The World Financial Review

By Edward B. Barbier

Introduction

Throughout much of history, a critical driving force behind global economic development has been the response of society to the scarcity of key natural resources, such as land, forests, fish, fossil fuels and minerals.  Increasing scarcity raises the cost of exploiting existing natural resources and creates incentives in all economies to innovate and conserve.  However, economies have also responded to increasing scarcity by obtaining and developing more abundant sources of natural resources.  Since the agricultural transition over 12,000 years ago, this exploitation of new “frontiers” has often proved to be a pivotal human response to natural resource scarcity.

For example, before the Industrial Revolution (ca. 1775), finding and exploiting new frontiers of land and natural resources were fundamental to successful economic development and seen as an important objective of conquering and occupying new lands, monopolizing trade links, and colonizing and populating other regions of the world.  However, since the Industrial Revolution and certainly over the last century, supplies of strategic raw material, mineral and energy commodities have become so cheaply available through global trade that natural resource scarcity is no longer viewed as an economic constraint.  Technological applications to land, fisheries, forests and other natural resource endowments have become sufficiently productive and routine that we believe that human ingenuity and innovations can overcome any resource scarcity problem.

“If humankind is to succeed in overcoming these global problems, we need to find the next “new frontiers” of natural resources and adapt economic development accordingly.”

Today, we are on the verge of a new era, the “Age of Ecological Scarcity”. For the first time in history, fossil fuel energy and raw material use, environmental degradation and pollution may be occurring on such an unprecedented scale that the resulting consequences in terms of global warming, ecological scarcity and energy insecurity are generating worldwide impacts. If humankind is to succeed in overcoming these global problems, we need to find the next “new frontiers” of natural resources and adapt economic development accordingly. This will require developing low-carbon sources of energy, processes of production and technological innovation that require less environmental degradation and pollution. It will also mean instigating institutional changes, creating global carbon and environmental markets, and implementing new policies to foster a new era of “sustainable” economic development.

History has shown that such changes in response to scarcity have occurred before, and those economies that have instigated the transformation first have emerged as leaders.  The question remains, however, how will the world economy respond to the economic and environmental challenges of the Age of Ecological Scarcity?

It may be too early to answer this question, but we can gain some insights into how the world should respond by examining the main factors underlying successful resource-based development in the past.

Lessons from history

A key misunderstanding about the role that natural resources play in economic development is that they are often treated as naturally occurring “fixed” endowments.  That is, countries are either “lucky”, and are endowed with abundant sources of valuable natural resources, or they are “unlucky”, and have very little resources or poor quality natural wealth.  In fact, exploiting or converting new sources of relative abundant resources for production purposes can be a dynamic process that causes economies to “take off”.  Years ago, the economist Joseph Schumpeter suggested that this process often contributes fundamentally to economic development, which he defined as “the carrying out of new combinations of the means of production”, one of which is “the conquest of a new source of supply of raw materials…irrespective of whether this source already exists or whether it has first to be created”.¹

“Exploiting or converting new sources of relative abundant resources for production purposes can be a dynamic process that causes economies to “take off.”

Various examples of successful resource-based development, from the late 19th century to the present, highlight the three key factors in this process.

First, country-specific knowledge and technical applications in the resource extraction sector can effectively expand what appears to be a “fixed” resource endowment of a country. For example, the economic historians Gavin Wright and Jesse Czelusta document this process for several successful mineral-based economies over the past 30 to 40 years: “From the standpoint of development policy, a crucial aspect of the process is the role of country-specific knowledge.  Although the deep scientific bases for progress are undoubtedly global, it is in the nature of geology that location-specific knowledge continues to be important….the experience of the 1970s stands in marked contrast to the 1990s, when mineral production steadily expanded primarily as a result of purposeful exploration and ongoing advances in the technologies of search, extraction, refining, and utilization; in other words by a process of learning.”²

