The Myth of the Resource Curse - Cafe Hayek

Wright and Czelusta

6 Challenge/March–April 2004

GAVIN WRIGHT is the William Robertson Coe Professor of American Economic History at StanfordUniversity. JESSE CZELUSTA is a graduate student in economics at Stanford.

Challenge, vol. 47, no. 2, March/April 2004, pp. 6–38.© 2004 M.E. Sharpe, Inc. All rights reserved.

ISSN 0577–5132 / 2004 $9.50 + 0.00.

WHY ECONOMIES SLOW

The Myth ofthe Resource CurseGavin Wright and Jesse Czelusta

Recent studies assert that natural-resource abundance(particularly of minerals) has adverse consequencesfor economic growth. But these two economists arguethat it is inappropriate to equate development ofmineral resources with terms such as “windfalls” and“booms.” Contrary to the view of mineral productionas mere depletion of a fixed natural “endowment,”they argue that “nonrenewable” resources have beenprogressively extended through exploration, technolog-ical progress, and advances in appropriate knowledge.

MANY OBSERVERS BELIEVE THAT RELIANCE ON NATURAL RESOURCES

has adverse consequences for economic growth. ConsiderRichard M. Auty. He writes flatly: “Since the 1960s, the

resource-poor countries have outperformed the resource-rich coun-tries compared by a considerable margin” (2001, 840). Although con-cern over the efficacy of resource-based development is centuries old,the recent cycle begins with Sachs and Warner (1995, 1997), who pre-

The Myth of the Resource Curse

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sented evidence of an inverse statistical relationship between natural-resource–based exports (agriculture, minerals, and fuels) and growthrates during the period 1970–90. Summarizing and extending this re-search (to 1989) several years later, Jeffrey Sachs and Andrew Warnerconclude: “What the studies based on the post-war experience haveargued is that the curse of natural resources is a demonstrable empiri-cal fact, even after controlling for trends in commodity prices. . . . Almostwithout exception, the resource-abundant countries have stagnated ineconomic growth since the early 1970s, inspiring the term ‘curse ofnatural resources.’ Empirical studies have shown that this curse is areasonably solid fact” (2001, 828, 837). This thesis has been widelydisseminated and is now often encountered in the popular press.

In this paper we subject the notion of a “resource curse” to criticalscrutiny. We concentrate on minerals, in part for reasons of our ownexpertise but also because oil and other minerals have been fingeredas the primary culprits in this melodrama.1

The resource-curse literature pays little attention to the economiccharacter of mineral resources or to the concept of “resource abun-dance.” Theirs is indeed a black box approach. Virtually without ex-ception, these studies equate the export of mineral products with“resource abundance,” seen as a simple reflection of an exogenouslygiven geological “endowment.” When the revenues from this activ-ity are described, terms such as “windfalls” and “booms” are gener-ally not far behind. This synonymy is a matter of implicit assumptionrather than analysis or demonstration, generally unquestioned, andall too often unrecognized. On closer scrutiny, each step in this chainof equivalences is questionable.

To begin, comparative advantage in resource products is not equiva-lent to “resource abundance.” The elementary theory of internationaltrade teaches that every country has a comparative advantage in some-thing. A comparative advantage in natural resources may simply re-flect an absence of other internationally competitive sectors in theeconomy—in a word, underdevelopment. Since indices of “develop-ment” are inherently imperfect, this statistical bias is not addressedby adding a host of additional variables into a cross-country regres-

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sion. Studies that use more appropriate measures of mineral abun-dance (such as reserves per capita or the level of natural resourceexports per worker) do not find that these variables are negativelyassociated with growth rates (Maloney 2002; Stijns 2003).

Historical studies show that successful resource-based developmentis not primarily a matter of geological endowment. The United Stateswas the world’s leading mineral economy in the very historical pe-riod during which the country became the world leader in manufac-turing (roughly between 1890 and 1910). Resource intensity was apervasive feature of U.S. technological and industrial development.But with the aid of hindsight, we know that the country’s mineralendowment was not particularly favorable. Instead, the United Statesdeveloped its mineral potential well ahead of countries on other con-tinents, including Latin America, on the basis of large-scale invest-ments in exploration, transportation, geological knowledge, and thetechnologies of extraction, refining, and utilization. It is fair to saythat the minerals sector constituted a leading edge of the knowledgeeconomy in U.S. history.

The minerals sector is no less linked to advances in knowledge andtechnological capabilities in the modern world. Indeed, it is one ofthe high-tech industries of the global economy. Fears of impendingscarcity have been overwhelmed by technological progress in explo-ration, extraction, and substitution over the past two centuries, afact well known to resource economists (such as Krautkraemer 1998and Tilton 2003), though it rarely arises in the resource-curse litera-ture. Less well known is the fact that returns to investments in coun-try-specific minerals knowledge have stayed high in recent decades,so that production and reserve levels have continued to grow in well-managed resource economies. Many other resource-based economieshave performed poorly, not because they have overemphasized min-erals but because they have failed to develop their mineral potentialthrough appropriate policies.

These issues matter precisely because of their relevance for policydecisions. What doctor would offer the diagnosis that her patient’scondition is hopeless and has been so from day one, attributing his



ills to an ill-fated factor endowment? Would lenders and donors con-sider as evidence of “reform” decisions to suspend programs of min-erals exploration, curtail the training of mining engineers, andterminate contracts with international mining companies? Perhapsnot, but how else should policymakers understand the implicationsof a thesis that a country would be better off not knowing about itsunderground wealth potential? On the other hand, perhaps an ap-preciation of the knowledge-based character of the minerals sectormight lead resource-curse advocates to reformulate their position andrethink its policy implications. Our position is that investment inminerals-related knowledge is a legitimate component of a forward-looking economic development program. We support this positionby examining cases of resource-based development, past and present.

The United States as a Resource-Based Economy

Writing in 1790, Benjamin Franklin declared: “Gold and silver arenot the produce of North America, which has no mines.”2 By 1913,however, the United States was the world’s dominant producer of vir-tually every one of the major industrial minerals of that era. Hereand there a country rivaled the United States in one mineral or an-other—France in bauxite, for example—but no other nation was re-motely close to the United States in the depth and range of its overallmineral abundance.

Resource abundance was a significant factor in shaping if not pro-pelling the U.S. path to world leadership in manufacturing. The coef-ficient of relative mineral intensity in U.S. manufacturing exportsactually increased sharply between 1879 and 1914, the very period inwhich the country became the manufacturing leader (Wright 1990,464–68). Louis Cain and Donald Paterson (1986) find a significantmaterials-using bias in technological change in nine of twenty U.S.manufacturing industries between 1850 and 1919, including many ofthe largest and most successful cases. A study of the world steel in-dustry in 1907–9 put the United States on a par with Germany in totalfactor productivity (15 percent ahead of Britain), but the ratio of horse-

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power to worker was twice as large in America as in either of theother two contenders (Allen 1979, 919). The American economy en-joyed abundant natural resources during the country’s ascendance toworld leadership, yet economists do not seem inclined to downgradeU.S. performance on this account.

There is good reason to reject the notion that American industrial-ization should be somehow discounted because it emerged from asetting of unique resource abundance: On closer examination, theabundance of American mineral resources should not be seen asmerely a fortunate natural endowment. It is more appropriately un-derstood as a form of collective learning, a return on large-scale in-vestments in exploration, transportation, geological knowledge, andthe technologies of mineral extraction, refining, and utilization. Thiscase is set out in detail by Paul David and Gavin Wright (1997) andmay be briefly summarized here.

For one thing, the timing of increases in production of a range ofminerals in the United States is striking. Leadership or near-leader-ship in coal, lead, copper, iron ore, antimony, magnesite, mercury,nickel, silver, and zinc all occurred between 1870 and 1910. Surelythis correspondence in timing cannot have been coincidental.

In direct contrast to the notion of mineral deposits as a nonrenew-able “resource endowment” in fixed supply, new deposits were con-tinually discovered, and production of nearly all major mineralscontinued to rise well into the twentieth century—for the country asa whole, if not for every mining area considered separately. To besure, this growth was to some extent a function of the size of thecountry and its relatively unexplored condition prior to the west-ward migration of the nineteenth century. But mineral discoverieswere not mere by-products of territorial expansion. Some of the mostdramatic production growth occurred not in the Far West but in olderparts of the country: copper in Michigan, coal in Pennsylvania andIllinois, oil in Pennsylvania and Indiana. Many other countries of theworld were large, and (as we now know) well endowed with minerals.But no other country exploited its geological potential to the sameextent. Using modern geological estimates, David and Wright (1997)



show that the U.S. share of world mineral production in 1913 was farin excess of its share of world reserves. Mineral development wasthus an integral part of the broader process of national economicdevelopment.

David and Wright identify the following elements in the rise of theAmerican minerals economy: (1) an accommodating legal environ-ment; (2) investment in the infrastructure of public knowledge; (3)education in mining, minerals, and metallurgy.

It would be a mistake to view the encouragement to mining asflowing exclusively from a simple, well-specified system of rights andincentives, because much of the best U.S. mineral land was trans-ferred into private hands outside of the procedures set down by fed-eral law. Nearly 6 million acres of coal lands were privatized between1873 and 1906, for example, mostly disguised as farmland. Most ofthe iron lands of northern Minnesota and Wisconsin were fraudu-lently acquired under the provisions of the Homestead Act. Neverthe-less, whether through official or unofficial procedures, the postureof American legal authority toward mining was permissive and evenencouraging well into the twentieth century.

This discussion may convey the impression that the rise of U.S.mineral production was an exercise in the rapid exhaustion of a non-renewable resource in a common-property setting. Although elementsof such a scenario were sometimes on display during periodic min-eral “rushes,” resource extraction in the United States was more fun-damentally associated with ongoing processes of learning, investment,technological progress, and cost reduction, generating a manifoldexpansion rather than depletion of the nation’s resource base. A primeillustration is the U.S. Geological Survey (USGS). Established in 1879,the USGS was the most ambitious governmental science project ofthe nineteenth century. The agency was successor to numerous state-sponsored surveys and to a number of more narrowly focused fed-eral efforts. It was highly responsive to the concerns of western mininginterests, and the practical value of its detailed mineral maps gave theUSGS, in turn, a powerful constituency in support of its scientificresearch. The early twentieth-century successes of the USGS in petro-

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leum were instrumental in transforming attitudes within the oil in-dustry toward trained geologists and applied geological science.

The third factor was education. By the late nineteenth century, theUnited States had emerged as the world’s leading educator in miningengineering and metallurgy. The early leader was the Columbia Schoolof Mines, opened in 1864; some twenty schools granted degrees inmining by 1890. After a surge in enrollment during the decades brack-eting the turn of the twentieth century, the University of Californiaat Berkeley became the largest mining college in the world. The mostfamous American mining engineer, Herbert Hoover—an early gradu-ate of Cal’s cross-bay arch rival, Stanford—maintained that the in-creasing assignment of trained engineers to positions of combinedfinancial and managerial, as well as technical, responsibility was adistinctive contributing factor to U.S. leadership in this sector. Amanpower survey for military purposes in 1917 identified 7,500 min-ing engineers in the country, with a remarkably broad range of pro-fessional experience, domestic and foreign.

United States v. Chile: The Case of Copper

Between 1900 and 1914, copper mines in the United States producedmore than ten times as much copper as did the mines of Chile, butthis vast differential was not based on superior geological endow-ment. Chilean copper production exceeded that of the United Statesuntil the 1880s and nearly recovered its relative standing by the 1930s.During the 1880–1920 era of U.S. ascendancy, however, there was nocomparison. The rapid growth of U.S. copper production illustratesthe ways in which investment and technology can expand a country’sresource base, effectively creating new natural resources from aneconomic standpoint.

The pure native coppers of the Great Lake region were indeed aremarkable gift of nature, but the capital requirements for profitableexploitation of this potential were immense. Along with the railroads,the copper companies of Michigan pioneered in the organization ofthe giant integrated business enterprise. Advances in the 1870s and



1880s reflected technological developments in drilling and blastingsuch as the use of nitroglycerin dynamite and rock-drilling machinespowered by compressed air. Steam engines were adapted to hoist orefrom the deepest mines in the country, as well as to stamping andother surface operations. Beginning in the 1870s, national totals wereaugmented by production from newly discovered deposits in Ari-zona and Montana, but Michigan copper continued to grow abso-lutely until the 1920s.

What truly propelled the copper industry into the twentieth cen-tury was a revolution in metallurgy, overwhelmingly an Americantechnological achievement. In the 1880s and 1890s, the major break-throughs were the adaptation of the Bessemer process to copper con-verting and the introduction of electrolysis on a commercial scale forthe final refining of copper. These advances made possible a nearlycomplete recovery of metal content from the ore. The dramatic newdevelopment of the first decade of the twentieth century was the suc-cessful application of the Jackling method of large-scale, nonselectivemining using highly mechanized techniques to remove all materialfrom the mineralized area—waste as well as metal-bearing ore. Comple-mentary to these techniques, indeed essential to their commercial suc-cess, was the use of the oil flotation process in concentrating the ore.Oil floatation called for and made possible extremely fine grinding,which reduced milling losses sufficiently to make exploitation of low-grade “porphyry” coppers commercially feasible.

Together these technological developments made possible a steadyreduction in the average grade of American copper ore, from 3.32percent in 1889 to 1.88 percent by 1910. By contrast, in copper-richChile—where output was stagnant—yields averaged from 10 to 13 per-cent between 1890 and 1910 (Przeworski 1980, 26, 183, 197). Fromthese facts alone, one might infer that the United States had simplypressed its internal margin of extraction further than Chile, intohigher-cost ores. But the real price of copper was declining duringthis period, confirming that the fall in yields was an indicator of tech-nological progress. Indeed, the linkage between yield reduction andthe expansion of ore reserves was exponential, because of the inverse

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relationship between the grade of ore and the size of deposits. Ad-vances in technology thus led directly to an expansion of Americanmineral wealth.

Historians differ on the reasons for the Chilean lag. In the mid-nine-teenth century, the Chilean industry was comparable to and probablysuperior to that of the United States in its technological sophistication.But the supply of high-grade ores began to decline in the 1880s, and, incontrast to the United States, Chile did not respond to this deteriora-tion with either new discoveries or technological adaptation. Politicalhistorians stress the lack of national consensus in support of the indus-try and the predominance of revenue motives in government policy.Economists tend to emphasize the obstacles posed by large fixed-capi-tal requirements in transportation and other forms of infrastructure,as well as in mining and processing facilities. American copper ben-efited from much greater investment in engineering skills, geologicalknowledge, and transport facilities (Maloney 2002, 126–28). Scale econo-mies were not independent of the legal and political regime, however;in Chile, for example, the mining code discouraged the consolidationof individual mining claims (Culver and Reinhart 1989, 741).

Whatever the precise mixture of explanations, the important pointis that Chile’s problem was not its mineral endowment but delay indeveloping its resource potential. The barriers were real, but largeU.S. companies found profitable what the Chileans did not, and in-vestments by Guggenheim and Anaconda after the turn of the cen-tury began the long-term reversal of the industry’s fortunes. Throughmassive investments in railroads, roads, steamships, water, and hous-ing, these private firms in effect created their own infrastructure.

Resource-Rich Underachievers

What was true of Chilean copper was also true of other areas of theworld that are now known to be richly endowed with mineral re-sources: Latin America, Russia, Canada, even Australia—a countrywhose early economic performance has been impugned for its exces-sive reliance on natural resources. European settlement of Latin



America was largely motivated by the search for precious metals, butthe Spanish and Portuguese rulers had little interest in possiblespillover benefits from gold and silver mining to broader mineraldevelopment. In contrast to the United States, the countries of LatinAmerica had barely made a beginning at exploiting their potential inzinc, lead, bauxite, iron ore, phosphate rock, and petroleum.

Contemporaries and historians have found many rationalizationsfor this pattern of underachievement. But the proximate impedimentseems to have been a lack of accurate knowledge about the extent anddistribution of mineral deposits. A report issued as part of the 1910survey of world iron-ore resources called attention to enormous un-developed deposits of high-grade iron ore in Brazil and attracted greatinterest in that country. Yet even in the 1930s experts cautioned that“a belief that South America is a vast reservoir of untouched mineralwealth is wholly illusory” (Bain and Read 1934, 358). Somehow theillusions metamorphosed into real resource endowments within sixtyyears, as mining investments blossomed throughout Latin Americain the 1990s.

Australia was a leading gold-mining country in the nineteenthcentury, but Australia was an underachiever with respect to virtu-ally every other mineral, particularly coal, iron ore, and bauxite. AsDavid and Wright (1997) show, Australia’s share of world produc-tion lagged well behind its actual share of mineral wealth (based onmodern estimates). In a nation with a strong mining sector and acultural heritage similar to that of the United States, why shouldthis have been so?

Here, too, it is easy to identify adverse factors that may have dis-couraged resource exploitation. The population of Australia was smallrelative to its area, and the harsh climate of the large desert areasdiscouraged migration from the coast. But similar conditions pre-vailed in much of the western United States. States like Montana, Utah,and Arizona are not famous for their gentle climates. Australia didinvest in geological research organizations, mining schools, and min-eral museums, and indications are that “a viable and independenttechnological system did develop in the years approximately 1850 to

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1914” (Inkster 1990, 43). Yet Australia lagged well behind other devel-oped countries in engineers per capita (Edelstein 1988, 14), and washeavily dependent upon foreign science. Into the 1880s, most largeAustralian mines were managed by Cornishmen, who had much prac-tical experience but were untrained in metallurgy and resistant tonew technology. The emerging Australian technological system wasdistinctly informal, reliant upon outside science, and lacking in scaleeconomies relative to the United States. In the early twentieth cen-tury, as Britain fell behind in minerals education and research, andas protectionist policies inhibited inflows of knowledge embodied ingoods and people, the relative pace of learning in the Australian min-erals sector appears to have decreased substantially. In a 1977 lectureat the University of Queensland, Raymond J. Stalker (a professor ofmechanical engineering) stated that “on the eve of the Second WorldWar, the ‘self-image’ of Australia was that of a relatively unsophisti-cated and technologically dependent dominion of the British Em-pire” (as quoted in Magee 1996, 31).

Arguably as a result of the above factors in conjunction with lowmineral prices, by the 1930s Australians had become pessimistic aboutthe possibilities for further expansion of their natural resources. W.A.Sinclair (1976, 201) speaks of “a greatly reduced willingness to under-write a process of development based primarily on the exploitationof natural resources.” In parallel with growing concerns in other coun-tries about the extent of natural resource supplies, Australians deemedit prudent to conserve minerals for domestic industries.

Pessimism led to misguided policies and lack of survey effort. In1938, when Australia had recently begun to export iron ore on a smallscale and gave promise of expanding this traffic, the government im-posed an embargo on all iron ore shipments in an effort to conservethe remaining supply—effectively raising a barrier to exploration thatremained in place for the next twenty-five years. The policy was jus-tified by a report to the Commonwealth in May 1938: “It is certainthat if the known supplies of high grade ore are not conserved Austra-lia will in little more than a generation become an importer ratherthan a producer of iron ore” (quoted in Blainey 1993, 337). As late as



the 1950s, the accepted view was that Australian minerals were fatedto diminish over time. A 1951 report stated:

We have been utilizing several of our basic metals at an ever-increas-ing rate and, with the development of many of the so-called backwardnations, it appears likely that that rate will not diminish in the future;demand is likely to increase. We have not an unlimited supply of thesemetals available to us by economic processes as known today, nor isthere any indication that sources other than the kind of ore-depositsworked today will become available to us. The capacity for produc-tion of some metals cannot be increased indefinitely. . . . Periods ofshortage such as we have experienced will recur more frequently. (Aus-tralian Bureau of Mineral Resources, Geology and Geophysics 1951)

However, when the policy regime changed in the 1960s, lifting theembargo and offering state encouragement to exploration and con-struction of new ore terminals, a rapid series of new discoveries openedup previously unknown deposits, not only of iron ore but of copper,nickel, bauxite, uranium, phosphate rock, and petroleum. By 1967,proven reserves of high-grade iron ore were already more than fortytimes the level of ten years earlier (Warren 1973, 215).

