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Resource curse

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  • Xavier Lhote

    (UP1 UFR02 - Université Paris 1, Panthéon-Sorbonne - UFR d'Économie - Université Paris I - Panthéon-Sorbonne - PRES HESAM)

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    Abstract

    Are natural resources a blessing or a curse? As a matter of fact, few countries with abundant natural resources have succeeded in combining growth and development. What may account for this apparent paradox? Our analysis suggests that the institutional development of a country (at the time of the discovery of the natural resources) is the key factor explaining why a vicious or a virtuous circle of growth may develop. If the institutions are sufficiently well-established and strong enough to face predation behaviours, the country will then benefit from its substratum. On the other hand, insecure property rights (as is typical of countries with weaker institutions) will fuel predation behaviours around rent-production. To secure their property rights, fi rms will have no other option but to resort to corruption by transferring part of their rents into bribes, exceptional taxes, extortion racket, etc. The increase in these predation behaviours then limits the direct investment flow from foreign countries and blocks the country's development. This in turn will establish a climate of corruption in an economy with low production development. In countries where natural resources are abundant, insecure property rights are thus detrimental in several ways. First, direct investment in the exploitation of resources is suboptimal. This has a proportional negative effect on the country's budget by lowering the tax revenue and limiting the country's development. The extraction potential, and thus the country's enrichment, is constrained by these insecure property rights. Besides, the climate of corruption, generated by the securing of these property rights, deters foreign investors from settling on the national market and locks the country in a poverty trap. The country only attracts firms belonging to sectors connected to natural resources and thus becomes dependent on the rate of raw materials and the exploitation of natural resources. When a state budget depends on exploitation rent at the expense of taxes on citizens, the democratic control of civil society is weakened and the convergence of the institutions towards an autocratic state is favoured, for lack of a strong system of checks and balances. In a moribund economy where investors (in particular foreign ones) are reluctant to value the country's potential, the inequalities generated by a corrupt government which grows richer through mining and oil revenues, and the empoverishment of the population, may result in political unrest leading to conflicts.

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    Paper provided by HAL in its series Post-Print with number dumas-00812172.

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    Date of creation: 12 Jul 2012
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    Handle: RePEc:hal:journl:dumas-00812172

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