Differences in natural resources

Economic Development – Differences in Natural Resources (IGCSE Economics 0455)

Learning Objectives

• Explain how a country’s endowment of natural resources influences its 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.
• Use key economic indicators (real GDP per head, HDI, GNI per head) to compare living standards.
• Evaluate the resource‑curse and Dutch‑disease concepts and suggest policies to mitigate them.
• Link natural‑resource endowments to the macro‑economic aims (growth, full employment, price stability, external balance) and to environmental sustainability.

Key Definitions (AO‑1)

• Natural resources: Raw materials found in nature that can be used to produce goods and services (e.g., minerals, oil, arable land, water).
• Resource abundance: Large quantities of valuable natural resources relative to a country’s population.
• Resource scarcity: Limited domestic availability of natural resources; the country must import them.
• Resource curse (paradox of plenty): The tendency for resource‑rich countries to experience slower growth, poorer governance or greater inequality.
• Dutch disease: Real‑exchange‑rate appreciation caused by a resource boom that harms other export sectors.
• Living‑standard indicators:

  • Real GDP per head – average economic output per person, adjusted for inflation.
  • Human Development Index (HDI) – composite of life expectancy, education and GNI per head.
  • GNI per head – gross national income divided by population; includes net income from abroad.

• Macro‑economic aims: Sustainable economic growth, full employment, price stability and a balanced external sector.
• Environmental sustainability: Managing natural‑resource use so that economic development does not degrade ecosystems or deplete resources for future generations.

Living Standards (5.1)

Living‑standard indicators help us compare how well people in different countries are doing.

• Purpose: Show the real well‑being of a population beyond simple output figures.
• Conversion example: Nominal GDP pc = $25 000 (2023). Inflation since base year = 10 %.
  

  Real GDP pc = Nominal GDP pc ÷ (1 + inflation) = \$25 000 ÷ 1.10 ≈ \$22 727.

• Higher real GDP pc, HDI and GNI pc generally indicate higher living standards, but distribution (inequality) and non‑economic factors (health, education) also matter.

Poverty (5.2)

• Absolute poverty: Living on less than a set threshold (e.g., $1.90 a day).
• Relative poverty: Being significantly worse off than the average standard of living in a society.
• Link to resources: Resource‑rich countries can still have high absolute poverty if revenues are mis‑managed (e.g., Nigeria). Conversely, resource‑poor countries may achieve low poverty through inclusive growth and social‑welfare programmes financed by taxes on diversified exports (e.g., South Korea).
• Policy connection: Social‑welfare spending, public‑health programmes, and education funded by resource revenues can reduce poverty.

Population (5.3)

• Key variables: Birth rate, death rate, net migration, age structure.
• Interaction with resources:

  • Resource‑rich, low‑population countries (e.g., Saudi Arabia) often have a high dependency ratio and rely heavily on expatriate labour.
  • Resource‑poor, high‑population economies (e.g., Bangladesh) need labour‑intensive manufacturing to absorb workers.

• Optimum population: The size at which a country can provide a decent standard of living for all citizens without overstretching resources.

Why Natural Resources Matter for Development (AO‑2)

Resources affect development through three inter‑related channels, each of which links to the macro‑economic aims.

1. Revenue generation: Export earnings can finance public investment, health, and education → promotes growth and full employment.
2. Industrial structure: A dominant extractive sector may crowd out manufacturing and services → can hinder diversification, affect price stability (through commodity‑price volatility) and the external balance.
3. External vulnerability: Dependence on a single commodity makes the economy sensitive to global price shocks → threatens external balance and can cause exchange‑rate fluctuations (Dutch disease).

Comparative Overview: Resource‑Rich vs. Resource‑Poor Countries (5.4)

Advantages & Disadvantages (AO‑2)

Abundant Natural Resources

• Advantages

  • High export earnings → rapid capital accumulation.
  • Funding for large‑scale infrastructure (roads, hospitals, schools).
  • Attracts foreign direct investment in extraction and related services.
  • Potential to build a sovereign‑wealth fund for future generations.

• Disadvantages

  • Risk of Dutch disease – real‑exchange‑rate appreciation harms non‑resource exports.
  • Rent‑seeking and corruption can weaken institutions (resource curse).
  • Economic volatility linked to fluctuating commodity prices.
  • Possible neglect of human‑capital development and environmental degradation.

Scarce Natural Resources

• Advantages

  • Incentive to develop human capital and technology‑intensive industries.
  • Greater focus on trade, integration into global value chains, and export diversification.
  • Often more resilient to commodity‑price shocks.
  • Pressure to adopt environmentally‑friendly production methods.

• Disadvantages

  • Higher cost of importing essential raw materials.
  • Potential trade deficits if export earnings are insufficient.
  • Vulnerability to global supply disruptions (e.g., energy crises).
  • Need for continuous innovation to stay competitive.

