The Theory of the Natural Resource Curse: A Political Economy View

Abstract

This study revisits the conditionality of the natural resource curse using ethnic polarization as the center of analysis. It argues that the resource curse is triggered in ethnically polarized societies when productive resources are reallocated toward rent-seeking activities. The study builds a theoretical model in a general equilibrium setting to explain how the elite expropriate natural resource rents in the economy. The elite decision problem comprises (i) the decision to become an elite actor through a marginal benefit–cost analysis, followed by (ii) a decision concerning the optimal level of rent. The results show how ethnically polarized societies become trapped in a high-corruption equilibrium when the returns from rent seeking are raised. Conversely, in ethnically homogenous societies, a low equilibrium acts as a conduit for a lower concentration of political power.