Sustained economic growth in developing countries has historically been associated with structural transformation: the movement of workers from low-productivity agriculture into higher-productivity manufacturing and services. Many LMICs have undergone premature deindustrialisation — losing manufacturing share before reaching the income levels that historically supported sustained transformation.
This threat is particularly relevant in the context of resource discoveries, which can accelerate deindustrialisation through Dutch disease effects, and in the context of the energy transition, which may reduce the long-run demand for some resource exports while creating new opportunities in critical minerals.
How It Operates
Dutch Disease Effects
Resource booms appreciate the real exchange rate, making manufacturing exports uncompetitive and shrinking the industrial base.
Labour Market Distortions
Resource sector wages draw skilled labour away from other sectors, raising costs and reducing competitiveness.
Investment Crowding-Out
Resource sector dominance crowds out investment in tradeable manufacturing and services that are more growth-conducive in the long run.
Policy Implications
- → Maintain competitive exchange rates to protect non-resource tradeable sectors during resource booms
- → Use resource revenues to invest in productive capacity — education, infrastructure, technology — that diversifies the economic base
- → Develop industrial policy frameworks that identify and support viable non-resource tradeable sectors