The Natural Resource The Natural Resource Curse I:Curse I:

Pitfalls of Commodity WealthPitfalls of Commodity Wealth

Jeffrey FrankelJeffrey FrankelHarpel Professor of Capital Formation & GrowthHarpel Professor of Capital Formation & Growth

Harvard UniversityHarvard University

International Monetary Fund, April 26, 2011International Monetary Fund, April 26, 2011

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The Natural Resource The Natural Resource CurseCurse

The NRC pertains especially to oil & minerals, The NRC pertains especially to oil & minerals, but sometimes to timber & agricultural but sometimes to timber & agricultural products too.products too.

Seminal references:Seminal references: Auty Auty (1990, 2001, 07, 09) (1990, 2001, 07, 09) Sachs & Warner Sachs & Warner (1995, 2001) (1995, 2001) Other studies find a negative effect of oil Other studies find a negative effect of oil

in particularin particular, on economic performance:, on economic performance: including Kaldor, Karl & Said (2007); Ross (2001); including Kaldor, Karl & Said (2007); Ross (2001);

Sala-i-Martin & Subramanian (2003); and Smith (2004). Sala-i-Martin & Subramanian (2003); and Smith (2004).

Frankel, “The Natural Resource Curse: Frankel, “The Natural Resource Curse: Survey,” Survey,”

NBER Working Paper 15836, 2010. NBER Working Paper 15836, 2010. forthcoming in forthcoming in Export PerilsExport Perils, ,

edited by B.Shaffer (U. of Pennsylvania Press: 2011) edited by B.Shaffer (U. of Pennsylvania Press: 2011)

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ExamplesExamples Conspicuously high in oil resources Conspicuously high in oil resources

and low in growth: and low in growth: Venezuela & Gabon. Venezuela & Gabon.

Conspicuously high in growth Conspicuously high in growth and low in natural resources: and low in natural resources: China & other Asian countries. China & other Asian countries.

The The overall relationshipoverall relationship on average is slightly negative: on average is slightly negative:

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Growth falls with fuelGrowth falls with fuel && mineral mineral exportsexports

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Are natural resources Are natural resources necessarilynecessarily bad? bad?

Commodity wealth needCommodity wealth need not necessarily not necessarily lead to inferior economic or political lead to inferior economic or political development. development.

Rather, it is a double-edged sword, Rather, it is a double-edged sword, with both benefits and dangers. with both benefits and dangers. It can be used for ill as easily as for good.It can be used for ill as easily as for good.

The priority for any country should be on The priority for any country should be on identifying ways to sidestep the pitfalls identifying ways to sidestep the pitfalls that have afflicted other mineral producers that have afflicted other mineral producers in the past, to find the path of success. in the past, to find the path of success.

No, of course not.No, of course not.

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The goal is to enjoy the success ofThe goal is to enjoy the success of Chile, Chile, vs. Boliviavs. Bolivia

Botswana, Botswana, vs. Congovs. Congo

Norway, Norway, vs. Sudanvs. Sudan..

The last section of my paper The last section of my paper explores some of the policies & explores some of the policies & institutional innovations that might help institutional innovations that might help avoid the natural resource curse and avoid the natural resource curse and achieve natural resource blessings instead.achieve natural resource blessings instead.

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How could abundance How could abundance of commodity wealth be a curse? of commodity wealth be a curse?

What is the mechanism What is the mechanism for this counter-intuitive for this counter-intuitive

relationship? relationship? At least 7 channels At least 7 channels

have been suggested:have been suggested:

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1.1. Downward price trendDownward price trend

2.2. Price volatility Price volatility

3.3. Crowding-out manufacturing Crowding-out manufacturing

4.4. Inhibited development of Inhibited development of institutionsinstitutions

5.5. Unsustainably rapid depletion Unsustainably rapid depletion as a result of unenforceable property rightsas a result of unenforceable property rights

6.6. Proclivity for armed conflictProclivity for armed conflict

7.7. The Dutch DiseaseThe Dutch Disease

7 Possible Natural Resource Curse Channels

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1.1. World commodity World commodity price trendprice trend could becould be downward downward (Prebisch-Singer);(Prebisch-Singer);

2.2. High High volatilityvolatility of oil prices of oil prices could be problematic could be problematic ;;

3.3. Natural resources Natural resources could be dead-end sectors could be dead-end sectors (Matsuyama):(Matsuyama): they may crowd out they may crowd out manufacturingmanufacturing, ,

1.1. which may be the home of which may be the home of dynamic benefits & spillovers. dynamic benefits & spillovers.

