Differences in natural resources

Published by Patrick Mutisya · 14 days ago

IGCSE Economics 0455 – Economic Development: Natural Resources

Economic Development – Differences in Natural Resources

Learning Objective

By the end of this lesson students should be able to:

  • Explain how the endowment of natural resources influences a country’s level of economic development.

  • Identify the advantages and disadvantages of abundant versus scarce natural resources.

  • Analyse real‑world examples of countries that have succeeded or struggled because of their resource base.

Key Concepts

  • Natural resources: Raw materials that are found in nature and can be used to produce goods and services (e.g., minerals, oil, arable land, water).

  • Resource abundance: A situation where a country possesses large quantities of valuable natural resources relative to its population.

  • Resource scarcity: Limited availability of natural resources, often requiring importation.

  • Resource curse (paradox of plenty): The tendency for resource‑rich countries to experience slower economic growth, poorer governance, or greater inequality.

How Natural Resources Affect Development

Natural resources can influence development through three main channels:

  1. Revenue generation: Export earnings from resources can finance public investment, education, and health.

  2. Industrial structure: Resource extraction can dominate the economy, limiting diversification into manufacturing and services.

  3. External vulnerability: Dependence on commodity prices makes the economy sensitive to global market fluctuations.

Comparative Table: Resource‑Rich vs. Resource‑Poor Countries

AspectResource‑Rich Country (e.g., Saudi Arabia)Resource‑Poor Country (e.g., Japan)
Primary natural resourcesOil, natural gasLimited mineral deposits; scarce arable land
Export composition90 %+ hydrocarbonsHigh‑tech goods, automobiles, machinery
Government revenue sourcePetroleum royalties & taxesCorporate taxes, value‑added tax, income tax
Typical growth driversCommodity price boomsInnovation, human capital, export‑oriented manufacturing
Vulnerability to external shocksHigh – price volatility of oilModerate – diversified export base
Common development challengesResource curse, rent‑seeking, limited diversificationResource scarcity, high import bills, need for technology acquisition

Advantages of Abundant Natural Resources

  • Potential for high export earnings.

  • Opportunity to fund large‑scale infrastructure projects.

  • Ability to attract foreign direct investment (FDI) in extraction industries.

Disadvantages of Abundant Natural Resources

  • Risk of “Dutch disease” – real‑exchange‑rate appreciation that harms other export sectors.

  • Possibility of weak institutions and corruption due to rent‑seeking.

  • Economic volatility linked to fluctuating commodity prices.

Advantages of Scarce Natural Resources

  • Incentive to develop human capital and technology‑intensive industries.

  • Greater focus on trade and integration into global value chains.

  • Often more diversified economies, reducing reliance on a single sector.

Disadvantages of Scarce Natural Resources

  • Higher cost of importing essential raw materials.

  • Potential trade deficits if export earnings are insufficient.

  • Vulnerability to global supply disruptions.

Case Studies

  1. Norway – Uses oil revenues to build a sovereign wealth fund, invests in education and health, and maintains strong institutions.

  2. Nigeria – Large oil reserves but experiences low per‑capita income, corruption, and limited industrial diversification.

  3. South Korea – Resource‑poor but achieved rapid development through export‑led manufacturing, heavy investment in R&D, and education.

  4. Chile – Copper‑rich; created a stabilization fund to smooth commodity price cycles and invested in social programs.

Key Economic Formulas

When analysing the impact of natural resources on GDP, the following identity is useful:

\$\text{GDP} = C + I + G + (X - M)\$

Where:

  • \$C\$ = Consumption

  • \$I\$ = Investment (including resource‑sector investment)

  • \$G\$ = Government spending (often funded by resource revenues)

  • \$X\$ = Exports (resource exports if abundant)

  • \$M\$ = Imports (higher for resource‑poor economies)

Suggested Diagram

Suggested diagram: A flow chart showing the channels through which natural resources affect economic development (Revenue → Investment → Growth; Resource Dependence → Vulnerability → Instability).

Discussion Questions

  • Why do some resource‑rich countries achieve high levels of development while others do not?

  • How can a resource‑poor country overcome its natural disadvantage?

  • What policies can mitigate the resource curse?

Summary

Natural resources are a double‑edged sword. Their presence can provide a powerful engine for growth if managed wisely, but they can also trap economies in low‑growth, high‑inequality cycles. Effective governance, diversification strategies, and investment in human capital are essential for turning natural endowments into sustainable development.