Britain is running out of oil. As this week’s Economist reminds us, production and reserves are now clearly falling.
There can be only one reaction to this – yippee. Natural resources are a curse, not a blessing. Just look at the countries with great oil reserves: Russia, Iraq, Saudi Arabia, Sudan, Nigeria. Ponder the prosperity of their ordinary citizens and the quality and honesty of their governments. Then look at Japan and Singapore, whose natural resources consist of little more than some pretty trees.
There are three reasons why natural resources are bad for economies.
- They cause a rise in the exchange rate, which hurts tradable goods sectors. This was the origin of the Dutch disease of the 1970s – when the discovery of natural gas hurt the economy. And it was a factor behind the UK’s deindustrialization of the early 1980s (though monetary policy as class war was a more important cause).
- They cause complacency. Governments have thought that oil wealth alone was sufficient for prosperity, and so have not fostered the institutions that promote growth. It’s well-known that young people who inherit wealth are generally useless squits, The same is true of countries.
- Big natural resources mean there are huge returns to controlling drilling or mining rights. This means there are huge incentives to fight for their ownership. At best, this leads to rent-seeking which, though productive to individuals in expected utility terms, is unproductive in aggregate. At worst, it can lead to corruption and civil war.
None of this means the transition to an oil-less economy will be painless. But the economics and history seem clear – natural resources are not much use to an economy.
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