natural resource curse

8/6/2019 Natural Resource Curse

1/10

DEVELOPMENT ECONOMICS


2/10

NATURAL RESOURCE CURSE

As we have already discussed,Geography impacts on economicperformance both directly and viainstitutions.

Ho

wever, a striking result is no

ted bySachs and Warner (2001): countrieswith abundant natural resources tendto grow slower than other countries,even after controlling for volatility incommodity prices.

Why could this be? There are a numberofpossible reasons for such an

asso

ciatio

n beyo

nd the afo

rementio

nedeffects on income levels. Frankel (2010)lists them as:

Prebisch thesis (primary producehas a falling terms oftrade).

Primary commodity prices tend tobe highly volatile.

Dutch Disease.

Macroeconomic Instability.

Crowding out manufactures.

Higher risk of conflict.

Natural resources foster inequality;the elite are likely unwilling to adoptpolicies that promote growth due tothe hold up problem discussed prior.

Note that one can discern between twotypes of Natural Resource. Isham et al(2005) note that it is point resources

that are negatively asso

ciated witheconomic growth:

Point resources are spatiallyconcentrated and easilyappropriable (minerals, oil), Diffuseresources are agricultural.

The spatial concentration ofpoint

reso

urces means that they arerelatively easy to guard and allocate.


3/10


Prebisch Thesis:

Because the World demand for primary produce is income inelastic (deriving fromEngels law), the terms oftrade (price ofexports/price of imports) will be on anegative trend.

Thus, primary commodity specialization is not feasible.

Theoretical critiques come in twoflavours:

Hotelling: Theprice of a point resource rises with the interest rate (due to the tradeoffbetween its price in the ground, and the interest you can earn from investingthe revenue post-extraction).

Malthus: Fixed supply of resources and a rising demand due to population growthincreases prices due to increasing scarcity.

Empirically, neither side ofthe argument gets much empirical support; Frankel(2010) notes that studies tend to be highly sensitive to the end date:

In net, both sides ignore that demand and technological innovation act wheneverprices are driven up (consumers become more eco-friendly, entrepreneurs enter themarket as a response to higher prices).

Prebisch thesis is unlikely to be the cause ofthe natural resource curse.


4/10


Volatile Prices:

Frankel (2010) notes that both point and diffuse resources have price fluctuations in excessofthose experienced by manufactures.

The volatility is driven due to the inelastic nature of both demand (cannot easily substituteinputs in the short-term) and supply (cannot easily change crops or output in the shortterm), meaning that a shift in either leads to amplified price changes.

However, Sachs and Warner (2001) control for price volatility, and still find natural resourcesto have an impact. Therefore, whilst price volatility may explain some of the effect, it doesnot explain it all.

Conflict:

Due to the easily appropriable and spatially concentrated nature of point resources, it ispossible that those with de facto power (militias) can take control ofthem by force ratherthan go through a slow-changing political system.

Such conflict has ravaged much ofAfrica, although the Colombian and Mexican drug tradeshave shown that the effect is not limited to point resources.

Natural Resources fostering inequality:

We have already discussed this. Bulte and Deacon (2005) note that the resultant institutionmix includes a lack of diversification and an over-taxed agricultural sector bankrolls abloated and inefficient public sector + nontradable sector. In addition, the level of corruption

is higher due to increased rent-seeking activity, and the revenues are used to fund inefficientinvestments (white elephants).


5/10


Dutch Disease:

Consider a positive shock for acountries main primary export.

The exchange rate will subsequently

become overvalued.

This will alter the relative prices ofnon-commodity exports and non-tradables/commodity exports in favourofthe latter.

Labour and capital is then reallocatedto be used in the latter sectors, raisingthe cost ofmanufacturing sectors (due

to scarcity offactors) and renderingthe sector uncompetitive.

This has two effects:

A fiscal deficit occurs as exportrevenue falls due to uncompetitivemanufactures.

Growth suffers due to manufacturesbeing the engine of growth (see

below).

In addition, when the price inevitablyfalls again, the entire process isrepeated but in reverse.

Crowding out:

According toHirschmans linkageslogic and endogenous growththeory(see topic 2 slides),manufacturing is more conducive tohigher rates ofgrowth thanagriculture.