Before the 1960s, Australians accepted any number of unscientificrationalizations for the absence of important minerals such as petro-leum: oil could not be found south of the equator; Australia’s rockswere too old to contain oil; the country had been so thoroughlyscoured by prospectors that surely nothing valuable could remain tobe found. But this very attitude could lead to lethargic and thereforeself-confirming search behaviors. Geologist Harry Evans recalled hisown classic “rational expectations” reaction when a search party fromthe Weipa mission on the Cape York Peninsula found extensive out-breaks of bauxite in 1955: “As the journey down the coast revealedmiles of bauxite cliffs, I kept thinking that, if all this is bauxite, thenthere must be something the matter with it; otherwise it would havebeen discovered and appreciated long ago.” Indeed there was nothingwrong with it: By 1964 Weipa held about one-quarter of the knownpotential bauxite in the world (Blainey 1993, 332).

Thus, it seems that Australia’s problem was not one of excessive

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reliance on minerals, but instead a failure to exploit its vast mineralspotential early enough. Once Australia began to develop this poten-tial in the 1950s and 1960s, growth of minerals production acceler-ated, as did growth of gross domestic product (GDP).

The Rise of Petroleum: Causes and Implications

The leading global mineral story of the twentieth century has beenpetroleum. In its origins and growth as an American specialty, petro-leum illustrates the themes of this essay very well: mineral develop-ment as a knowledge industry; evolving institutional relationshipsamong government agencies, academic institutions, and private cor-porations; and national economic strength emerging from a resourcebase. The usefulness of the liquid mineral originally known as “rockoil” was first recognized in the United States, which dominated worldproduction for more than a century. New discoveries led to an ever-widening range of uses in the twentieth century. It would seem to bea classic example of a nation building comparative advantage aroundits resource base. Yet we now know that from a world perspective, theUnited States was not particularly well endowed with petroleum. Para-doxically, American technology launched a worldwide, century-longmovement away from a mineral for which the United States has enor-mous reserves (coal) in favor of a liquid mineral, the domestic supplyof which is drying up and for which geographic linkages betweenresources and industry have been substantially weakened.

Before petroleum, the role of applied science in industry was negli-gible. When the first oil well was put down at Titusville, Pennsylva-nia, in 1859, the techniques used were well known from centuries ofdrilling deep wells for brine and water. As discoveries moved on tomore difficult terrain, drilling was facilitated by technological im-provements, such as the replacement of the cable drill by the rotarydrill. In addition to advances in machinery, the application of petro-leum geology was critical. At the Columbia School of Mines, the cur-riculum included instruction in the drilling of artesian, brine, andoil wells, while Charles F. Chandler, its dean and professor of applied



chemistry, devised the flash-point test for kerosene and was the fore-most chemical consultant for the industry at the time. During the1880s and 1890s, several pioneer American geologists were employedas consultants by oil operators to help locate deposits in the Appala-chian fields (Williamson et al. 1963, 441).

The major breakthroughs for petroleum geology came in the twodecades after the turn of the century. At least forty professional ge-ologists and geological engineers were employed in California be-tween 1900 and 1911, probably more than in any other oil region ofthe world at the time. Working with reliable field data published bythe U.S. Geological Survey, these early graduates of the University ofCalifornia and Stanford were influential in popularizing the anticli-nal theory of the structure of oil-bearing strata. While the major ele-ments of the theory had been worked out before 1900, the discoveryin 1911 of the rich Cushing pool in Oklahoma dramatically demon-strated that anticlines were favorable places to find oil. In 1914 theOklahoma Geological Survey published a structure-contour map ofthe Cushing field clearly indicating that the line separating oil fromwater was parallel to the surface structure contours. For the next fif-teen years, most new crude discoveries were based on the surfacemapping of anticlines. Prior to the 1920s, oil development outside ofthe United States and Canada was almost entirely based on surfaceseepage. Because of the absence of detailed structural maps, majorpotential fields in other parts of the world had been passed over.

It is not geology but this investment in geological knowledge thatexplains the long American domination of world oil production. Otherproducing centers eventually emerged, most notably in the MiddleEast, which collectively passed the United States in 1960. The rich oilpotential of the Middle East had long been suspected, but its exploi-tation was delayed by political turmoil and international rivalries. Aslate as 1948, estimated reserves in North America and the Middle Eastwere closely matched. By the 1980s, total world reserves surpassedanything dreamed of in 1948. The Middle East held by far the largestshare, but oil reserves in virtually every other continent have cometo surpass those of North America. To some extent this trend toward

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globalization reflects the many years of depletion of the U.S. stock.But the more important influence has been the spread of explorationaround the world, using advanced science-based techniques and withdrilling capabilities that make even deep offshore wells commerciallyviable. If all the oil extracted in the United States since 1859 were putback in the ground, North America would still be a minor player inthe world oil production picture today.

Oil and Economic Development in the United States

The historical American specialization in petroleum was thus notprimarily a matter of endowment but of learning. One might wellquestion, however, just what contribution this historical path hasmade to American economic development in general. Many modernanalysts believe that the advent of petroleum has led to economicdeterioration, if not ruin, for “petro-states” such as Venezuela (e.g.,Karl 1997). Does the extended American love affair with oil have anylessons to offer on this score?

The discoveries of oil in the San Joaquin Valley, at Signal Hill, SantaFe Springs, and Huntington Beach, did not bring economic ruin tosouthern California (Rhode 1997). Before 1900, California was a re-mote, peripheral economy. Between 1900 and 1930, California (notTexas) became the leading oil state in the nation, and the result was a“sudden awakening” of the regional economy. Spurred not just by jobsin oil but also by the dramatic fall in the cost of energy, California’sshare of national income nearly doubled. Contrary to Dutch diseasemodels, the size of the state’s manufacturing sector quadrupled. Oneclear lesson from California: Do not restrict the indicators of progressto per capita income. With the rush of population, California’s percapita income continued its slow downward convergence toward thenational average. But the state was launched on its modern course ofleadership in technology and innovation.

The transition from coal to oil entailed learning of many kinds, asCalifornia became the world’s first oil-fueled economy. Potential us-ers had to “learn to burn” the new fuel, convert burners, and estab-



lish fuel supply networks. The Southern Pacific Railroad began usingfuel oil on a permanent basis after 1895 and switched over completelyafter 1900. The state’s electric utilities and sugar refining led the way,as virtually all of the large fuel consumers switched. With oil came acommitment to the gasoline-powered automobile, as California cameto symbolize the high-mobility American lifestyle of the twentiethcentury. Although opinions are undoubtedly divided about the valueof this lifestyle for humanity, one cannot deny that the institutionsof higher learning that petroleum geology helped to put on the map—Berkeley and Stanford, to name two—have evolved into world-classresearch universities.

