Questions: Natural Resources and the Resource Curse

Question 1

Country X discovers enormous offshore oil deposits. Based on resource curse theory, which outcome is most likely if its existing institutions are weak?

• A. Rapid industrialization as oil revenues fund manufacturing investment
• B. Increased political competition over control of oil revenues, with elites prioritizing resource capture over productive enterprise
• C. Falling poverty rates as oil wealth trickles down through higher wages and public services
• D. Diversification into services and technology as oil revenues free citizens from subsistence farming

Answer: (B)

The resource curse operates through rent-seeking: when a country's wealth comes from controlling a natural resource rather than productive activity, political and economic elites compete to capture those rents. The payoff from controlling an oil ministry can be enormous and immediate compared to patient productive investment. Weak institutions amplify this by providing insufficient checks on elite behavior. Options A, C, and D represent positive scenarios that require strong institutions to realize — they are exactly the outcomes resource-cursed economies fail to achieve. The key distinction is between exploiting the resource as a platform for development (requires institutions) versus capturing resource rents through political power.

Question 2

A resource-rich country experiences a surge in oil export revenues, causing its currency to appreciate significantly. Which sector is most directly harmed by this?

• A. The oil sector, whose profits are denominated in foreign currency
• B. Domestic manufacturing and agriculture, whose exports become more expensive on world markets
• C. The financial sector, which benefits from capital inflows
• D. The public sector, which can now import more goods at lower domestic prices

Answer: (B)

This is the Dutch disease mechanism. Currency appreciation from resource export revenues makes domestically produced non-resource goods (manufactured products, agricultural exports) more expensive in foreign currency terms, rendering them uncompetitive on world markets. Manufacturing contracts. The economy becomes increasingly concentrated in the single resource, which is dangerous because commodity prices are volatile. Options A and C are incorrect — oil profits are boosted by a stronger currency (they earn foreign currency), and the financial sector may benefit. Option D describes a benefit to importers, which is real but masks the structural damage to tradeable industries.

Question 3

The resource curse is an inevitable consequence of natural resource abundance — no resource-rich country can escape slower growth relative to resource-poor neighbors.

• T. True
• F. False

Answer: False

Botswana is the canonical counterexample. Despite possessing some of the world's largest diamond deposits, Botswana achieved one of the fastest growth rates in the world for four decades by using diamond revenues to invest in education, infrastructure, and savings rather than allowing elite capture. The resource curse is not about resources themselves — it is about whether institutions channel resource wealth toward investment or toward extraction. Countries with strong pre-existing institutions (accountability, rule of law, checks on power) can avoid the curse. The curse is conditional on institutional weakness, not inevitable.

Question 4

A government funded primarily by natural resource revenues faces weaker pressure to develop effective institutions than one dependent on taxing its citizens.

• T. True
• F. False

Answer: True

This is the institutional atrophy channel of the resource curse. Governments that generate revenue by taxing citizens must deliver services and maintain some accountability to sustain tax compliance — a logic that historically drove state capacity building. A resource-funded government receives revenue without this social bargain: citizens are not paying taxes, so they have less leverage to demand services or democratic accountability. The government has less incentive to invest in the human capital, infrastructure, and governance quality needed to support broad-based economic activity. This explains why resource-rich countries often have systematically weaker institutions than resource-poor ones with equivalent income levels.

Question 5

Why does Botswana's success with diamonds challenge but not disprove the resource curse thesis?

Model answer: Botswana's success actually confirms the institutional explanation of the resource curse: it had pre-colonial institutions emphasizing consultation and accountability (the kgotla system) that survived colonialism, providing a foundation for responsible resource management. The government used diamond revenues to invest in education, infrastructure, and savings (the Pula Fund) rather than distributing rents to elites. This shows that the curse is conditional — it operates through weak institutions — not mechanical. Botswana proves that resources plus good institutions can produce development; it does not prove resources are neutral or beneficial on their own.

The resource curse thesis is not 'resources always cause poor growth' but rather 'resource wealth in the context of weak institutions tends to cause poor growth through rent-seeking, Dutch disease, and institutional atrophy.' Botswana's exception confirms the conditional nature of the thesis: change the institutional context and the outcome changes. This is methodologically important — single counterexamples don't falsify a conditional causal claim, they illuminate which condition is the key variable.