Effect of Natural Resources on Economic Growth

A simple form of the production function, which concentrated on labor and capital inputs, was used in the previous reading. The production function can be extended to include other factors of production, such as:

1. Human capital (H).
2. Raw materials (N).
3. Public capital \((K_p)\).
4. Technological know-how (A).
5. ICT Capital (\(K_{IT}\)).
6. Non-ICT capital (\(K_{NT}\)).

Therefore, the production function can be written mathematically as follows:

$$ Y= AF (N, L, H, K_{IT}, K_{NT}, K_p) $$

In this sub-reading, we discuss the effect of natural resources on economic growth.

Natural Resources

Natural resources include land, oil, and water.

Categories of Natural Resources

1. Renewable resources:

   These are resources that are rechargeable. Example, a forest.

2. Non-renewable resources:

   These are resources that are depleted after they have been used. Example, oil, and coal.

Limited Availability of Natural Resources and Economic Growth

Countries with enormous natural resources experience high economic growth. For instance, Australia has a high per capita income because of its immense natural resources. However, this argument is not always valid.

Economists agree that accessibility to natural resources is crucial to economic growth. However, possessing and producing natural resources is not required for a country to attain a high-income level. For example, Japan has experienced high economic growth despite its limited natural resources. Ironically, Nigeria has extensive oil reserves but experiences deplorable economic growth.

More interestingly, some countries suffer from having abundant resources. Two reasons can explain this:

1. They fail to come up with economical institutions to oversee economic growth.
2. Dutch disease. This is where high demand for natural resource exports is a country’s currency appreciation’s sole driver. Consequently, other parts of the economy, such as the manufacturing sector, become uncompetitive, making it shrink. Therefore, TFP is reduced, and hence, the reduction of total output.

Question

Country X has slow GDP growth, immense natural resources, and well-advanced economic institutions. The least likely factor for the current condition of GDP growth in this country is:

1. Improved manufacturing exports.
2. High level of natural resource exports.
3. A consistently strong currency.

Solution

The correct answer is A.

Since this country has many natural resources, developed economic institutions, and slow GDP growth, it must be suffering from Dutch disease. That is, the high demand for natural resource export solely drives the currency appreciation. Consequently, other parts of the economy, such as the manufacturing sector, become uncompetitive, making it shrink.

Reading 9: Economic Growth

LOS 9 (f) Explain how natural resources affect economic growth and evaluate the argument that limited availability of natural resources constrains economic growth.