The resource curse theory is a theory in economics which, simply put, suggests that nations which have rich, yet finite, natural resources may fail to develop in other sectors, ultimately bringing about financial problems. There is some argument as to how much of a role the resource curse theory plays in economic development, with many economists pointing to African nations as an excellent example of the myriad paths which developing nations can take. As with other economic theories, it helps to remember that this idea is only a theory, and not a law which is fixed in stone.
Several factors come into play in the resource curse theory. The first is fairly obvious. If a country has a large supply of a natural resource like timber, the temptation is to sink all energy and resources into development of the timber industry, at the cost of other industries. This causes a series of chain reactions which can impede or even stall economic development.
In the example above, a nation which sinks all of its energies into timber development might run into serious problems if timber prices fell radically. By investing heavily in one resource, a country or region puts itself at risk of developing a very volatile market. A focus on extraction can also prevent a company from making money with finished and refined products; for example, exporting all your teak cuts you out of the market for teak furniture, teak oil, teak decking, and other teak products, thereby hurting the economy.
Under the idea of the resource curse theory, a country will also fail to develop infrastructure and other industries, instead focusing on a handful of industries as cash cows. Often, the wealth becomes concentrated in the hands of the few, sitting up fierce inequality which can become a serious social problem. By failing to develop a more diverse economy, a country is also forced to rely on other nations for a wide variety of goods and services, and it may in fact end up with a net loss at the end of the year.
In a way, the resource curse theory is a paradox of plenty; despite the fact that a country may seem well-established with abundant natural resources, it can in fact be very fragile. The abundance of resources can cripple a country, by encouraging very isolated investment and development while ignoring the need for diversity. When the market for a product declines, or the resource is exhausted, the results can be economically devastating.
Economists believe that fighting the resource curse theory is as simple as encouraging balanced, diverse investment and development. If a country has rich oil resources, for example, in addition to extracting and refining oil, it should also pursue other methods of making money, to ensure a more stable market.