Diamonds are Forever - The Resource Curse
I'm posting a 14-part series of mini-essays on diamonds (but really about the economic point of view). Here's part 14, the conclusion.
The Resource Curse
Some economists have made the counterintuitive case that a nation apparently blessed with an abundance of natural resources is actually cursed.
The so-called resource curse says that conflict over a country’s valuable resources mires it in endless rent-seeking, extortion, bribery, nationalization, and even outright violent contestation.
While all these outcomes are possible in a world of rich natural resource endowments, the divergent paths of two of the world’s leading diamond exporters—Botswana and the Democratic Republic of the Congo—demonstrate that the resource curse is anything but deterministic.
Over the last few decades, the landlocked Botswana has become one of Africa’s success stories. Meanwhile, the Congo remains mired in civil war and grinding poverty. GDP per capita is about ten times higher in Botswana relative to the Congo.
The presence or absence of natural resources is never the ultimate cause of economic development.
Underlying all other proximate causes of development are institutions, the formal and informal rules of the game that structure economic interactions. Dramatically oversimplifying, Botswana more closely approximates an ideal of secure private property rights, low taxes, liberalized trade, sound money, and the rule of law.
The Congo is anything but.
Within the context of the right institutional infrastructure, large diamond deposits—or any other natural resource—will not doom a country to endless infighting. Saudi Arabia and Australia are two good examples: both resource-rich, both prosperous, both free of violent, internal conflict. Counterexamples are readily available, but this only reinforces my point that institutions are the ultimate cause.
Of course, the story of how to get and keep “good” institutions is far more complicated. Yet, the resource curse is a good jumping off point for a discussion of institutional origins, function, and evolution.
These topics don’t exhaust the economic lessons that the tiny, glorious diamond illuminates.
A course with time to spare might explore how workers’ compensation in diamond mines influences their wages, the impact of tort law on investments in mining safety and pollution control, or the rates at which entrepreneurs deplete their mines.
But suppose someone said I couldn’t use diamonds for my illustrations.
What then?
I’d go with the tennis ball—but that’s a story for another day.