Key Economic Formula (AO‑2)

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

• C – Consumption
• I – Investment (including resource‑sector investment)
• G – Government spending (often financed by resource revenues)
• X – Exports (resource exports if abundant; manufactured goods if scarce)
• M – Imports (higher for resource‑poor economies)

Link to Globalisation & International Trade (6.1‑6.4)

• Natural‑resource endowments shape a country’s comparative advantage → specialisation in either extractives or high‑tech manufacturing.
• Export‑oriented resource‑rich economies may run a current‑account surplus during commodity booms but can swing to deficits when prices fall.
• Resource‑poor, export‑driven economies rely on open markets, trade agreements and foreign‑exchange stability.
• FX diagram note: A resource boom shifts the demand for the domestic currency rightward, causing real‑exchange‑rate appreciation (Dutch disease). Sterilisation or sovereign‑wealth‑fund withdrawals can shift the curve back.

Environmental & Sustainability Note (AO‑2)

• Extractive activities can cause deforestation, water pollution, soil erosion and greenhouse‑gas emissions.
• Sustainable‑revenue management links to the UN Sustainable Development Goals (e.g., SDG 7 – affordable clean energy, SDG 13 – climate action).
• Policy tools:

  • Environmental taxes or royalties earmarked for rehabilitation.
  • Strict licensing and monitoring of mining operations.
  • Investment of a portion of resource revenues in renewable‑energy projects.

Case Studies (AO‑3 – application and analysis)

1. Norway – Oil wealth managed through the Government Pension Fund Global; high HDI, low inequality, strong institutions; avoids Dutch disease through fiscal rules.
2. Nigeria – Large oil reserves but low per‑capita income, high corruption, limited diversification; classic resource‑curse example.
3. South Korea – Resource‑poor; achieved rapid development via export‑led manufacturing, heavy investment in education and R&D; low external vulnerability.
4. Chile – Copper‑rich; created a stabilization fund to smooth price cycles and used revenues for social programmes and education.
5. Botswana – Diamond endowment managed through prudent fiscal policy and investment in health/education; avoided many resource‑curse pitfalls.

Policies to Mitigate the Resource Curse (AO‑3)

• Fiscal rules & sovereign‑wealth funds – Save a portion of export earnings for future generations (e.g., Norway, Chile).
• Transparent revenue management – Publish budgets, conduct independent audits, involve civil society.
• Economic diversification – Promote manufacturing, services and agriculture through tax incentives, infrastructure and skill‑development programmes.
• Strengthen institutions – Enforce anti‑corruption laws, ensure an independent judiciary, protect property rights.
• Human‑capital investment – Allocate resource revenues to education, health, vocational training and research.
• Exchange‑rate management – Use sterilisation, sovereign‑wealth‑fund withdrawals or macro‑prudential tools to limit real‑exchange‑rate appreciation.
• Environmental safeguards – Impose royalties for ecosystem restoration, adopt green‑technology standards, and integrate SDGs into fiscal planning.

Suggested Diagrams (AO‑2)

• Channel Flowchart – Shows how natural‑resource revenue → government spending → investment → economic growth; and how resource dependence → price volatility → external vulnerability → macro‑economic instability.
• Production‑Possibility Frontier (PPF) – Illustrates a “resource‑rich” economy (point far out on the resource axis) versus a “resource‑poor” economy (point far out on the manufacturing axis).
• FX/Dutch‑Disease Diagram – Demand for domestic currency shifts right after a resource boom, causing real‑exchange‑rate appreciation; shows sterilisation policy as a leftward shift.
• HDI Comparison Bar Chart – Plots HDI scores of a resource‑rich and a resource‑poor country to visualise living‑standard differences.
• Trade‑Openness Pie Charts – Compare the share of exports + imports in GDP for resource‑rich vs. resource‑poor economies.

Discussion Questions (AO‑3)

1. Why do some resource‑rich countries (e.g., Norway) achieve high development while others (e.g., Nigeria) do not?
2. How can a resource‑poor country turn its scarcity into a development advantage?
3. What specific policies would you recommend to a country experiencing Dutch disease?
4. Evaluate the role of human capital in reducing reliance on natural resources.
5. Discuss the ethical considerations of using a sovereign‑wealth fund to support current consumption versus saving for future generations.
6. How can environmental sustainability be integrated into the management of natural‑resource revenues?

Summary

Natural resources are a double‑edged sword. When managed wisely—through transparent fiscal policy, investment in human capital, diversification, strong institutions and environmental safeguards—resource abundance can accelerate development, raise living standards and help achieve the macro‑economic aims. Without such governance, the resource curse, Dutch disease and environmental degradation can impede growth, increase poverty and destabilise the economy. Resource‑poor economies, while facing higher import costs, often develop innovative, export‑oriented industries that foster sustainable, inclusive growth. Effective governance and strategic use of any natural endowment are therefore essential for long‑term, inclusive development.