Explain the resource curse and how governance can mitigate it.

• A. Resources lead to corruption, conflict, and poor development if governance is weak; mitigation includes transparency, revenue management, and diversification
• B. Resources always promote rapid growth regardless of governance
• C. Governance has no influence on resource outcomes
• D. Resource diversification worsens development

Answer: (A)

The idea being tested is how natural-resource wealth can become a burden rather than a blessing when institutions and governance are weak, and how strong governance can turn that wealth into development. When a country sits on abundant resources, rents from those resources can fuel corruption and rent-seeking, as individuals and groups vie to capture the wealth instead of investing it productively. This can weaken incentives to diversify the economy, empower inert economies during price swings, and even trigger conflict as different groups compete over pie slices. Transparent reporting of resource revenues, accountable budgeting, and rules that prevent off-budget spending help reduce opportunities for theft and mismanagement. At the same time, shaping fiscal policy to stabilize and prudently manage revenue—such as saving a portion of earnings in stabilization or savings funds—helps guard against boom-bust cycles. Diversifying the economy away from reliance on a single resource reduces exposure to commodity price volatility and builds resilience, while strong institutions, the rule of law, and inclusive social contracts ensure that resource wealth translates into broad-based development rather than personal gain or conflict.

This is why the best answer emphasizes that resources can lead to corruption, conflict, and poor development when governance is weak, and that mitigation involves transparency, revenue management, and diversification. The other options ignore the governance dimension, claim resources always spur growth, or suggest diversification worsens outcomes, which misrepresent how governance and economic structure interact with resource wealth.