The natural resources poverty trap

Last week we discussed the conflict poverty trap, the first of four traps which keep countries poor, according to Paul Collier, author of The Bottom Billion. This week, the offender is natural resources. This cause of poverty is counter-intuitive, because you would expect that valuable natural resources would help a country to become rich. However, about 29% of the poorest billion people in the world live in countries where natural resources dominate the economy.

Resource exports cause a country’s currency to rise in value, so that other exports from the country become uncompetitive, while imports flood the local markets, driving local manufacturing firms out of business. Because only a small number of people in a country can be employed in the mining sector, the majority of people in the country are worse off, rather than better off, if natural resource exports form the country’s major economic activity.

When a government’s major revenue source is from natural resource exports rather than from ordinary citizens, there is less need for the government to be accountable to its electorate, so bad government is more likely. Unfortunately, foreign aid has the same sort of effect on a country’s economy as natural resource income. Aid agencies use foreign currency to purchase local currency, causing the local currency’s value to rise, making local export businesses uncompetitive and driving them out of business.