The resources stimulates the economy through diversification;The resources stimulates the economy through diversification;

The hypothesis of the
“resource-curse” was first advanced by Prebisch and Singer (1950). Their
explanation relied on the idea that prices for primary goods have a tendency to
decline relative to that of manufactured goods. The two scholars have linked
this trend to the progress in technology, which puts at a disadvantage
countries relying on the production of primary goods. In 1970, primary
commodities represented more than 80 percent of the developing world’s
exportations. This figure dropped to 34.2 percent in 1993.

 

Although statistics seems to
consolidate the thesis put forwards by Prebisch and Singer, the relationship
proves to be more sophisticated than suggested by the two scholars. Innis
(1954) put forward the “staple theory of economic development” suggesting that
countries through their importation of primary goods have managed to develop a
fully integrated economy; such was the case of Canada.  Whether the resource sector impacts the
economy positively or negatively depends on the linkages that tie the primary
sector to the rest of the economy. The abundance of resources stimulates the
economy through diversification; either through a backward or forward linkages.
The former refers to the development of industries that supply the inputs used
in the exploitation of natural resources. On the other hand, “forward linkages”
designates the economic relationship between the sector of natural resources
and the sector that processes the staples prior to their exportation. If the
linkages between the different sectors of the economy are sound, the economy
diversifies and becomes immune to the resource-curse. Otherwise, the economy
falls into the “Staple trap”, a case in which the natural resource sector is
weakly or not connected to other sectors in the economy. In this case and
consistently with the “Staple trap theory”, the economy becomes vulnerable to
negative shocks in the prices of primary goods.

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Although the Staple Trap Theory
is valid on the theoretical dimension, it presents some limitations as it does
not take into account the macroeconomic and political aspect to explain the
resource curse. On the macroeconomic level, the academic consensus invokes the “Dutch
Disease” to explain the resource curse