.

## Understanding the Mechanics of the Resource Curse

The resource curse is a paradoxical situation in which countries with an abundance of [non-renewable](https://www.investopedia.com/terms/n/nonrenewableresource.asp) natural resources experience stagnant economic growth or even economic [contraction](https://www.investopedia.com/terms/c/contraction.asp). Although there may be multiple reasons to explain why a resource curse happens, the phenomenon mainly occurs when a country begins to focus all of its production means on a single industry, such as mining or oil production, and neglects investment in other major sectors.

Also known as a resource trap or paradox of plenty, it can also result from government [corruption](https://www.investopedia.com/articles/investing/012215/how-corruption-affects-emerging-economies.asp). When national wealth is concentrated in a few industries, the government might misuse power, like giving contracts for bribes. Too much labor and capital in just a few industries can weaken the economy and harm the country.

This type of problem is often observed in developing economies that discover large natural resource deposits. When a natural resource is discovered, investment often focuses on that industry.

This new industry fosters [economic growth](https://www.investopedia.com/terms/e/economicgrowth.asp) offers good wages and encourages people to invest their savings. In the long run, this dynamic can lead to countries becoming very dependent on the price of that particular [commodity](https://www.investopedia.com/terms/c/commodity.asp), subsequently making it difficult to continue developing the economy.  

> **Fast Fact**
>
> The term resource curse is attributed to Richard Auty, who wrote about the concept in his 1993 book titled "Sustaining Development in the Mineral Economies: The Resource Curse Thesis".

## Key Factors Contributing to the Resource Curse

The resource curse is considerably noticeable when it comes to one particular natural resource: petroleum. The political science department at the University of California, Los Angeles, conducted a study, analyzing the correlation between natural resource wealth and politics. It concluded that a resource curse did exist in petroleum-rich countries.

The study found three harmful, mostly unresolved effects in these countries:

*   Boosting authoritarian regimes
*   Increasing corruption
*   Triggering conflict in low- and middle-income nations

The study cited the use of the term resource curse in countries in Africa, Latin America, the Middle East, and the former Soviet Union.

This highlights the need for [diversification](https://www.investopedia.com/investing/importance-diversification/). Relying too much on one or two resources can severely harm the economy.

> **Important**
>
> Diversified economies handle global economic cycles better than those focused on few sectors.

## Case Studies: The Resource Curse in Action

### Angola

Located on the west coast of Southern Africa, Angola is home to some 34 million citizens. Its economy, however, is heavily dependent on commodities—particularly oil and gas resources. According to the International Trade Administration, roughly 75% of Angola's national revenues come from the oil and gas sector.

Angola’s economy, though, is extremely vulnerable to any large or sustained decline in the [price of oil](https://www.investopedia.com/articles/economics/08/determining-oil-prices.asp), since virtually all of the nation’s wealth is reliant on this one sector. In this sense, Angola may have been cursed by its large [oil reserves](https://www.investopedia.com/terms/o/oil-reserves.asp).

### Saudi Arabia

Another country that relies heavily on selling oil to other nations is Saudi Arabia. The value of the kingdom's oil exports exceeded $202.1 billion in 2021. But unlike Angola, Saudi Arabia took steps to steadily [diversify](https://www.investopedia.com/terms/d/diversification.asp) its economy and move away from its resource curse.

Saudi Arabia succeeded in increasing its exports of various petroleum-related manufactured goods but these lie further up along the [value chain](https://www.investopedia.com/terms/v/valuechain.asp). In doing so, the nation reduced its reliance on [crude oil](https://www.investopedia.com/terms/c/crude-oil.asp) and take steps toward developing its economy, making it less vulnerable to the resource curse.

Some of the most notable industries that are flourishing include:

*   **Financial:** The Financial Sector Development Program was launched in 2017. Its aim was to boost the country's private sector, develop a [capital market](https://www.investopedia.com/terms/c/capitalmarkets.asp), and enhance financial planning.
*   **Travel, Tourism, and Entertainment:** The primary goal is to make the kingdom a major destination for tourists. The kingdom also aims to boost household spending when it comes to entertainment and leisure, notably through the new construction of movie theaters and a stake in Live Nation.  
    

## The Bottom Line

The resource curse exemplifies the paradox where nations rich in natural resources fail to thrive economically, often due to a heavy reliance on a singular resource sector like oil or minerals. This concentration can lead to economic instability, especially when commodity prices fluctuate. Nations like Angola and Saudi Arabia illustrate the risk and potential of the resource curse: Angola remains heavily dependent on oil, while Saudi Arabia is taking steps to diversify its economy.

To mitigate the resource curse, countries must focus on diversifying their economies and decreasing reliance on any single resource to ensure sustainable long-term growth.

> **Article Sources**
>
> 1.  Annual Reviews. "[What Have We Learned about the Resource Curse?](https://www.annualreviews.org/doi/10.1146/annurev-polisci-052213-040359)"
>     
> 2.  Bloomberg. "[The Resource Curse](https://www.bloomberg.com/quicktake/resource-curse)."
>     
> 3.  The World Bank. "[Population, total - Angola](https://data.worldbank.org/indicator/SP.POP.TOTL?locations=AO)."
>     
> 4.  International Trade Administration. "[Angola - Country Commercial Guide: Oil and Gas](https://www.trade.gov/country-commercial-guides/angola-oil-and-gas)."
>     
> 5.  Organization of the Petroleum Exporting Countries. "[Saudi Arabia facts and figures](https://www.opec.org/opec_web/en/about_us/169.htm)."
>     
> 6.  Vision 2030. "[Financial Sector Development Program](https://www.vision2030.gov.sa/v2030/vrps/fsdp/)."
>     
> 7.  International Trade Administration. "[Saudi Arabia - Country Commercial Guide: Travel, Tourism, and Entertainment](https://www.trade.gov/country-commercial-guides/saudi-arabia-travel-tourism-and-entertainment)."