The developmental contribution of oil was not limited to Califor-nia. With the rise of petrochemicals in the 1920s, petroleum was in-strumental in the transition of U.S. manufacturing from traditionalmass production to science-based technologies. Before 1920, therewas little contact between oil companies and the chemical industry.The rise of the United States to world stature in chemicals was associ-ated with a shift of the feedstock from coal tar to petroleum. Work-ing in close partnership with Massachusetts Institute of Technology,New Jersey Standard’s research organization in Baton Rouge, Louisi-ana, produced such important process innovations as hydroforming,fluid flex coking, and fluid catalytic cracking. As chemical engineerPeter Spitz has written: “regardless of the fact that Europe’s chemicalindustry was for a long time more advanced than that in the UnitedStates, the future of organic chemicals was going to be related topetroleum, not coal, as soon as the companies such as Union Car-bide, Standard Oil (New Jersey), Shell, and Dow turned their atten-tion to the production of petrochemicals” (Spitz 1988, xiii). Progressin petrochemicals is an example of new technology built on a re-source-based heritage.

The Case of Norway

The reader may accept this analysis as history and yet protest that ithas little relevance for the newer oil-producing nations of the world.3

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How could such newcomers expect to contribute to what is now anextremely advanced science-based world petroleum technology? Inrebuttal, consider the example of Norway, in which the first com-mercial discoveries of oil occurred only in 1969. In many ways theNorwegian experience parallels that of California. Though not poorby world standards, Norway in the 1960s was remote and structur-ally underdeveloped. Yet in fairly short order, the country was ableto reorient its traditional engineering skills from shipbuilding tobecome a full partner in the adaptation of oil exploration and drill-ing technologies to Norwegian conditions. Virtually from the start,negotiations with international oil companies emphasized the trans-fer of competence and control to Norway (Anderson 1993, 98–100).With the establishment of a state-owned company (Statoil) in 1973and investment in the training of petroleum engineers at the Nor-wegian Technical University and Rogaland Regional College, “re-cipient competence” was transformed into “part icipantcompetence,” making it possible to speak of an independent Nor-wegian oil industry.

The Norwegian industry became expert at producing deepwater drill-ing platforms. Initially designed to overcome immediate productionbottlenecks, the platforms came to be export goods, as they proveduseful for offshore drilling in other parts of the world. A distinctiveapproach to exploration developed at the University of Oslo’s De-partment of Geology, focusing on the properties of different types ofsandstone as reservoir rock and the flow of water and oil in sedimentbasins, has come to be known as the “Norwegian school of thought”regarding oil exploration. As a result of this approach, forecasts ofimpending depletion have been repeatedly overturned and reserveestimates adjusted. In effect, these advances in technology and in theinfrastructure of knowledge have extended the quantity of Norway’spetroleum reserves, and they have allowed Norwegians to participatein the process as well-paid professionals, not just as passive recipi-ents of windfall economic rents.



The Case of Venezuela

Granted, Norway sets a high standard for national administrativecompetence and responsible democratic government, but it is “thecomplete antithesis of Venezuela,” according to Terry Lynn Karl(1997, 217). Oil-rich Venezuela is one of the world’s “most tremen-dous development failures” (Rodriguez and Sachs 1999, 277). Aftera strong performance from the 1920s to the 1970s, overall economicgrowth in Venezuela has been negative for twenty years or more.This dismal performance certainly shows that a favorable mineralendowment is no guarantee of sustained economic progress. Butwhat exactly went wrong in Venezuela?

Francisco Rodriguez and Jeffrey Sachs (1999) believe the problemis that natural resource industries “which rely on exhaustible fac-tors of production, cannot expand at the same rate as other indus-tries” (p. 278). They characterize the decline in Venezuelan oil exportsper capita as a “simple depletion of a natural resource” (p. 284).But this interpretation is untenable. Despite the intragovernmentalconflict described by Karl (1997), Venezuela’s state-owned oil de-velopment agency (Pétroleos de Venezuela, S.A., or PDVSA) has hadconsiderable success in developing technologies appropriate for theunusual concentration of heavy oil in the Orinoco Belt. Country-specific advances in heavy-oil technology led to a significant up-ward jump in reported Venezuelan reserves beginning in the 1980s,and the level of reserves has been rising since then. Aided by col-laborative research agreements with BO Petroleum (a company withCanadian experience in heavy oil), PDVSA developed a new fuel,orimulsion, for use by power utilities and heavy industry. Orimulsionhas favorable market prospects, because it has a potential for gasifi-cation, can be used in a combined fuel cycle, and is environmen-tally friendly.

Nor can the growth implosion be traced to Dutch-disease distor-tions or unfavorable externalities associated with oil. As RicardoHausman points out in a persuasive critique:

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Venezuela’s growth collapse took place after 60 years of expansion,fueled by oil. If oil explains slow growth, what explains the previousfast growth? Moreover, the growth collapse occurred when oil rev-enues were declining, so that the Dutch disease should have operatedin reverse, facilitating the growth of output in nonoil tradables: it didnot happen. (2003, 246)

Hausman shows that the decline in the nonoil Venezuelan economyis traceable to a massive rise in real interest rates, dating from the country’sloss of bond rating in the wake of its 1983 default. He attributes thesubsequent continuation of low bond ratings to “distributive conflictsurrounding the allocation of the decline in oil revenues” (ibid.).

Unquestionably, this diagnosis of Venezuela’s growth implosiondraws upon and perhaps thereby confirms some of the componentsof some of the critiques of resource-based development. Excessivereliance on a single commodity for export earnings is unwise, espe-cially if the market in question is volatile and if it provides the majorsource of government revenues. As economists have long advised, itis imprudent for governments to make major spending commitmentsduring periods of rapid revenue growth, as though this growth couldbe extrapolated into the indefinite future. In such a situation, ad-verse shocks are extremely stressful for any society, and in the case ofVenezuela, it may have been more than the society could withstand.4

However one may assign responsibility for these events, the centralpoint is that they should be understood as elements of a specific his-torical episode, not as recurring or inherent features of resource de-velopment. Still less do they constitute evidence for the transience ofoil wealth. Much of the resource-curse literature simply assumesnonsustainability, making no distinction between demand-side fluc-tuations and the determinants of long-run supply.

Minerals and Economic Development: ModernSuccess Stories

Venezuela shows that there are risks of policy failure associated withresource-based growth, but this finding does not justify a conclusionthat resource development itself is mistaken as national policy. In-



deed, the essence of the policy failures described by Ascher (1999,chap. 6) is not an excessive expansion of resource-based activity butpolitical interference with incentives to develop these resources morefully. At times of fiscal crisis, cash-poor governments in Mexico andVenezuela chose to raid the investment budgets of state-owned oil com-panies, weakening their research and development programs. Suchknowledge and human capital expenditures should properly be seenas a positive part of infrastructure investment. The successes of well-managed resource-based regimes illustrate some of the possibilities.