Second, there must be strong linkages between the resource sector and frontier-based activities and the rest of the economy.  For example, the origins of rapid industrial and economic expansion in the United States over 1879-1940 were strongly linked to the exploitation of abundant non-reproducible natural resources, particularly energy and mineral resources. “Not only was the USA the world’s leading mineral economy in the very historical period during which the country became the world leader in manufacturing (roughly from 1890 to 1910); but linkages and complementarities to the resource sector were vital in the broader story of American economic success….Nearly all major US manufactured goods were closely linked to the resource economy in one way or another: petroleum products, primary copper, meat packing and poultry, steel works and rolling mills, coal mining, vegetable oils, grain mill products, sawmill products, and so on”.³ Such linkages were essential in promoting successful “staples-based” development in many economies during the 1870-1914 era: “not all resource-rich countries succeeded in spreading the growth impulses from their primary sectors….in a number of instances the staples sector turned out to be an enclave with little contact with the rest of the economy….The staples theory of growth stresses the development of linkages between the export sector and an incipient manufacturing sector.”⁴

Third, there must be substantial knowledge spillovers arising from the extraction and use of resources and land in the economy.  For example, Wright and his fellow economic historian Paul David suggest that the rise of the American minerals-based economy from 1879 to 1940 can also be attributed to the infrastructure of public scientific knowledge, mining education and the “ethos of exploration”.  This in turn created knowledge spillovers across firms and “the components of successful modern-regimes of knowledge-based economic growth. In essential respects, the minerals economy was an integral part of the emerging knowledge-based economy of the twentieth century….increasing returns were manifest at the national level, with important consequences for American industrialization and world economic leadership.”⁵ Wright and Czelusta cite the development of the US petrochemical industry to illustrate the economic importance of knowledge spillovers: “Progress in petrochemicals is an example of new technology built on resource-based heritage.  It may also be considered a return to scale at the industry level, because the search for by-products was an outgrowth of the vast American enterprise of petroleum refining.”⁶

There are many historical examples from eras other than the 19th and 20th century that also fit the above conditions for successful resource-based development.

This is certainly true for the Sung Dynasty in China from 960 to 1279.  Military conquest ensured that Sung China had amassed a huge “internal frontier” of agricultural land and other abundant natural resources, such as iron ore, coal, timber, fuelwood, salt, fish and metals.  But Sung rulers did not just exploit these frontiers for windfall gains; they also invested the tax revenues earned from frontier expansion into developing canals, waterways and an effective inland transport system, as well as innovations in flood control and irrigated paddy rice production.  These developments in turn fostered substantial floodplain and lowland arable land expansion throughout southern China, which sustained large increases in agricultural productivity as well as population growth.  Tax revenues earned from the increased agricultural production funded further public works investments.  Cheap and safe waterway transport facilitated long-distance marketing of agricultural products and induced further agricultural expansion into new frontier areas.  New rice and sugar varieties were imported and cultivated in tropical southern China, suitable for both irrigated paddy and rainfed cultivation.  These varieties allowed dryland rice farming to spread into hilly terrain, doubling cultivated area.  By developing its abundant coal resources and blast furnace technology, a large iron industry grew in northern China, allowing the manufacture of weapons, farm implements and tools.  Other technological innovations spurred new industries, such as the water-powered spinning wheel for textiles, mining technologies for salt production, new kilns, ceramic and glazing techniques for porcelain and advances in sericulture, spinning and weaving in the silk industry.  By the end of the 11th century, the iron industry in northern China was producing 125,000 tons annually.  This iron output amounted to 3.5 to 4.3 pounds per person, a level of production that exceeded that of Western Europe until the Industrial Revolution seven centuries later.

So robust was Sung China’s resource-based development that economic progress survived the Mongol conquest and continued during the subsequent Yuan Dynasty (1260 to 1368).  But, towards the end of the latter dynasty, the conditions for successful resource-based development had ended, and by the onset of the Black Death (1330 to 1370) and its aftermath, China embarked on a long period of economic decline.

