Resource Abundance and Economic Growth

It seems reasonable to assume that countries that have a lot of resources (oil, gold, diamonds, etc.) would experience high economic growth . Looking at the high oil prices today, not many people will deny that statement.

But for the past 30 to 40 years, economic growth for resource abundant countries have been slower compared to countries that do not even have any resources at all. For example, oil rich countries like Nigeria, Venezuela and Iran have all experienced negative growth rate from the 1980s to 2000. Yet, resource-scarce countries like the Asian Tigers (Hong Kong, Taiwan, South Korea and Singapore) have experienced rapid growth during that time period.

There are several reasons that have been proposed on why that happens.

• Dutch Disease Model. Basically a resource boom will cause labour to move from manufacturing to the booming resource sector. Sees a decline in manufacturing industries. Growth is reduced since manufacturing accounts for a large portion of R&D and growth.
• Education. Resource rich countries tend to allocate less funds to education.
  
• Corruption
• Failure to Diversify. The dependency on oil would make the economy very volatile.
• Distribution of Wealth. Only a small portion of the economy benefits from the resource boom.
  

Question time. Venezuela is one of the major oil producers in the world. But its growth is slow from 1970s to the 1990s. Does the lack of focus on education explains that lack of growth ? How ? There is no prizes for this, but I'm just trying to increase the amount of discussion here :)


By the way, thank you all for the valuable comments so far. It has been interesting to learn from all the different perspectives.

Diamond-Water Paradox part 2

Earlier I posted a question on why the value of diamond is so much higher than the value of water when water is more useful. I got some answers posted by the readers : scarcity, demand and supply. To some extent I do agree with those answers. Diamonds are more scarce than water which means they have a lower supply. Which explains its high value.

But the concept which truly explains this paradox is the concept of marginalism. The marginal utility derived from a product is the change in satisfaction gained as the quantity of the product changes. Applying this to the paradox. Diamond has very high value because the marginal utility is higher than water. And extra gram of diamond gives so much more satisfaction than an extra gram of water. Imagine haven a bit more water. It wouldn't have much or even any difference to your happiness.

That's it ! Do post your questions if you have any. :)

Diamond-water Paradox

They say that Diamond is a women's best friend. Yet, water which is so essential for life lacks that kind of valuation.

Why is this so ?

This is called the Diamond-water Paradox, which is set forth by Adam Smith in his book, The Wealth of Nations. He said :

"Nothing is more useful than water; but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it."

Adam Smith wasn't able to solve the paradox. But today the paradox has already been solved, leading to the discovery of one the most important theory in Economics.

Do you know what it was ? Give it a shot !