The resource drag

Between 1995 and 2001, Jeffrey Sachs and Andrew Warner published a series of influential empirical studies examining mining and energy’s role in economic growth. Their principal finding was that economies heavily dependent on extractive activity in 1971 grew more slowly than comparable non-extractive economies over the next 19 years. This result has been deemed ‘the resource curse’. The result is generally robust across differing country samples and across extended sample periods. Many have sought to explain the phenomenon, but without unified success. Sachs and Warner suggest that crowding out of a sector or activity with production externalities is the most likely explanation. This paper demonstrates that the relatively slower growth in mineral and energy economies may simply reflect a resource drag whereby optimally managed per capita resource production does not grow substantially over time and hence introduces a drag on the measured growth of per capita economic output. If the resource curse is indeed only a resource drag, this has implications for trade and industrial policies implemented on the presumption that there are growth-reducing market failures associated with mineral and energy production.