Chile

The resurgence of Chilean copper production in the first half of thetwentieth century took place in the absence of strong domestic tech-nical capacity. According to Patricio Meller, “in the 1950s, one couldhave learned more about Chilean copper in foreign libraries than inChilean ones. . . . [Nor] was there training of Chilean engineers andtechnicians specializing in copper” (1991, 44). It took thirty years(1925–1955) for the government to recognize the need to build such acapacity and about ten years to train Chilean specialists (p. 45). Theenhancement of technical expertise did not prevent disastrous policymissteps, culminating in the nationalizations of 1971. But the newmining code of 1983 strengthened private rights in mining conces-sions, though the state-owned copper mining company (Codelco)retained more than half of the country’s copper production.

Since 1990, Chile has been “Latin America’s star economy” (“InSearch of New Tricks; Chile’s Economy,” Economist, December 1, 2001,37) growing at an average annual rate of around 8 percent. The min-ing industry has been central to this growth, accounting for 8.5 per-cent of GDP and 47 percent of all exports during the decade. Copperis still Chile’s most important mineral, but its expansion has notdeterred diversification within the sector or within the economy morebroadly. Chile now also exports substantial quantities of potassiumnitrate, sodium nitrate, lithium, iodine, and molybdenum.

The Engineering and Mining Journal notes that “investment plans

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are . . . coming into the pipeline at a higher-than-average rate in Chile”;planned mine projects rose to US$10.7 billion in 2001 (“Latin AmericaStill on Top,” January 2002, 29–30). As the article comments: “With-out successful exploration, many such projects would not have cometo fruition.” Codelco, the state mineral development company, re-mains very active in exploration activity in a number of locationsthroughout the country.

The relationship between ore grade and reserve quantity is illus-trated by reports such as the one stating that “estimated resources atEscondida, which include resources used to define ore reserves, haveincreased significantly due to the release for the first time of lowgrade ore which is below the current concentrator cut-off grade butabove the economic cut-off grade” (“Andean Action,” Mining Maga-zine, May 1, 2001, 234). Investments in exploration and processingcontinue to expand for an array of other minerals, even as produc-tion of almost every Chilean mineral continues to rise. In early 2002,Coeur d’Alene Mines Corp. announced the discovery of high-gradegold and silver deposits on its Cerro Bayo property in southern Chilebut noted that “only a small portion of the Cerro Bayo property hasbeen explored” (“Coeur Discovers More Gold/Silver at Cerro Bayo,”Skillings Mining Review, February 2, 2002, 15).

Peru

Peru is considered the region’s newest success story by the miningpress. After the privatization program started in 1992, mining ex-ports doubled to $3.01 billion by 1999. As of the end of 2001, Peruranked second in the world in production of silver and tin, fourth inzinc and lead, seventh in copper, and eighth in gold. Mining Magazinereported:

There is a determination that the mining sector should play an evenlarger role in the economy and a number of legal instruments are nowin place aimed at promoting foreign investment . . . As mining re-gimes go, Peru’s can be fairly described as possessing an enabling en-vironment. (“Andean Action,” 240)



The president of Codelco, Juan Villarzu, “liken(s) the country toChile in the early 1990s” (“Peru’s Comeback,” Mining Magazine, Janu-ary 2002, 12). That present development is far below potential is con-firmed by such reports as: “Iscaycruz is one of the world’s highest-gradezinc mines, but at present operates on only 1,000 ha [hectares] of the52,000 ha it holds in concessions” (ibid.).

Yet Peru appears to be on its way to reaching this potential. Forinstance, “Roque Benavides, chief executive of Compania de MinasBuenaventura, is forecasting that by 2008, output will have climbedto 1.38 Mt [Million tons] for copper, 1.16 Mt for zinc, and 146 forgold” (ibid., 6; these figures represent increases relative to 2000 of145, 28, and 11 percent, respectively). A US$3.2 billion project beganproduction at Antamina in 2001 and is expected to yield 675 millionpounds of copper over the first ten years (“Peruvian Mining Conven-tion Highlights Mining Development and Importance,” Mining Engi-neering, December 2001). In Yanacocha, “exploration efforts [byMinera Yanacocha, Latin America’s largest gold producer] indicatedmajor copper sulfide deposits under the gold deposits . . . Yanacochamay someday become a major copper producer in addition to gold”(ibid., 21). In May 2002, Barrick Gold Corp. announced the discoveryof an estimated 3.5 million ounces of gold at its Alta Chicama prop-erty in southern Peru (“Barrick Makes New Gold Discovery in Peru,”Skillings Mining Review, May 4, 2002, 8). Substantial investments inmineral processing facilities are also under way (“Peruvian MiningConvention,” 21).

Brazil

Brazil is the leading industrial nation of the region, though the shareof the mining sector is low relative to its neighbors. Following anintensive government investment program in prospecting, explora-tion, and basic geologic research (highlighted by the Radar Survey ofthe Amazon Region Project), mineral production grew at more then10 percent per year in the 1980s. Exploration was interrupted between1988 and 1994 because of restrictions imposed by the constitution of

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1988 on foreign participation in mining. These restrictions were liftedin 1995, and the government mining company was privatized in 1997(U.S. Geological Survey 1999). Mineral exploration activities expandedsignificantly in the 1990s, increasing both production and Brazil’sreserves of most minerals. Currently Brazil produces more than sixtymineral commodities and is the world’s largest exporter of iron ore.

At present, Brazil has only one copper mine and imports substan-tial amounts of copper. Because of a number of major discoveries inthe Carajas region in Para State, however, Brazil expects “to occupy aprominent position in world copper production beginning in theperiod 2003–2005” (“Explorations in South America,” Mining Jour-nal, April 20, 2001, 289). Production capacity for bauxite, which hasalready risen dramatically over the past two decades, is expected toincrease further, with Brazil’s largest bauxite producer planning tofinish a $200 million expansion by the end of 2002 (“Brazilian Baux-ite Producer Expands Capacity,” Mining Engineering, March 2002, 10).

Australia

The most striking success story is Australia. Beginning in the 1960s,Australia witnessed a simultaneous resurgence of successful miner-als search and economic growth. Across the board and almost with-out exception, production of minerals has increased rapidly. Figure 1showcases a few of the dramatic surges in production of Australianminerals. Contrary to earlier fears, increased production has not di-minished mineral reserves. From 1989 to 1999, Australian mineralreserves expanded alongside production for almost all minerals. Asthe Mining Journal reports:

There have been 136 gold discoveries since 1970. . . . In other mineralsectors and against a background of difficult commodity prices, (more)recent Australian successes include an entirely new mineral sands prov-ince, the Murray Basin; the development of lateritic nickel depositssuch as Murrin Murrin, Cawse and Bulong, and sulphide nickel depos-its such as Black Swan, Cosmos and RAV 8; and major zinc and copperdiscoveries such as Century, Cannington and Ernst Henry. (“Explora-tion: The View from Down Under,” April 5, 2002, 244)



The Australian minerals sector has created much more wealth thanit has depleted. The real value of Australia’s subsoil assets increased byalmost 150 percent from 1990 to 1998, while the real value of the min-ing sector’s capital stock increased by 40 percent over the same period,almost twice the rate for all other industries (Stoeckel 1999, 18–19).