The contemporary era

However, in the Contemporary Era from 1950 to present, many economies with abundant endowments of land, mineral and fossil fuel resources have had difficulty in achieving successful resource-based development.  There are signs that four large emerging market economies, Brazil, China, India and Russia – the so-called BRIC economies – are beginning to reap economy-wide benefits from exploiting their vast sources of land and natural resources.  But these economies are unusual compared to most developing countries because of the sheer scale of their populations, economies and resource endowments.  Although since the 1990s the economic growth performance of the BRIC countries has been impressive, it is unclear whether this growth is the result of successful and sustainable management of their large natural resource endowments, or simply due to the having such large endowments to command for economic development.

Unfortunately, not many smaller resource-abundant economies have performed as well. For example, the economist Thorvaldur Gylfason has examined the long-run growth performance of 85 resource-rich developing economies since 1965.⁷ Only Botswana, Malaysia and Thailand managed to achieve a long-term investment rate exceeding 25% of GDP and long-run average annual growth rates exceeding 4%, which is a performance comparable to that of high income economies.  Malaysia and Thailand have also managed successfully to diversify their economies through re-investing the financial gains from primary production for export.  Botswana has yet to diversify its economy significantly but has developed favorable institutions and policies for managing its natural wealth and primary production for extensive economy-wide benefits.  Although many other developing countries still depend on finding new reserves or frontiers of land and other natural resources to exploit, very few appear to have benefited from such frontier-based development.  It appears that the Contemporary Era is a historical anomaly that poses an intriguing paradox:  Why should economic dependence on natural resource exploitation and frontier land expansion be associated with “unsustainable” resource-based development in many low and middle-income countries today, especially as historically this has not always been the case?

“The relationship between natural resource exploitation and development has changed substantially over the past 60 years.  By 1950, it no longer mattered to economic development how well endowed an economy was with its own natural resources.”

One reason is that the relationship between natural resource exploitation and development has also changed substantially over the past 60 years.  By 1950, it no longer mattered to economic development how well endowed an economy was with its own natural resources.  World trade in all types of raw material, energy and mineral commodities was the means through which all countries would supplement their own supplies of these commodities. In addition, frontier land expansion as a source of agricultural land was no longer essential to the accumulation of a nation’s wealth.  Even those temperate “surplus land” countries that successfully industrialized through resource-based development, such as the United States but also Australia, Canada, New Zealand and Russia, relied less and less on the frontier land expansion as a means to absorb “surplus labor”.  Instead, the role of frontier land expansion – especially on marginal lands in fragile environments – as a means to absorb growing numbers of rural poor became an entrenched feature of the underdeveloped periphery of mainly tropical countries.

Many of these global trends have continued unabated.  For example, since 1950, there has been an unprecedented exploitation of land and natural resources, with much of it occurring in the developing regions of the world as international trade boomed and industrializing economies demanded more primary product commodities.  Many developing economies became dependent on finding new frontiers or reserves of natural resources and land to exploit as the basis of their long-term development efforts.

Yet, the extensive resource-based development that has occurred over the past 50 to 60 years in the vast majority of the low and lower middle-income countries could hardly be considered successful.  First, the gap in economic development, in terms of per capita income levels, between the handful of rich, industrialized economies of the world and the vast majority of poor developing economies has continued to grow during the Contemporary Era.  In addition, many developing economies have a large concentration of their populations on fragile land and high incidence of rural poverty.  Since 1950, the estimated population in developing economies on fragile lands has doubled, and today, nearly 1.3 billion people – almost a fifth of the world’s population – live in such areas in developing regions. Also, as noted above, with only a few exceptions, most resource rich low and middle income countries have failed to benefit significantly from resource-based development.  The conditions for ensuring successful development have simply not been met. That is, in most of today’s developing economies, frontier expansion has been symptomatic of a pattern of economy-wide resource exploitation that generates little additional economic rents, and what rents are generated, have not been reinvested in more productive and dynamic sectors, such as resource-based industries and manufacturing, or in education, social overhead projects and other long-term investments.

“During the Age of Ecological Scarcity, the world economy must confront simultaneously two major imbalances that were not present in previous eras: the global economic imbalance and the global environmental imbalance.”

Final remarks

An important reason for examining how economies have developed historically through natural resource exploitation is to understand better the role of scarcity and frontiers in today’s economies.  A related question is whether the world economy is faced with new environmental and resource challenges as compared to past eras.

