Neoclassical growth and the natural resource curse puzzle

We advance a novel mechanism that helps to explain the puzzling evidence on the natural resource curse. The new channel arises in a standard dynamic Heckscher–Ohlin model composed of small-open economies that take international output prices as given. Within this framework, a more capital-intensive primary sector implies that natural-resource abundant economies grow more slowly along the adjustment path. This effect might be only temporary because the natural input also affects long-run income, and not necessarily in the same direction as transitional growth. We produce quantitative results that show that the new mechanism can account for a significant fraction of the observed output growth gap between resource rich and resource poor U.S. states. •We introduce natural inputs into a dynamic Heckscher-Ohlin model.•Natural resources directly affect both long-run income and transitional growth.•Reconciled views: Natural riches can be beneficial for income but harmful for growth.•The model can explain a very large fraction of the natural-resource curse finding acros U.S. states.•Rybczynski-type mechanisms account for a sizable percentage of this GDP growth variation.