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Abstract
Oil, minerals, and agricultural resources can bring great riches to those who possess them. Yet countries that are abundantly endowed with such natural resources often encounter pitfalls that interfere with the expected superior economic performance. Possibly undesirable side effects include reallocation of production away from the manufacturing sector. The crowding out of manufacturing comes not just via expansion of the natural resource sector itself, but also via expansion of the government and nontraded goods sectors. The artificial inflation of these sectors in turn comes via relative prices (real appreciation of the currency), government spending, or both. One interpretation is that this phenomenon is cyclical, with the effects reversed when commodity boom turns to commodity bust. Another interpretation is that it can be permanent—countries endowed with natural resources more often develop social structures in which autocratic or corrupt political elites finance themselves through physical control of the natural resources. Meanwhile, those governments that lack these endowments have no choice but to develop decentralized, democratic, and diversified economies with market incentives that are more conducive to the development of manufacturing.
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