The case of Australia demonstrates that expansion of a country’sminerals base can go hand in hand with economic growth and tech-nological progress. The Australian minerals sector’s share of GDPexpanded through the mid-1980s as Australia reversed more than acentury of relatively slow GDP growth. New and old Australian in-dustries also benefited. Manufacturing industries with importantconnections to minerals include: metal and steel products, autos,industrial equipment, petroleum products, ships, and chemicals.

The Australian minerals sector is knowledge intensive. In the pastten years, income from Australian intellectual property in mininghas grown from $40 million a year to $1.9 billion a year. R&D expen-ditures by the mining sector accounted for almost 20 percent of R&Dexpenditure by all industries in 1995–96 (Stoeckel 1999, 17), a dispro-portionate contribution relative to the sector’s share of GDP. Themining sector’s contributions to Australia’s human capital are alsorelatively large. From July to September of 1996, the mining sectorspent an average of $896 per employee on training, while the averagefor all industries was $185; over the same period, the proportion ofpayroll spent on training was 5.8 percent for mining and 2.5 percentfor all industries (ibid., 18).

As Australia’s mineral production has flourished since the aban-donment of the passive conservation policies of the 1930s, the coun-try has emerged as one of the world’s leaders in mineral explorationand development technology. “Australia leads the world in miningsoftware and now supplies 60 to 70 per cent of mining software world-wide” (ibid., 25). Australia’s unique geology calls for unique science;for example, World Geoscience, an Australian company, is a leader inthe development of airborne geophysical survey techniques. Indus-try leaders have put forward an ambitious technological vision knownas the “glass Earth project,” a complex of six new technologies that

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would allow analysts to peer into the top kilometer of the Earth’scrust to locate valuable mineral deposits. One executive stated: “Thediscovery of another Mt. Isa or Broken Hill—and we think they areout there—would lift us to fifth [place in the world]” (Cave 2001, 7).Yet many of the technologies coming out of Australia’s particular

Sources: Christopher J. Schmitz, World Non-Ferrous Metal Production and Prices, 1700–1976 (Totowa,NJ: Biblio Distribution Centre, 1979); and American Bureau of Metal Statistics, Non-Ferrous MetalYearbook, various years.

Figure 1. Australian Mine Production, Selected Minerals, 1844–1998

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geological conditions find applications in other parts of the worldand “Australian mining companies search the world for minerals,(with) the bigger Australian companies now spending 30–40 per centof their exploration budgets offshore” (Stoeckel 1999, 31).

The Development Potential of Minerals

Economists have known for some time that Harold Hotelling’s theo-retical prediction, that the scarcity and relative prices of nonrenew-able resources would rise inexorably over time, has not been borneout by the facts of history. Jeffrey Krautkraemer’s recent comprehen-sive survey of the evidence reaches the following conclusions:

For the most part, the implications of this basic Hotelling model havenot been consistent with empirical studies of nonrenewable resourceprices and in situ values. There has not been a persistent increase innonrenewable resource prices over the past 125 years. . . . Economicindicators of nonrenewable resource scarcity do not provide evidencethat nonrenewable resources are becoming significantly more scarce.Instead, they suggest that other factors of nonrenewable resource sup-ply, particularly the discovery of new deposits, technological progressin extraction technology, and the development of resource substitutes,have mitigated the scarcity effect of depleting existing deposits. (1998,2066, 2091)

But Krautkramer’s analysis, like virtually all economic writing onthis subject (see Tilton 2003), is conducted at the level of the entiremarket supply for a commodity, which is to say the world as a whole.Although this approach may be appropriate for testing the Hotellingthesis, these conclusions leave open the possibility that the specter ofdepletion has only been staved off at the global level—i.e., in largepart through the opening up of new or previously underexploredterritories. What has not been appreciated is that the process of ongo-ing renewal of nonrenewable resources has operated within individualcountries as well as across continents.

Table 1 displays average annual growth rates of mine productionfor eight major minerals in six relatively well-managed mineral-pro-



ducing nations. The strong positive growth rates for the world as awhole reinforce Krautkraemer’s point. But equally striking is the vig-orous production growth of nearly every mineral in nearly everycountry. The one notable exception (among the minerals displayedin Table 1) is lead mining, for which production has declined in theworld as a whole. This decline is presumably related to lead’s uniqueposition as a recyclable; two-thirds of consumption consists of scraprecovery, thus reducing demand for the newly mined mineral. For atrue mineral economic success story like Australia, however, produc-tion growth has continued for every one of the minerals on the list,lead included. For the group taken as a whole, it is remarkable thatproduction has expanded country by country across a twenty-yearperiod during which real minerals prices have drifted downward.

Many economists are aware of the global historical evidence butremain in the grip of the intuition that because minerals are nonre-newable, eventually they must grow scarcer—these forms of advanceserve only to “mitigate” the Hotelling forecast, so that “finite avail-ability . . . has not yet led to increasing economic scarcity of nonre-

Table 1

Average Annual Growth Rates of Mine Production for SelectedMineral-Country Pairs, 1978–2001 (percent)

Australia Brazil Canada Chile Peru Mexico World*

Bauxite 3.41 7.72 2.15Cobalt 5.30 6.43 –0.17Copper 5.77 16.89 –0.22 6.93 1.96 4.81 2.80Gold 14.04 4.45 5.14 9.49 16.39 9.02 2.43Lead 2.08 –6.32 –3.54 –0.67 1.83 –0.63 –1.20Nickel 3.03 8.93 1.69 2.56Silver 3.73 5.47 1.03 8.12 2.90 –7.85 2.60Zinc 4.17 2.98 –0.62 13.17 2.96 2.63 1.07

Sources: Non-Ferrous Metals Yearbooks (selected years from 1978 to 1998) and Minerals Yearbook(Washington, DC: U.S. Bureau of Mines, 2001).

*1978–2000.

Note: Growth rates are coefficients from a log-linear trend regression Brazilian copper productionin 1979 set equal to that of 1978 (100 metric tons).

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newable resources” (Krautkraemer 1998, 2103, emphasis added). Butif examples of successful country-specific mineral development areso numerous, the question arises whether common underlying pro-cesses in such countries may exist, and this possibility in turn leadsto reconsideration of the sustainability of nonrenewable resources asa base for economic development.

