Henry Ford's Model-T

Economic Growth: Natural Resource Curse

by Elaine Schwartz    •    May 5, 2013    •    687 Views

The natural resource curse can strike in surprising places.

But Detroit?

When economies blessed with commodity wealth fail to soar, the reason might be the natural resource curse. Single minded focus on one economic sector means unpreparedness when that sector falters. It means a less diversified economy that ignores its total potential. It means a costly infrastructure that will eventually become virtually useless.

In other words, channeling resources toward one industry can lead to “crowding out” others.

Also, the natural resource curse can involve political instability, volatile world markets and the impact of currency appreciation. Furthermore, comparing those stricken–Bolivia, Sudan, the Congo–to those who avoided it–Norway, Chile, Botswana–we can see that it is not inevitable.

But for now, let’s just stick with “crowding out” and return to Detroit.

If someone says Ford, Buick, Chevrolet, Dodge and Chrysler, don’t you think of car companies? Also though, they are last names of the amazing entrepreneurs who made the Detroit region thrive. With the auto as the growth engine, Detroit was a leading US city during the first half of the 20th century.

Now, Detroit is always near the top of distressed municipalities lists. With a jobs, transport and housing infrastructure based almost exclusively on the auto, Detroit responded catastrophically to globalization. Only 12% of Detroit’s adults have a college degree, much of their infrastructure is irrelevant, 1/3 of the city’s population lives below the poverty line (2011 stats) and April unemployment is close to 10%. Harvard economist Ed Glaeser says that the decline could have been lessened or avoided by targeting auto manufacture with less human and physical capital.

In other words, as with the traditional definition of the natural resource curse, a temporarily thriving economic sector monopolized land, labor and capital. Consequently, the region was unprepared for the inevitable changes that the future always brings.

Our bottom line? Debating resource or manufacturing development, many of the same ideas relate. We can consider crowding out, negative externalities, currency appreciation, civil institutions or depletion. Always though, economic growth is the bottom line.

Sources and Resources: Harvard economist Ed Glaeser conveys his analysis of Detroit in an hour long econtalk podcast and much more briefly for economix. For more on Detroit’s descent toward bankruptcy and the state’s takeover of its finances, this Reuter’s article provides the details. Then, to complete the picture, this superb  NBER working paper discusses the causes, likelihood, and prevalence of the natural resource curse and its connection to economic growth.

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