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September 29, 2010

Lifting the “Resource Curse”

Mineral wealth can build a nation or subvert it. Afghanistan might become a success story yet.

Geologists have discovered almost $1 trillion in untapped deposits of copper, gold, cobalt, and lithium in Afghanistan. Will Afghanistan’s newfound mineral wealth promote economic growth and political stability, or will it fuel yet more corruption and violent conflict while doing little to improve the lives of everyday Afghans?

There has been a lot of hand-wringing about this question, with many pundits predicting that Afghanistan will follow the examples of countries such as Nigeria and become a victim of the “resource curse.” There are reasons to be a bit more sanguine. Research that we’ve conducted on the histories of countries that have experienced oil and mineral booms since the nineteenth century suggests that roughly twice as many countries have been blessed by resource booms as cursed by them.

One common refrain among resource-curse adherents is that unless a country already has “good institutions” in place, a resource boom will lead to slow economic growth, civil war, and authoritarianism. According to this argument, countries like the United States, Canada, and Norway are unreliable guides about what will happen in Afghanistan.

Afghanistan’s mineral wealth won’t transform the regime of Hamid Karzai into a model of good governance overnight.

There may be some truth to that claim. Yet there are countries that had “bad institutions” and then became prosperous democracies during a resource boom. Trinidad and Tobago, for example, was populated in the nineteenth century by indentured Indian and Chinese laborers who toiled in a kind of quasi-slavery on the islands’ sugar plantations and were subject to apartheid-like laws. The growth of its middle class, and its democracy, was fueled by the subsequent discovery of oil and gas. Australia was set up as a penal colony, but it became democratic when it filled up with settlers attracted by its gold and copper wealth.

This is not to say that Afghanistan’s mineral wealth will transform the regime of Hamid Karzai into a model of good governance overnight. Nor does it mean that the Afghan economy, among the world’s poorest, will suddenly begin to grow at a breakneck pace. Afghanistan faces a host of problems. The country is landlocked and mountainous. The population is poorly educated and the central government virtually nonexistent. And the society is organized on the basis of tribes headed by venal warlords.

Nevertheless, other countries have confronted geographic and institutional constraints and have managed to overcome them precisely because they were able to leverage their natural-resources endowments.

Until its late nineteenth-century oil and mineral boom, Mexico was not much different from Afghanistan. Foreign investors stayed away; the only roads were footpaths that dated from the sixteenth century; the overwhelming majority of the population were illiterate; the central government was perpetually bankrupt; and warlords ran the areas outside Mexico City as virtual fiefdoms.

The Mexican state was in fact so weak that it had seventy-five presidents during the fifty-five years from 1821 to 1876. One strongman served as president eleven separate times.

Mexico’s second natural-resources boom—oil—from the late 1970s to the present accompanied the creation of a multiparty democracy.

Mexico’s first natural-resources boom (minerals and oil) from the 1880s to the 1920s did not produce a democracy, but it did produce a stable political system and a fast-growing economy. Mexico’s second natural-resources boom (oil) from the late 1970s to the present accompanied the creation of a multiparty democracy. In fact, the democratically elected governments of Vicente Fox, from 2000–2006, and Felipe Calderón, beginning in 2006, have financed their ambitious antipoverty (and antinarcotics) programs through petroleum taxes.

Afghanistan’s potentially vast mineral resources are no guarantee of democracy and prosperity. But nor do they condemn the country to eternal corruption, poverty, and war.


Stephen Haber, Peter and Helen Bing Senior Fellow at the Hoover Institution and A.A. and Jeanne Welch Milligan Professor in the School of Humanities and Sciences at Stanford University, is also professor of political science, history, and (by courtesy) economics at Stanford. He has been awarded every teaching prize at Stanford, including the Walter J. Gores Award for distinguished teaching. His research examines political institutions and economic policies that “hold up” innovation. His current research examines the creation of regulatory barriers to entry in finance, the economic and political consequences of hold up problems created by different systems of agricultural production, and the comparative development of patent systems. Haber’s most recent book, Fragile by Design (with Charles Calomiris), examines how governments and industry incumbents often craft banking regulatory policies in ways that stifle competition and increase systemic risk.


Victor Menaldo was a W. Glenn Campbell and Rita Ricardo-Campbell National Fellow at the Hoover Institution for 2009–2010 at the Hoover Institution.


Reprinted by permission of the Wall Street Journal. ©2010 Dow Jones & Co. All rights reserved.

Available from the Hoover Press is Crony Capitalism and Economic Growth in Latin America: Theory and Evidence, edited by Stephen Haber. To order, call 800.935.2882 or visit www.hooverpress.org.