Certainly we are not qualified to make pronouncements about thegeographical distribution of minerals in the earth’s crust, much lesswithin particular countries. But a cursory reading of the geologicalliterature on mineral stocks convinces us that most geologists wouldnot be surprised by the patterns we have described. DeVerle P. Harris,for example, notes in a survey article that

ore deposits of a specific kind, e.g., massive sulfide copper, are createdfrom common crustal material by earth processes that are characteris-tic of that deposit type. Consequently, such deposits exhibit somecommon characteristics irrespective of where they occur, e.g., in theAfrican or North American continents. (1993, 1035)

Among these characteristics are deposit size, average grade,intradeposit grade variation, and depth to deposit. Mapping the sta-tistical properties of these distributions is now the object of sophisti-cated, large-scale computer modeling, such as the Minerals AvailabilitySystem (MAS) of the U.S. Bureau of Mines. The broad picture thatemerges from such investigations is that the underlying elasticitiesof mineral supply are very high with respect to any number of physi-cal and economic margins. The more that is learned about the effectsof deposit features on “discoverability,” with the information gainthat occurs from continued exploration within regions, the more itis evident that the potential for expansion of the resource base—theeconomically meaningful concept of mineral resource endowment—is vast if not unlimited.

From the standpoint of development policy, a crucial aspect of theprocess is the role of country-specific knowledge. Although the deepscientific bases for progress in minerals are undoubtedly global, it is inthe nature of geology that location-specific knowledge continues to be



important. Sometimes this has to do with unique features of the ter-rain, affecting the challenge of extraction. At other times, heterogene-ity in the mineral itself calls for country-specific investments in thetechnologies of manufacture and consumption. The petroleum indus-tries of Norway and Venezuela, respectively, provide examples of thesetwo possibilities. The development of the solvent extraction–electrowinnowing (SX-EW) process in the United States serves as an-other example of the potential benefits of country-specific knowledge.This technique revived American copper mining in the 1980s and 1990s,after it had been pronounced dead by observers in the mid-1980s, andis particularly suited to countries with substantial accumulated wastepiles of oxide copper minerals and stringent environmental regula-tions. More generally, in virtually all the countries we have examined,the public-good aspects of the infrastructure of geologic knowledgehave justified state-sponsored or subsidized exploration activities, of-ten with significant payoffs to provincial or national economies.

Conclusion

Contrary to long-entrenched intuition, “nonrenewables” can be pro-gressively extended through exploration, technological progress, andinvestments in appropriate knowledge. We suggest that such processesoperate within countries as well as for the world as a whole. The coun-tries we have reviewed are by no means representative, but they arefar from homogeneous, and together they refute the allegation thatresource-based development is “cursed.”

The resource-price escalation of the 1970s did indeed constitute anexogenous unanticipated windfall boom from the perspective of manyminerals-based economies. It is obvious in retrospect that those boomtimes were destined to end, and perhaps one can argue that eventhen, countries (and lenders) should have been more aware of theephemeral character of the boom and planned accordingly. Withoutdoubt, many countries made poor use of these one-time gains. Noth-ing in this paper offers any guarantees against corruption, rent-seek-ing, and mismanagement of mineral and other natural resources. But

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the experience of the 1970s stands in marked contrast to the 1990s,when mineral production steadily expanded through purposeful ex-ploration and ongoing advances in the technologies of search, extrac-tion, refining, and utilization; in other words, by a process of learning.It would be a major error to take the decade of the 1970s as the proto-type for minerals-based development.

What is at stake in this debate? The resource-curse hypothesis seemsanomalous as development economics, since on the surface it has noclear policy implication but stands as a wistful prophecy: Countriesafflicted with the “original sin” of resource endowments have poorgrowth prospects. The danger of such ostensibly neutral ruminations,however, is that in practice they may influence sectoral policies. Min-erals themselves are not to blame for problems of rent-seeking andcorruption. Instead, it is largely the manner in which policymakersand businesses view minerals that determines the outcome. If miner-als are conceived as fixed stocks, and mineral abundance as a “wind-fall” unconnected to past investment, then the problem becomes oneof divvying up the bounty rather than creating more bounty. Miner-als are not a curse at all in the sense of inevitability; the curse, whereit exists, is self-fulfilling.

Notes

1. Problems of agricultural development belong in a very different policy cat-egory, involving as they often do the employment of large portions of the popula-tion. In that case, human resource issues are at least as pressing as the naturalresource content of their economic activity. Renewable resources such as forestsalso raise distinct policy questions, though much of what we argue may apply tothese sectors as well.

2. In the eighteenth century, “mine” referred to an outcropping or deposit of amineral.

3. This section draws upon unpublished research by Ole Andreas Engen, OddEinar Olsen, and Martin Gjelsvik of the Rogaland Research Institute in Stavanger,Norway.

4. Ill-considered extrapolation of oil and other mineral revenues during the1970s was a pathology by no means unique to Venezuela. Osmel Manzano andRoberto Rigobon (2001) show that the Sachs-Warner natural resource variable (pri-mary exports divided by GDP, which they refer to as “resource abundance”) is highlycorrelated with the growth of debt in the 1970s. Manzano and Rigobon argue that



high resource prices led countries to borrow internationally, using their resourcereserves as collateral (perhaps implicitly) and leaving a debt overhang when thisasset bubble burst in the 1980s. They show that the debt-to-GDP ratio for 1981 fullyaccounts for the apparent adverse effect of natural resources on growth rates during1970–90.

For Further Reading

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Andersen, Svein. 1993. The Struggle over North Sea Oil and Gas. Oxford: Oxford Uni-versity Press.

Ascher, William. 1999. Why Governments Waste Natural Resources. Baltimore: JohnsHopkins University Press.

Australian Bureau of Mineral Resources, Geology, and Geophysics. 1951. The Aus-tralian Mineral Industry, vol. 4. Melbourne: Commonwealth of Australia.

Auty, Richard M. 2001. “The Political Economy of Resource-Driven Growth.” Euro-pean Economic Review 45: 839–946.

Bain, H.F., and T.T. Read. 1934. Ores and Industry in South America. New York: Harper.Blainey, Geoffrey. 1993. The Rush That Never Ended: A History of Australian Mining,

4th ed. Melbourne: Melbourne University Press.Cain, Louis P., and Donald G. Paterson. 1986. “Biased Technical Change, Scale and

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Culver, W.W., and C.J. Reinhart. 1989. “Capitalist Dreams: Chile’s Response to Nine-teenth Century World Copper Competition.” Comparative Studies in Societyand History 31: 722–44.

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———. 1995b. “Natural Resource Abundance and Economic Growth.” Revised. NBERWorking Paper 5398. National Bureau of Economic Research, Cambridge, MA.

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The Myth of the Resource Curse - Cafe Hayek

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