2.2. ““Industrialization” could be Industrialization” could be the essence of development.the essence of development.

The 7 NRC Channels Elaborated

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The 7 NRC Channels continued

4. Countries where physical command 4. Countries where physical command of mineral deposits by the government of mineral deposits by the government or a hereditary elite automatically confers or a hereditary elite automatically confers wealth on the holders may be less likely wealth on the holders may be less likely to develop the to develop the institutionsinstitutions that are that are conducive to economic development conducive to economic development (Engerman-Sokoloff …),(Engerman-Sokoloff …),

e.g., rule of law & decentralization of decision-making, e.g., rule of law & decentralization of decision-making, as compared to countries where moderate taxation as compared to countries where moderate taxation

of a thriving market economy is the only way of a thriving market economy is the only way to finance government.to finance government.

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The 7 NRC Channels continued

5. 5. Non-renewableNon-renewable resources resources are are depleted too depleted too fast,fast,where it is difficult to enforce where it is difficult to enforce property property rightsrights,,as under frontier conditions.as under frontier conditions.

6. 6. Countries that are endowed with minerals Countries that are endowed with minerals may have a proclivity for may have a proclivity for armed conflictarmed conflict, , which is inimical to economic growth.which is inimical to economic growth.

7. 7. Swings in commodity prices can engender Swings in commodity prices can engender macroeconomic instabilitymacroeconomic instability (Dutch Disease),(Dutch Disease), via the real exchange rate via the real exchange rate and government spending.and government spending.

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(7)(7) The Dutch Disease The Dutch Disease and Procyclicalityand Procyclicality

Developing countries have historically Developing countries have historically been prone to procyclicality:been prone to procyclicality: Especially procyclical government spendingEspecially procyclical government spending ““Procyclical” means destabilizing. Procyclical” means destabilizing.

This is particularly true of commodity This is particularly true of commodity producers.producers.

The Dutch Disease describes unwanted side-The Dutch Disease describes unwanted side-effects from a strong, but perhaps temporary, effects from a strong, but perhaps temporary, upward swing in the world price of the export upward swing in the world price of the export commodity.commodity.

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ProcyclicalityProcyclicality

Volatility in developing countries Volatility in developing countries

arises both from foreign shocks, arises both from foreign shocks, including export commodity price fluctuations, including export commodity price fluctuations,

and from domestic shocksand from domestic shocks including macroeconomic & political instability. including macroeconomic & political instability.

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ProcyclicalityProcyclicality

Volatility in developing countriesVolatility in developing countries

Most developing countries in the 1990s brought Most developing countries in the 1990s brought under control the chronic runaway budget deficits, under control the chronic runaway budget deficits, money creation, & inflation, that they money creation, & inflation, that they experienced, experienced,

but many still showed monetary & fiscal policy but many still showed monetary & fiscal policy that was procyclical rather than countercyclical:that was procyclical rather than countercyclical:

They tend to be expansionary in booms They tend to be expansionary in booms and contractionary in recessions, and contractionary in recessions, thereby exacerbating the magnitudes of the swings. thereby exacerbating the magnitudes of the swings. The aim should be to moderate swings The aim should be to moderate swings

-- the countercyclical pattern that economists, after the Great -- the countercyclical pattern that economists, after the Great Depression, originally hoped discretionary policy would take.Depression, originally hoped discretionary policy would take.

