Published by EH.NET (February 2007)

Daniel Lederman and William F. Maloney, editors, Natural Resources: Neither Curse nor Destiny. Stanford, CA: Stanford University Press, 2006. xx + 369 pp. $30 (paperback), ISBN: 0-8047-5709-7.

Reviewed for EH.NET by Stanley L. Engerman, Departments of Economics and History, University of Rochester.

This collection of eleven essays is published in a series sponsored by the Inter-American Development Bank, the United Nations Economic Commission for Latin America and the Caribbean, and the World Bank. The manuscripts selected were to “represent the highest quality in each institution’s research and activity output,” and these include papers authored by scholars at universities in the United States, Europe and Latin America. All essays are concerned with answering questions about the so-called curse of natural resources — the presumed effect of rich resource endowments in lowering rates of economic development, particularly for Latin America. The essays employ different analytical methods, different samples of countries, and different sets of independent and dependent variables.

There are several explanations offered for the argued-for putative negative correlation between resources and growth. One with a long intellectual history relates to the question of whether it is better for growth if things are easy, based on the presence of ample resources and favorable climate, or are difficult, because of limited resources and thus the need to labor hard to get adequate output. Does the easy availability of food- stuffs make for a limited labor input and does a relative absence of resources lead to the drive for labor-saving innovations, so that lower incomes at first lead, in the long-run, to higher incomes and more rapid growth? More recent arguments concerning the negative relation between resources and growth present more specific economic relations — the relatively slower advances in productivity for resources and agriculture, compared to manufacturing and services, and the relative long-run price declines in agriculture relative to manufacturing. At issue, also is the ability of resource-based economies to diversify over time, due either to public policy or to the behavior of private firms, and their ability to develop the necessary complementary capital stock, physical and human.

The volume is divided into three sections, primarily on the basis of method. After the introduction by the two editors, the next three essays entail the use of econometric evidence. The next section has four essays described as “lessons from history,” which involve less quantitative and statistical evidence than those in the first section; and the third section is similarly also less statistical, and deals with some broader theoretical issues of trade theory and public policy. All told the essays include considerable quantitative material, with some 105 table and figures. There are extensive bibliographies. Works such as Sachs and Warner (1995, 1997, 2001), Prebisch (1950), and Auty (1998, 2001) are generally the main centers of attack. The general conclusion of most essays is that there is no evidence that natural resources provide an economic curse. This is, in part, because of the specific relationships tested, which relate economic growth to resources as well as the levels of human capital and the capacity to innovate. Resources in conjunction with human capital and appropriate technology will generally lead to rapid economic growth, whereas resources without human capital and technology will produce only limited growth. And, as earlier argued by Kuznets and others based on the case of Japan, the absence of resources with the appropriate institutions and high levels of human capital and technology can generate modern economic growth. Several studies point to the changes in the empirical basis of the “curse” argument. In recent years the developments in technology and the rate of productivity change in the agricultural and mineral sectors have been greater than in the manufacturing and service sectors, while there has been no strong evidence of a relative decline in prices in the resource sectors. Their findings, plus the successful past experience of several economies during times of resource expansion cast some doubt on the traditional arguments.

Detailed econometric analysis by Lederman and Maloney and by Manzano and Rigobon use the data from the Heston-Summers database to estimate the effects of trade structure and of resource production on growth. Both conclude that there is no direct evidence of a “resource curse.” Manzano and Rigobon argue for an indirect effect, via borrowing when resource prices are high, attributing problems found in cross-section estimates (but not in panel data) to debt overlay. These problems they attribute to “credit market imperfections,” not to resource-associated difficulties as usually argued. On the basis of some historical examples and with the use of over ninety nations from the Heston-Summers database, Bravo-Ortega and de Gregorio conclude that natural resources are a “hindrance” to growth only “in countries with very low levels of human capital,” (p. 92) and that “abundant human capital” can offset any problems due to natural resources (p. 93). This essay by two Chilean economists is perhaps the clearest presentation of the central message of these studies.

A detailed econometric analysis of resource price data for the twentieth century by Cuddington, Ludema, and Jayasuriya draws upon the numerous studies undertaken by the World Bank and others. The authors conclude that there has been no clear downward trend in natural resource prices, with there being only a break in 1921. There are three detailed historical studies of different parts of the world to examine the impact of natural resources on growth. Maloney argues that the failure of Latin America to develop as rapidly as others reflects difficulties in human capital and innovative capacity and the failures resulting from protectionist policy. He notes the impact of immigrants upon the industrialization of Latin America, and the importance of engineers and technical education in Sweden, Australia, and the United States. Wright and Czelusta provide more historical detail in studying the cases of the United States, Australia, Chile, Peru, Brazil, and Botswana, indicating the many examples of “successful resource-based growth” (p. 207). They argue against accepting a belief in the resource curse to preclude a growth policy based on taking advantage of the resource endowment. Blomstrom and Kokko demonstrate Swedish success based upon exporting natural resources (mainly from the forest industry), accompanied by an expansion of education, human capital, and technological and institutional changes. Sweden also benefited from an open economy which led to higher level of exports, to lower-priced imports, and to more foreign direct investment.

In the final part, Venables describes the endogenous characteristics of comparative advantage, with the roles of transport costs, externalities, and agglomeration effects. It is a useful survey of the geographic approach to international trade and development, and he comments that “natural resource endowments are not an important part of the story in the context of the theoretical models discussed” (p. 283). Lederman and Xu, using the Heston-Summers dataset, argue that economic growth is positively related to exports, except for tropical agricultural exports. The key point is, again, the crucial role of “endowments of human capital, knowledge, and infrastructure” (p. 314). Martin shows that over the last thirty years of the twentieth century the share of merchandise exports from developing countries that were manufactured goods rose sharply, while the shares of agriculture and mineral goods declined. He advocates an open economy, as well as encouragements to technological change and human capital investment to promote growth.

This volume in the Latin American Development Forum Series, a co-publication of Stanford Economics and Finance, the Stanford University Press, and the World Bank, represents a very high-quality publication of essays that all generally point to the same policy conclusions. Works pointing to different conclusions are frequently cited, but there is nothing included by those scholars who argue in a different direction. The basic arguments that the key variables for growth are education, innovation, and human capital remain critical for understanding the nature of, and prospects for, economic development. Resources alone cannot necessarily lead to success, but in appropriate circumstances, they do not provide a “curse” limiting the achievement of success.

Stanley L. Engerman is the John H. Munro Professor of Economics and Professor of History at the University of Rochester.