Natural Resources, Incentives and Human Capital: Reinterpreting the Curse

We offer an alternative mechanism for the curse of natural resources. In this mechanism, natural resource rents, when distributed as lump sum transfers to individuals, retard economic growth by their distortive adverse effect on the incentive to invest in human capital. Extending an OLG model for this purpose, we show that if this resource-transfer effect occurs when the country’s technology level is marginal, the chance that the country will converge to a low-level equilibrium trap is greatly increased and the chance that it will converge to a high-income equilibrium in the long run is similarly reduced. We find empirical support for the model in both cross sectional and dynamic panel regressions.