developing resources – resource curse or resource blessing?
DESCRIPTION
Isabelle Ramdoo, ECDPM Bangkok, Thailand, 11 – 13 June 2013TRANSCRIPT
Isabelle Ramdoo European Centre for Development Policy Management
Bangkok, Thailand, 11 – 13 June 2013
Developing Resources – Resource Curse or Resource
Blessing?
1. What is the resource curse?
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• Countries with large natural resource endowments perform worse in terms of economic development and governance that those with fewer resources
• Used for the first time by R. Auty in 1993; • Sachs and Warner (1995; 2001) observed similar
trends: economic dependence on oil and minerals was correlated with slow economic growth;
• Other studies also find negative effect of oil on economic performance (Smith 2004; and Kaldor, Karl and Said 2007); corruption (Sala-i-Martin & Subramanian, 2003); civil war (Humphreys, 2005) and democratic development (Ross, 2001).
1.a. Definition and empirical evidence
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Source: Frankel, 2012
Empirical evidence show that growth slower as share of minerals in exports are higher
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Fortunately not. The challenge is not about the resources themselves, but rather the result of their mis-management.
Variations across countries• Some countries have performed well: Norway, Canada,
Australia but also Botswana, South Africa, Chile, Indonesia etc
New literature: NR wealth are contingent to other factors – institutions and governance- Haber and Menaldo, 2011; Maloney 2007, Dunning 2008;- Humphreys 2005 – Finds no correlation between NR and
war- Robinson et al, 2006 – countries with accountable govt
benefit from boom
1.b. Are resources necessarily bad?
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First we need to understand what are the distinctive characteristics of NR?1. “Enclaved sector” : NR does not need to be produced but only needs to be extracted. Can operate independently of other economic activities2. Non renewable: more like an asset than a source of income3. Resources are unevenly spread4. Unequal geological knowledge and negotiation expertiseThese features give rise to a complex set of political and economic processes that, when combined, may produce adverse effects on the economy. E.g “rent seeking behaviour”- which in turn create incentives to use political mechanisms to capture these rents
2. Where does the resource curse come from?Specific Characteristics
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What is the mechanism for this counter-intuitive relationship? At least 4 categories of explanations1. Price volatility 2. Dutch Disease3. Procyclicality including
1. Procyclical capital flows2. Procyclical monetary policy3. Procyclical fiscal policy.
4. Inhibited development of institutions
3. Channels of resource curse:
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Source: Frankel
i. Volatility in commodity prices
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Earnings from NR are generally volatile as a result of (a) variation in rates of extraction; (b) variations in payments (taxes) to state by companies; (c) fluctuation in value of NR (and their price on world market). The latter has been less volatile in recent years as a result of the increasing “financiarisation” of the commodities sector.
This renders long term economic planning difficult. Volatility in receipts leads to volatility in government expenditure on infrastructure, social spending etc. Volatility has also exacerbated debts of countries when price of commodities fall (eg. Mexico, Nigeria and Venezuela in 1980’s when price of oil fell)
Price volatility
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Resource-rich countries often experience a decline in pre-existing domestic sector due to an increase in the value of Result:
1) A real appreciation in the currency 2) Other sectors find it difficult to export3) A rise in government spending 4) A rise in non-traded goods prices 5) Simultaneously labour and other factors of production shift to the NR sector from other sectors (agric, manuf etc). 6) A resultant shift of production out of manufactured goods 7) Sometimes debt.
ii. Dutch disease
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How the Dutch Disease works
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• The Dutch Disease describes unwanted side-effects of a commodity boom.
• Commodity exporting countries are historically prone to procyclicality,
• Procyclicality in:Capital inflows; Monetary policy;Real exchange rate; Non-traded GoodsFiscal Policy
iii. Pro-cyclical behaviours
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iv Inhibited development of institutions:
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1. Economic challengesa. Excessive dependence on exports and rentsb. Undiversified economic structuresc. Fast growth but high income inequality
2. Governance and political challengesd. Weakened accountability and citizens legitimacye. Transparency and corruptionf. At times conflicts and war
4. Major challenges facing countries
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Oil and Gas rents as a share of GDP, 2010 Mineral rents as a share of GDP, 2010
Oil as gas as a share of exports, 2009 Ores and metals as a share of exports, 2009
i.a Excessive dependence on exports and rents (Africa)
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Number of export products representing more than 75% of total merchandise exports, 2010
1.b Undiversified economic structures (Africa)
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Mineral rich, GNI per capita, $2010 Oil rich, GNI per capita, $2010
1.c High income inequality (Africa)
Source: WB, 2012, WDIs Page 17ECDPM
ii.a Weak accountability and legitimacy
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ii.b Transparency and corruption
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ii.c At times war and conflicts
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• The Natural Resource Curse should not be interpreted as a rule that commodity-rich countries are doomed to fail.
• The question is what policies to adopt to avoid the pitfalls and improve the chances of prosperity.
A wide variety of measures have been tried.
Some work better than others.
Conclusion
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