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Procyclicality in developing Procyclicality in developing countriescountries

The procyclicality of fiscal policyThe procyclicality of fiscal policy

Many authors have shown that fiscal policy Many authors have shown that fiscal policy has tended to be procyclical in developing has tended to be procyclical in developing countries,countries,

especially in comparison with industrialized especially in comparison with industrialized countries.countries. [1]

A major reason for procyclical public spending: A major reason for procyclical public spending: receipts from taxes or royalties rise in booms.receipts from taxes or royalties rise in booms. The government cannot resist the temptation or The government cannot resist the temptation or political pressure to increase spending political pressure to increase spending proportionately, or more.proportionately, or more.

[1] Cuddington (1989), Tornell & Lane (1999), Kaminsky, Reinhart, & Cuddington (1989), Tornell & Lane (1999), Kaminsky, Reinhart, & Vegh (2004), Talvi & Végh (2005), Alesina, Campante & TabelliniVegh (2004), Talvi & Végh (2005), Alesina, Campante & Tabellini ((2008), Mendoza 2008), Mendoza & Oviedo (2006), Ilzetski & Vegh (2008), Medas & Zakharova (2009) & Oviedo (2006), Ilzetski & Vegh (2008), Medas & Zakharova (2009) and Gavin & Perotti (1997).and Gavin & Perotti (1997).

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The procyclicality of fiscal policyThe procyclicality of fiscal policy, continued, continued

Procyclicality is especially pronounced in countries Procyclicality is especially pronounced in countries with natural resources and where income from those with natural resources and where income from those resources tends to dominate the business cycle.resources tends to dominate the business cycle. Cuddington (1989) and Sinnott (2009)Cuddington (1989) and Sinnott (2009)

An important recent development: some developing An important recent development: some developing countries, including commodity producers, have been able countries, including commodity producers, have been able to break the historic pattern in the most recent cycle:to break the historic pattern in the most recent cycle: Taking advantage of the boom of 2002-2008Taking advantage of the boom of 2002-2008

to run budget surpluses & build reserves,to run budget surpluses & build reserves, thereby earning the ability to expand fiscally in the 2008-09 crisis.thereby earning the ability to expand fiscally in the 2008-09 crisis. Chile is the outstanding model.Chile is the outstanding model.

Procyclicality in developing Procyclicality in developing countriescountries

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(i) Public investment (i) Public investment projectsprojects

Two large budget items that account for much Two large budget items that account for much of the increased spending from oil booms:of the increased spending from oil booms: (i) investment projects and (i) investment projects and (ii) the government wage bill.(ii) the government wage bill.

Regarding the 1Regarding the 1stst budget item, investment budget item, investment in infrastructure can have large long-term pay-off in infrastructure can have large long-term pay-off if it is well designed; too often in practice, if it is well designed; too often in practice, however, it takes the form of white elephant however, it takes the form of white elephant projects, projects, which are stranded without funds for completion or which are stranded without funds for completion or maintenance, when the oil price goes back down.maintenance, when the oil price goes back down. Gelb Gelb (1986)(1986) . .

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(ii) Public sector wage (ii) Public sector wage billsbills

Regarding the 2nd budget item, Regarding the 2nd budget item, oil windfalls have often been spent on higher public oil windfalls have often been spent on higher public sector wages sector wages -- Medas & Zakharova-- Medas & Zakharova (2009(2009) ) . .

They can also go to increasing the number They can also go to increasing the number of workers employed by the government. of workers employed by the government.

Either way, they raise the total public sector wage Either way, they raise the total public sector wage bill, which is hard to reverse when oil prices go back bill, which is hard to reverse when oil prices go back down.down.

Figures 2 & 3 plot the public sector wage bill, Figures 2 & 3 plot the public sector wage bill, for two oil producers, Iran & Indonesia.for two oil producers, Iran & Indonesia. against primary product prices over the preceding 3 years. against primary product prices over the preceding 3 years.

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IRN

Wage

Exp

enditu

re a

s %

of G

DP

Real Oil Prices lagged by 3 year, in Today's Dollars11.46 59.88

7.4

16.52

Iran’s Government Wage Bill Is Influenced by Oil Prices Over Preceding 3 Years (1974, 1977-1997.)