Manufacturing is associated with richerlinkages and more externalities (inparticular, learning by doing) than

agriculture.H

ence, high investment innatural resources crowds out theengine ofgrowth.

Frankel (2010)disputes that notionhowever; primary exports can confersimilar externalities, but they needappropriate institutions in order to doso: the US provided knowledgeinfrastructure which helped developits natural resources.


6/10


Macroeconomic Instability:

Developing countries with natural resources tend to practice pro-cyclical fiscal and monetary policies; Sinnot (2009) finds thatGovernment revenue responds significantly to commodity prices.

We have already noted that Government spending is associated withwhite elephant investments, but it is also used to expand the publicsector, which causes macroeconomic problems during downturnswhen the Government can no longer pay for it.

Atkinson and Hamilton (2003) find that Genuine Savings (the extentto which a country is either liquidating or creating national wealth) is

associated with the curse; those with low levels ofgenuine savings(bad policies) have been afflicted with the curse.

In addition, A+Hfind that bad institutions lead to countries usingresource revenue to finance current consumption rather than investand save; those that do act prudently tend to have a better rate ofgrowth.


7/10


There is nothing automatic about either the curse!Remember that the curse acts via through institutionsand that we have just seen that bad institutions allowthe curse to work.

How can a country harness its natural resources toachieve its comparative advantage and secure futuregrowth, as the US, Australia and Norway have done?

Frankel (2010) provides 4 categories ofpolicies:

Policies that have failed:

Marketing boards (where trade passes through aGovernment agency, which stabilises prices. Inpractice it is used to extract revenues andredistribute).

Price controls: Consumer, producer subsidies,cartels (large incentive to defect), taxes oncommodity production.

Policies to ensure short-run microeconomic stability(share risk):

Price setting in contracts with foreign companies,

Hedging in commodities futures markets,denomination of debt in terms of commodity

prices.

Policies to ensure medium-run macroeconomicstability:

Have some sort ofanchor for agents to baseinflation expectations on. Can either do via afixedexchange rate or inflation targeting (would be best

to use a measure of inflation that reflected theexport commodity, to provide flexibility).

Policies to ensure long-run pro-cyclical savings:

Have rules for the budget deficit (see CHILE) whichprevent the Government having discretionary useofwindfall revenue. Rules should be dictated byexperts, not politicians.

Commodity or Sovereign Wealth Funds (see CHILE,NORWAY), important to safeguard against politicalravaging. Possibly earmark funds to place a cap onspending.

Restrictions on private capital inflows duringbooms to prevent bubbles.

Have external checks to prevent elites ignoring

rules and acting with full discretion.


8/10

CHILE


9/10

CHILE: NRC

Chile has successfully based its exports on its primary produce (mainly copper,but other natural resources such as Salmon and Wine have been developed).

However, there has been diversification of the export basket; natural resourceshave fallen from 75% oftotal exports in 1975 51% in 2002.

This has been compensated for by a rise in processed natural resources asopposed toother industrial goods.

This suggests that Chile has been expanding its comparative advantage basedon technologies linked to its comparative advantage.

This has allowed it to enjoy the static gains from comparative advantage andthe dynamic gains resulting from spillover effects.

No evidence of natural resources crowding out other sectors; to the contrary,there has been a simultaneous fall in the relative importance ofthe sector and arise in its productivity, the technological spillovers from which have created newexport products.

Voracity effects (rent-seeking) has been prevented by a strong institutionalframework;for example, the copper stabilisation funds and the fiscal rulespreventing such funds being pillaged.


10/10

CHILE: NRC

Dutch disease effects havent appeared in Chile in part due to itopening the copper industry toforeign investment and foreignownership, which limits the impact of copper exports on its

real exchange rate, as well as limiting crowding out effects.

There is strong evidence to refute the hypothesis that primaryproduce sectors are lacking in growth-enhancing linkages withother sectors:

Kalter (2004) notes that there is strong evidence to suggestthat spillovers from natural-resource sectors to other levels of

the supply chain drive growth.

After trade liberalization, the manufacturing sectorrestructured itself using new technologies linked to naturalresource endowments (for example, salmon fishing requiresfish feed, medicines, special equipments and rafts to catch thesalmon in).

natural resource curse

Documents