Are Natural Resources Good for Development?
The Democratic Republic of the Congo (DRC) has entered global capital markets with a headline-grabbing debut: a $1.25 billion Eurobond, oversubscribed four times. This “DRC Eurobond Deal” is structured in 5- and 10-year tranches with yields of 8.75% and 9.5%, the issuance has been widely interpreted as a success and a signal of investor confidence.
It also reflects a broader global shift. As demand for critical minerals accelerates – driven by electrification, AI, and the energy transition – capital is increasingly flowing toward countries endowed with cobalt, copper, lithium, rare earths, and other minerals.
At first glance, this seems rational. Scarcity drives value. Strategic resources attract geopolitical attention. Markets respond.
But sovereign debt is not just a bet on commodities. It is a bet on a country’s ability to generate sustainable economic returns – and ultimately repay its obligations. That requires far more than natural resource endowments. It requires functioning institutions, political stability, infrastructure, and broad-based economic development.
So, what exactly are investors betting on?
Resources are not destiny – institutions are
For decades, economists have tried to explain why some resource-rich countries prosper while others stagnate. One of the most influential frameworks comes from Daron Acemoglu and James Robinson, who distinguish between inclusive and extractive institutions.
- Inclusive institutions distribute power broadly, enforce property rights, and create incentives for investment and innovation.
- Extractive institutions concentrate power, prioritize rent extraction, and limit broad participation in economic life.
The implication is that natural resources do not determine economic success; institutions do.
This helps explain why so many resource-rich countries are not doing well economically.
Globally, only a handful of them are considered long-term success stories:
- Norway, with transparent governance and disciplined management of oil revenues
- Botswana, which transformed diamond wealth into sustained growth and institutional strength (see below)
- Chile, combining copper wealth with credible macroeconomic policy
- To some extent, Australia and Canada – though their success is rooted in broader institutional strength rather than resources alone.
What these countries share is not geology, but governance. It was not the abundance of resources that led to their success; at most, it contributed to it.
The Resource Curse: Abundance Without Development
In many resource-rich nations, the expected path to prosperity is often reversed. Countries like Angola, Nigeria, Equatorial Guinea, and South Sudan possess vast natural wealth yet struggle to achieve broad-based economic development.
This stagnation typically stems from extractive institutions. When underground resources are easily accessible, the ruling elites are incentivized to focus on short-term personal gain for themselves, their families, and their friends, rather than investing in the long-term national welfare of the country. This creates a cycle where short-term extraction replaces the hard work of building a diversified, modern economy.
There is, however, one exception in Africa.
Botswana: the exception that proves the rule
Botswana illustrates what happens when institutions come first.
At independence in 1966, it was among the poorest countries in the world. Diamonds were discovered shortly thereafter. In 1969, under President Seretse Khama, Botswana negotiated a joint venture with De Beers (Debswana), securing a 50% state stake and ensuring meaningful participation in resource revenues.
From the beginning, it has been the government’s strategy to reinvest these “windfall revenues” into public goods – education, infrastructure, health; within a framework of fiscal discipline and relatively strong institutions.
The results were extraordinary:
- 1970s–80s: 13–15% annual growth
- 1990s: 6–9%
- 2000s: 4–6%
Botswana avoided the resource curse not because of diamonds, but because it built inclusive institutions early.
Diamonds did not create good institutions. It was the other way round: Good institutions made diamonds a success.
Where should investors look?
When investors buy sovereign bonds in emerging markets today, an important question arises:
Are they overestimating the value of natural resources – and underestimating the importance of institutions?
Natural resource wealth can be attractive. But it also increases the risk that extractive institutions take hold, concentrating power and undermining long-term development. In such environments, resource revenues are often captured rather than reinvested – limiting the very growth needed to service debt sustainably.
At the same time, a different group of countries follows a more consistent path.
Across Africa, economies such as Kenya, Rwanda, Ghana, Côte d’Ivoire, and Morocco have relied less on natural endowments and more on institution-building, diversification, and state capacity. While not without challenges, their development trajectories are generally more stable and predictable.
They point to a broader lesson:
Broad-based economic development is built through institutions, not natural resources.
Conclusion: look above the ground
Resource scarcity will shape global markets in the coming decades. But catering for this scarcity alone does not generate development.
For investors in emerging market sovereign bonds, the key variable is not what lies underground—but how power, incentives, and institutions are structured above it.
A more disciplined investment lens would therefore ask:
- Are institutions inclusive or extractive?
- Are resource revenues broadly reinvested or narrowly captured?
- Is there a credible path toward diversification?
These questions are less visible than mineral reserves – but far more predictive.
Such questions should not be swept under the carpet in the case of the DRC either, even though the country has recently entered into a partnership with the current US administration.
Natural resources create opportunities and risks.
Institutions determine outcomes.
