Sovereign Debt and the Resource Curse

In this book chapter, the authors argue that contrary to the general view shared among social science scientists until the eighties, resource wealth seems actually to impede the economic performance of many countries.

An extensive literature documents that resource wealth can be a curse rather than a blessing for many countries. Until the eighties, the general view among economists and political scientists was that a large endowment of natural resources has a positive impact on a country's development prospects. Yet, over the past forty years, casual observation and statistical studies indicate that natural resources often fail to deliver the expected economic benefits. On the contrary, resource wealth seems to impede the economic performance of many countries. Our research contributes to a better understanding of the curse of natural resources by focusing on international credit market imperfections and institutional failures within resource-rich economies. In particular, we wish to examine how excessive resource-based lending by external financial institutions can induce debt, default and regime change in autocratic developing countries. Moral hazard in the financial markets on the part of borrowers and lenders leading to excessive lending to sovereigns has been noted previously (Bulow 2002). The connection between inefficient lending, natural resources and political instability is less clear.