There is little doubt that the world is entering a new era: the Age of Ecological Scarcity. Yet, the lessons learned from how economies have developed through the use of natural resources are instructive for understanding how to address our current global environmental concerns, whether they are global warming, ecological degradation, freshwater scarcity or energy insecurity.

In addition, during the Age of Ecological Scarcity, the world economy must confront simultaneously two major imbalances that were not present in previous eras: the global economic imbalance and the global environmental imbalance. The fact that these are worldwide problems indicates that the scale of the ecological scarcity problem and its economic consequences is unprecedented.  Moreover, both imbalances are sufficiently severe that focusing on just one problem could still leave the world economy highly vulnerable.  We must formulate solutions to the global environmental crisis that also address the problem of structural economic imbalances.  For example, reducing carbon dependency and improving energy security should help to alleviate the chronic current account deficits of oil-importing economies while reducing the large surpluses of fossil fuel exporting economies.  For emerging market economies with chronic current account surpluses, reorienting economic development to boost clean energy investments, increase imports of low-carbon technologies and capital, and expand “green sector” products for consumption should absorb more savings domestically and help reduce trade surpluses. National actions are important but they may be insufficient on their own to tackle global economic and environmental imbalances; international policy coordination and implementation will become essential.

Although the world economy is facing new challenges during the Age of Ecological Scarcity, overcoming these challenges involves fundamentally the same resource-based development strategies as for previous historical eras.  Throughout history, those economies that have developed successfully and sustainably have adapted and applied technologies and spillovers to the land and natural resource endowments available to them.  The result has been the generation of substantial economic rents, or profits.  However, whether this process leads to economy-wide benefits and sustainable dependent has depended on the creation of backward and forward linkages between the resource-based sectors and the rest of the economy.  If done successfully, the land and natural resource endowments are transformed into endogenous components of the development process, often creating increasing returns across key sectors of the economy.

Both the scarcity and abundance of natural resources have shaped economic development in the past. In these early decades of the Age of Ecological Scarcity, the world is realizing that it is the Earth’s life-support and ecological systems that are becoming increasingly scarce. Already, the choices facing the world economy are clear.  Either we recognize the threat posed by this global scarcity problem and adopt the necessary and sufficient conditions for sustainable economic development, or we face the growing human, environmental and economic costs imposed by worsening ecological scarcity and global imbalances.

This article is based on Scarcity and Frontiers: How Economies Have Developed Through Natural Resource Exploitation, by Edward B. Barbier and published by Cambridge University Press.

About the author

Edward B. Barbier is the John S Bugas Professor of Economics at the University of Wyoming. He has over 25 years experience as an environmental and resource economist, working on natural resource and development issues as well as the interface between economics and ecology. He has authored over 150 peer-reviewed articles and chapters, written or edited twenty-one books, and published in popular journals. His latest books are Scarcity and Frontiers: How Economies Have Developed Through Natural Resource Exploitation and Capitalizing on Nature: Ecosystems as Natural Assets, both published by Cambridge University Press.

Notes

1. Schumpeter, Joseph A. 1961. A Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Oxford University Press, New York, p.66.
2. Wright, Gavin and Jesse Czelusta. 2004. “Why Economies Slow: The Myth of the Resource Curse.” Challenge 47(2):6-38.
3. Wright and Czelusta (2004).
4. Findlay, Ronald and Mats Lundahl. 1999. “Resource-Led Growth – a Long-Term Perspective: The Relevance of the 1970-194 Experience for Today’s Developing Economies.” UNU/WIDER Working Papers No. 162.  World Institute for Development Economics Research, Helsinki, pp. 31-2.
5. David, Paul A. and Gavin Wright. 1997. “Increasing Returns and the Genesis of American Resource Abundance.” Industrial and Corporate Change 6:203-245, pp. 240-241.
6. Wright and Czelusta (2004).
7. Gylfason, Thorvaldur. 2001. “Nature, Power, and Growth.” Scottish Journal of Political Economy 48(5):558-588.