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Rule of law, property rights, and open markets needed for developing nations to avoid "resource curse"

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Release Date: July 9, 2009

TORONTO, ON-Countries rich in natural resources need sound economic institutions such as rule of law, property rights, open markets, and an independent judiciary in order to grow their economies and avoid the "resource curse," concludes a new study from independent research organization the Fraser Institute.

In recent years debate has flared over whether an abundance of natural resources, such as minerals and metals, oil, agricultural resources and so on, stimulates economic growth or acts as a hindrance to growth, a concept known as the "curse" of natural resources. Proponents of the idea of a "resource curse" point to nations such as oil-rich Nigeria and Venezuela and diamond-rich Sierra Leone, which experienced lower, and at times negative, rates of economic growth compared to nations that lack natural resources. As more developing nations seek to utilize natural resource revenues to expand their economy, the debate has intensified.

"There's no doubt that the economies of some countries have floundered despite being rich in natural resources, but by no means does that indicate all or even many resource-rich nations are doomed to failure," said Fred McMahon, Fraser Institute director of trade and globalization studies and editor of a new Institute series of studies on the resource curse.

"Research from many different sources shows that nations with strong institutions - the rule of law, open markets, and limited government power - benefit from natural resources, while those with weak institutions may in fact suffer from the 'resource curse'."

In Institutions, Economic Growth and the 'Curse' of Natural Resources, author Amela Karabegovic examines the full range of research on the resource curse and finds that much of the early research neglected the role of economic institutions. She points out that nations with good economic institutions are more capable of managing the revenue from natural resources and decreasing, if not eliminating, the adverse economic and political consequence of a resource boom.

When sound institutions are absent, funds coming from natural resources can deepen corruption, lead to conflict, and strengthen the concentration of power of the ruling elite who, directly or indirectly, manage these funds, instead of stabilizing a country's budget and sparking economic growth.

"Nations with sound and well-developed institutions typically find that natural resources boost economic growth, whereas nations with weak institutions appear to have turned their natural resources into a curse," McMahon said.

"National leaders in developing nations seeking to build a strong economy would be wise to focus on building sound economic institutions-rule of law, property rights, an independent judiciary and impartial judges, and limitations on government power. These will increase prosperity and help their country avoid a self-imposed curse of natural resources," McMahon said.



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