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Abstract
Since the 1950s and until recently, economists have argued that countries with a comparative advantage in production based on their natural resources would suffer from declining terms of trade. The price of raw materials relative to industrial goods would decline over time, according to the argument, making specialization in natural-resource-based production unattractive. Paradoxically, recently economists have argued that specialization in natural resources is unattractive for exactly the opposite reason: such specialization is so economically beneficial that in fact it may turn into a curse. Led by Sachs and Warner (1995, 1997), many have argued that on average, resource-abundant countries have slower growth than resource-poor countries. But asking what the average effect of oil is in Norway and Nigeria, or the average effect of diamonds in Botswana and Sierra Leone, might not be the most interesting or most relevant question. Rather than the average, it is more important to understand the variation. Why has oil induced prosperity in some countries but stagnation in others? In this chapter, I argue that the main reason for this is that different political incentives map into different political outcomes.
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