Media Briefings

Natural Resource Abundance Can Boost Economic Development: Evidence

  • Published Date: March 2011

Parts of the world that enjoy an abundance of natural resources need not find it a curse. Indeed, in the right circumstances, such riches can be harnessed to promote the long-term growth of the local economy. That is the central finding of research by Dr Guy Michaels, which looks at a century of development in the American South, comparing the experiences of counties that were blessed with an abundance of oil and those that were oil-poor.

His study, published in the March 2011 issue of the Economic Journal, finds that the higher wages paid by the oil industry (and its customers and suppliers) attracted people to the oil-rich counties and led to big investments in roads and airports. In turn, this transport infrastructure increased long-term productivity, not only in oil-related industries but also in the rest of the local economy, including agriculture and manufacturing.

These findings suggest that a rich endowment of natural resources can promote long-term local growth. If oil-rich areas elsewhere in the world have failed to develop, the failures are probably due to political rather than economic mechanisms, notably the absence of institutions to prevent politicians from embezzling or squandering the oil windfalls.

Distinguishing the effect of oil abundance from factors that affect general economic development – such as technology and institutions – is a difficult challenge in most settings. As a result, an examination of the long term effects of resource abundance has often proved elusive.

To shed light on this problem, Michaels examines a century of development in an area where the natural endowment of oil has by now been systematically mapped – the American South. This area is particularly interesting, since it remained largely agricultural and poor for a long time compared with the North of the United States, and the role of oil in its development has not been well understood.

In this study, Michaels finds that oil-rich counties in the American South were very similar to other counties in the region in 1890 (before oil was discovered in that part of the world), suggesting that differences in subsequent development between oil-rich and oil-poor counties were due to the discovery and extraction of oil.

After oil was discovered, wages (and income) in the oil-rich counties grew more rapidly, and remained higher throughout the twentieth century. These higher wages attracted many people to the oil-rich counties, raising their population by at least 50%.

This larger population was employed not only in oil extraction – Michaels finds that oil-rich counties also had a larger manufacturing sector and even a larger agricultural sector. This finding may come as a surprise since it is not immediately obvious why oil abundance should give a productivity advantage to firms that engage in activities far removed from oil extraction.

To help explain this puzzle, Michaels shows that by attracting more people, oil-rich counties were able to develop better transport infrastructure. In particular, oil-rich counties were about twice as likely to have an interstate highway or a local airport.

The productive advantage of this better infrastructure appears to have offset the higher costs of production in the oil-rich counties, which continued to have higher wages, higher housing prices and denser population even in 1990, when oil prices were low.

The findings of this research have a number of implications:

  • First, they suggest that abundant natural resources can be harnessed to promote local economic development. Higher wages paid by the oil industry (and other industries that supply it or are supplied by it) can attract population and lead to large-scale infrastructure investments, which can in turn increase long-term productivity not only in oil-related industries, but in the rest of the local economy as well. These local ‘linkages’ can help resource-rich areas to remain productive even when local prices are higher.
  • Second, the research suggests that if oil-rich areas in other parts of the world have failed to develop, these failures are probably due to political rather than economic mechanisms. Such failures could arise when weak institutions allow politicians to embezzle or squander oil windfalls. For example, in joint work with Francesco Caselli, Michaels find that oil-rich Brazilian municipalities failed to use the oil windfalls they received to improve locals’ living standards.
  • Finally, the study’s findings suggest that oil abundance facilitated economic development in the American South. It is true that the oil industry in the South developed later than in the North of the country, despite the South's greater oil abundance. But once it did, the oil industry helped the South to catch up with the North.


Notes for editors: ‘The Long-Term Consequences of Resource-Based Specialisation’ by Guy Michaels is published in the March 2011 issue of the Economic Journal.

Guy Michaels is at the Centre for Economic Performance at the London School of Economics.

For further information: contact Guy Michaels on 020-7852-3518 (email:; or Romesh Vaitilingam on +44-7768-661095 (email: