Econ Index
By Richard Bruce BA, MA, and PhC in Economics
Former Instructor St. John's University, New York City

Why Natural Resource Rich Countries Stay Poor

Why are natural resource rich nations so poor? The failure of natural resource rich nations to grow has frequently been noted, and there have been various attempts to explain it. Many of these explications are critical of the politics, culture, and/or religion of the natural resource rich countries.

There is however an economic explanation, that does not insult the people, governments, religion or culture of natural resource rich developing nations. If a country has natural resources this raises wages without increasing the economic sophistication of the country. The education, work experience, skills, and training of the people may still be weak. The roads, communications, electricity generation and distribution may still be primitive and yet the wages are high. So industry moves to those nations that have a similar level of sophistication and infrastructure but do not have natural resources and therefore have cheaper labor.

Saudi Example

For example, few capitalists would chose to export industrial goods from Saudi Arabia. Sure Saudi Arabia is poorer than the USA, Western Europe, and Japan, and therefore Saudi Arabian wages are likely to be lower. But Saudi Arabia does not have the infustructure, skilled labor, and general economic sophistication of those highly developed nations. You can find nations with a similar level of sophistication to Saudi Arabia which have much lower wages, so that is where factories are built. Saudi Arabia can not compete with the advanced industrial nations in high level industries and it can not compete with resource poor nations in low level industries, so they continue to pay for their imports by exporting oil.

Uncertain Wages

As argued above the higher wages of the oil rich nations discourage the development of low level industries, for example, clothing, and toys. Another problem facing natural resource rich countries is the uncertainty of wages. If the prices of their natural resource exports are high for a few years this could force wages up. The potential factory owners will realize that they can not count on low wages and this gives them another reason to set the factory up in a relatively resource poor country.

As the economic history of Japan, South Korea, Taiwan, Hong Kong, Singapore, and now China illustrates, the country with the fewest natural resources per person can have an advantage in attracting industry.

This is particularly true of labor intensive, light industry. When you have very few natural resources, labor intensive light industry is your only solution. The great advantage of this is that labor intensive, light industry also happens to be the secret to rapid growth. (I have a web page on why, light industry is so important to rapid growth.)

Industry Provides a Smooth Ramp

More generally, industry has the advantage over natural resource production that it provides a smooth ramp to development. As the workers gain skills, the infrastructure improves, and the government learns how to serve the needs of industry, more and more sophisticated industries set up factories in the country. The per capita income and wages increase. But as industry moves from the most simple, easy, standard, cheap, goods, for example, underwear, t-shirts etc. to more sophisticated goods, the sophisticated industries can afford to pay higher wages.

With natural resources the nation produces and exports the natural resource, the natural resource earns foreign exchange and prevents the country from falling into the direst poverty. However the natural resources are often a dead end. They do not lead to anything. Year after year you simply produce and export oil, coffee, sugar, or what ever.

3 Factors Drag Down Growth of Natural Resource Producer

While the industrial exporter follows a simple ramp from unsophisticated light industry to progressively more sophisticated goods the natural resource exporter faces three obstacles that tend to drag it down.

First, the nation maybe depleting its natural resource. This may mean it has progressively less to export, or it is progressively more expensive to produce the product. For example, the easily mined ores are exhausted and the mines have to go deeper, or the high grade ore is exhausted and low grade ores that are harder to process must be used.

Second, even if the resource is completely renewable, rising population means there is less per person as the population rises.

Third, natural resource prices have tended to fall over time. There was a period in which that trend was reversed recently. Natural resources rose because of the rapid growth of so many developing nations, particularly China. In fact the rising prices allowed many poor natural resource exporters to grow rapidly. The economic slump, and other factors has, perhaps temporarily, sent natural resource prices down again. But before the recent rise and fall in natural resource prices there was a long run downward trend in natural resource prices, and that was a major factor in the slow economic development of natural resource exporting countries.

Exports to 1st World Provide Funds for Capital Imports

Note that a key to rapid economic growth of developing nations is the ability to trade something with the 1st World, developed nations. Selling to developed nations provides the developing nation with the hard currency they need to buy capital equipment which the developing nation needs to become more productive.

Developing nations and developed nations tend to produce different goods. Consumer goods are frequently produced in poor, developing countries, while the most developed countries concentrate on more expensive capital goods. Capital goods are the goods that you use at work to produce goods and services.

Note that point about goods and services. Many people may think of capital goods as simply factory equipment. The rich, developed country produces sewing machines and exports them to the poor, developing country. The developing nation pays for the sewing machines by exporting some of the underwear back to the developed nation. However, capital goods include many goods that are not used in factories, or export industries. For example, the developing country will frequently import equipment for its hospitals, which provide services for its own people and do not earn money from abroad. This is still capital equipment even though it is not used in a factory and produces little or nothing for export.

Is the United States a Counter Example?

Perhaps the reader has spotted an apparent counter example, what about the United States, wasn't America natural resource rich and yet America has become very rich.

The United States never had an extended period of rapid growth like Japan, South Korea, Taiwan, Hong Kong, Singapore, or China. Many other developing nations have also had extended periods of growth far above the two percent per capita growth that has been typical of American economic history. The United States started out rich, largely because it had natural resources. Furthermore, the United States started its development earlier than most other nations. It grew slowly, as mentioned above typically at about 2% a year per capita. Per capita means per person. Similar stories can be told about the development of Canada, Australia, and New Zealand. This slow growth would be disappointing for today's 3rd world countries.

Natural Resource Producers Are Not Permanently Stuck

But what of the natural resource rich countries that are not developed, are they permanently stuck? No, they may have difficulty growing rapidly for a while, but as natural resource poor countries, particularly China develop and pass them economically, the natural resource rich countries can have their turn. Their wages will be cheaper than other countries with similar levels of economic sophistication and they will be able to attract the industry, particularly the labor intensive light industry that is so key to growth. Vietnam, Cambodia, Bangladesh, and Pakistan now have cheaper wages than China, so the less sophisticated industries are moving to them, and they are enjoying rapid growth and industrial development.

China's Growth Will Fuel Others Growth

As China has such a large population, and therefore a large economy, it is shedding a massive number of jobs to poor nations. China's movement out of low level industry is fueling the rapid industrial growth of many nations.

Of course, China's rapid growth is also creating enormous demand for natural resources which has allowed many poor nations to achieve high growth without making the transition to industry.

The poorer nations have done well in recent years, far better than the rich nations. We can expect this to continue as we see the relative "rise of the West" is replaced by the relative "rise of the rest."

Natural Resources Have Prevented Industrialization

But more to the point the natural resource rich nations should realize their lack of success up to this point has not been principally about their failures as a culture, or in politics. The natural resources protected them from the direst poverty that countries without those resources suffered, but those same natural resources also prevented the natural resource rich country from developing.
How will the 3rd world develop? This popular web page lays out the growth path.

Here is an index to my other pages on economics, and a short review of my qualifications in this field.

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Last updated May 19, 2015

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