Page 1 of 8
International Journal of Research
Available at https://edupediapublications.org/journals
e-ISSN: 2348-6848
p-ISSN: 2348-795X
Volume 04 Issue 11
October 2017
Available online: https://edupediapublications.org/journals/index.php/IJR/ P a g e | 13
Natural Resource Abundance and Economic Growth: A
Case Study of Pakistan
Hani Fatima,Fatima Jinnah Women University Rawalpindi,Pakistan
Zainulabiden Malik, Shaanxi Normal University, Xian, China
hani-fatima1@hotmail.com
zainulabidenmalik786@gmail.com
ABSTRACT
Natural resources, including both renewable and nonrenewable when being abundant are
generally considered to have a positive relation with a county’s economic growth. This paper
examines the effects of natural resource abundance on economic growth. It measures the
trend that resource-poor areas are better off than resource-rich areas. The story behind the
effect of natural resources on economic growth is a complex one, which typical growth
regressions do not capture well. Mostly evidence suggests that resource abundance has a
negative effect on economic growth of any country. This study will help us to explain why the
above mentioned negative relationship between natural resources and economic growth
exists and how this negativity can be controlled.
KEY WORDS:Economic growth,Natural resources,Relation
INTRODUCTION
Natural capital is one of the important
pillars of good economic performance and
development. It has been strongly believed
from the time of Adam Smith and David
Ricardo that the countries endowed with
natural resources have an edge over
countries that are not. Natural resource
endowments can help countries to grow
and diversify. Natural capital is considered
an important source of wealth around the
world but some studies found that
abundance of natural capital is neither
necessary nor sufficient for prosperity
and economic development. The
experience shows that natural resources
played minor role in the development of
the countries like United States and
United Kingdom. Most of the Western
European countries have few natural
resources but developed on the basis of
manufacturing and services . Another
example of the experience of Asian
economies called Asian tigers that do not
possess natural resource endowments. It
can also be clearly observed that the
countries enriched with natural capital
could not sustain their economic growth.
Natural resources seem to have been more
Page 2 of 8
International Journal of Research
Available at https://edupediapublications.org/journals
e-ISSN: 2348-6848
p-ISSN: 2348-795X
Volume 04 Issue 11
October 2017
Available online: https://edupediapublications.org/journals/index.php/IJR/ P a g e | 14
of a curse than a blessing for many
countries. Numerous researchers have
supported the view that resource-poor
countries often outperform resource-rich
countries in economic growth. Typical
examples include the Netherlands versus
Spain in the 17th century, and Switzerland
and Japan versus Russia in the 19th and
20th centuries. Natural resources serve as
important capital in economic
development. In principle, revenues
generated from the natural resource sector
should be good for the economy.
However, many resource-rich countries
have worse economic performance than
their resource-poor counterparts, a
phenomenon known as the “resource
curse”.
The idea that natural resources
might be more of an economic curse than a
blessing began to emerge in the 1980s. In
this light, the term resource curse thesis
was first used by Richard Auty in 1993 to
describe how countries rich in natural
resources were unable to use that wealth to
boost their economies and how, counter- intuitively, these countries had lower
economic growth than countries without
an abundance of natural resources.
Pakistan is situated in a region
where bulk of natural resources is found in
its surroundings. Pakistan is one of those
countries which are endowed by the
natural resources. In spite of the
presence of vast natural resources,
Pakistan could not make significant
achievements to improve the exports
related to natural resources. Point-source
type natural resource endowment does
retard democratic and institutional
development, which in turn hampers
economic growth. Institutions and
institutional functioning are the crucial
link between resource endowments,
geography and policies, on the one hand
and economic outcomes on the other hand.
In Pakistan there is no optimal allocation
of natural resources due to improper
polices natural resources wasted to a large
extent. Natural resources are related to
agriculture and mining and these both
sectors are of primary nature which
includes raw material which generates
little amount of foreign exchange earnings
and if natural resources will utilizes
properly they help in generating a huge
foreign exchange in the country.
Hypothesis:
Ho: There is a negative impact of resource
abundance on economic growth.
H1: There is not a negative impact of
resource abundance and economic growth.
H2: There may exist a negative or a
positive impact of resource abundance on
economic
growth.
LITERATURE REVIEW
The natural resource abundance
and economic growth is addressed in the
light of literature. An important number of
both theoretical and empirical studies have
tried to explain why natural resources are a
“curse” rather than a “blessing” for
economic development.
Theoretical Framework
Natural resources are a fixed factor
of production and hence, almost by
definition, impose a restriction on
economic growth potential. Dependence
on natural resources affects current
institutions as well as macroeconomic
outcomes (Gylfason and Zoega n.d).
According to them natural resources cause
a growing labor force and a growing stock
of capital to run into diminishing returns.
Moreover, huge natural resource rents may
create opportunities for rent-seeking
behavior on a large scale on the part of
producers, thus diverting resources away
from more socially fruitful economic
activity.
Matsuyama (1992) derives a formal
model of what is called the “linkages
approach” to the analysis of the role of
natural resources for growth. He
investigates the role of agriculture in a
model in which manufacturing is
characterized by learning-by-doing. He
concludes that forces that push the
economy away from manufacturing and
towards agriculture lower the growth rate
Page 3 of 8
International Journal of Research
Available at https://edupediapublications.org/journals
e-ISSN: 2348-6848
p-ISSN: 2348-795X
Volume 04 Issue 11
October 2017
Available online: https://edupediapublications.org/journals/index.php/IJR/ P a g e | 15
of the economy, by reducing learning- induced growth of manufacturing. Since
the learning effects are external to the firm,
market equilibrium is not efficient.
Sachs and Warner (1995)
generalize Matsuyama's model using the
framework of the “Dutch disease” model.
In the Dutch disease model, named after
the disappointing economic experience of
the Netherlands (and the U.K.) following
the discovery of North Sea oil in the
1970s, the economy has three sectors: a
tradable natural resource sector, a tradable
(non-resource) sector, and a non-traded
sector. The greater the natural resource
endowment, the higher is the demand for
non-tradable goods, and consequently, the
smaller will be the allocation of labor and
capital to the manufacturing sector. This
“Dutch disease” is an actual problem for
the economy if there is something special
about the sources of growth in
manufacturing, such as the learning by
doing stressed by Matsuyama.
Many countries in the world
depend heavily on natural resource
endowments and usually suffer from a
high degree of macroeconomic instability
which in turn might have negative
implications for their GDP per capita
growth. It may reduce saving, investment
and growth, as well as lowering the level
of output per capita in the long run.
Countless studies document the correlation
between abundant mineral resources and a
series of negative economic and political
outcomes, including poor economic
performance, unbalanced growth, weakly
institutionalized states, and authoritarian
regimes across the developing world.
Empirical framework
Empirical work in this area has
suffered from data limitations. Data on
past natural resource is often unreliable,
especially in historically poor and less
developed countries.
Firstly, Sachs and Warner (1995a)
made a major contribution when they
found a negative association between
natural resource abundance and growth in
a large cross-country study and a
substantial number of papers have since
considered the natural resource curse
hypothesis from different points of view.
They also show that economies with a high
ratio of natural resource exports to GDP in
1971 tended to have low growth rates
during the subsequent period 1971-89.
This negative relationship holds true after
controlling for variables found to be
important to economic growth, such as
initial per capita income, trade policy,
government efficiency, and investment
rates. The consequences of the Sachs and
Warner paper for economic development
are far reaching. They concluded that “one
of the surprising features of modern
economic growth is that economies
abundant in natural resources have tended
to grow slower than economies without
substantial natural resources.”
Ding and Field (2005) used single- equation model to explain growth and
found the negative impact of resource
endowment but a significant positive effect
of natural resource endowment. They
explored two more complete models to
sort out these effects. A two-equation
model in which resource dependence is
first determined by resource endowment
and other factors, and then applied
recursively in a growth equation. The
impact of natural resource endowments
and resource dependence are still
significant in the growth equation, but
their impact is substantially smaller than in
the single-equation model. They then used
a three-equation model, in which human
capital is linked recursively through its
impacts on resource dependence. In this
model they found that the impacts of
natural resources on growth have
disappeared.
Norman (2008) examines the
„resource curse‟ using new data on historic
resource stocks and an improved
econometric methodology. He
distinguishes between resource abundance
(stocks) and extractive intensity (flows),
focusing on relationships between
resources and rule of law. Previously
unavailable information on past resource