Source: Frankel (2005b)Source: Frankel (2005b)

2020

Indonesia’s Government Wage Bill Is Influenced by Oil Prices Over Preceding 3 Years (1974, 1977-1997.)

IND

Wage E

xpenditure

as %

of G

DP

Real Oil Prices lagged by 3 year, in Today's Dollars11.46 59.88

1.77

3.52

Source: Frankel (2005b)Source: Frankel (2005b)

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Public sector wage bills,Public sector wage bills, continuedcontinued

There is a clear positive relationship. There is a clear positive relationship.

That the relationship is strong with a 3-year That the relationship is strong with a 3-year lag shows the problem: oil prices may have lag shows the problem: oil prices may have fallen over 3 years, but public sector wages fallen over 3 years, but public sector wages cannot easily be cut nor workers laid off.cannot easily be cut nor workers laid off.

Arezki & Ismail (2010) find that current Arezki & Ismail (2010) find that current government spending increases in boom government spending increases in boom times, but is times, but is downwarddownward-sticky.-sticky.

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The Dutch Disease: The Dutch Disease: 5 side-effects of a commodity 5 side-effects of a commodity

boomboom 1) A real appreciation in the currency 1) A real appreciation in the currency

2) A rise in government spending 2) A rise in government spending

3) A rise in nontraded goods prices 3) A rise in nontraded goods prices

4) A resultant shift of resources out of 4) A resultant shift of resources out of non-export-commodity traded goods non-export-commodity traded goods

5) A current account deficit5) A current account deficit

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The Dutch Disease: The 5 effects elaboratedThe Dutch Disease: The 5 effects elaborated

1) A real appreciation in the 1) A real appreciation in the currencycurrency taking the form of nominal currency taking the form of nominal currency

appreciation appreciation if the exchange rate floatsif the exchange rate floats

e.g., floating-rate oil exporterse.g., floating-rate oil exporters Kazakhstan, Mexico, Norway, & Russia.Kazakhstan, Mexico, Norway, & Russia.

or the form of money inflows & inflation or the form of money inflows & inflation if the exchange rate is fixed if the exchange rate is fixed [1] ; ;

e.g. fixed-rate oil-exporters, the UAE & Saudi Arabia.e.g. fixed-rate oil-exporters, the UAE & Saudi Arabia.

2) A rise in government spending 2) A rise in government spending in response to increased availability in response to increased availability

of tax receipts or royalties.of tax receipts or royalties.

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The Dutch Disease: The Dutch Disease: 5 side-effects of a commodity boom5 side-effects of a commodity boom

3) An increase in nontraded goods prices 3) An increase in nontraded goods prices

(goods & services such as housing that are not internationally (goods & services such as housing that are not internationally traded), traded), relative to traded goodsrelative to traded goods (manufactures & other (manufactures & other

internationally traded goods other than the export commodity).internationally traded goods other than the export commodity).

4) A resultant shift of resources out of 4) A resultant shift of resources out of non-export-commodity traded goods non-export-commodity traded goods pulled by the more attractive returns pulled by the more attractive returns

in the export commodity and in non-traded goods.in the export commodity and in non-traded goods.

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The Dutch Disease: 5 side-effects of a commodity The Dutch Disease: 5 side-effects of a commodity boomboom

5) A current account deficit 5) A current account deficit thereby incurring international debt that may be thereby incurring international debt that may be

difficult to service when the boom ends difficult to service when the boom ends [2]..

Most developing countries avoided it in 2003-10.Most developing countries avoided it in 2003-10.

[2] Manzano & Rigobon (2008): the negative Sachs-Warner effect of Manzano & Rigobon (2008): the negative Sachs-Warner effect of resource dependence on growth rates during 1970-1990 was mediated resource dependence on growth rates during 1970-1990 was mediated through international debt incurred when commodity prices were high. through international debt incurred when commodity prices were high.

Arezki & Brückner (2010a): commodity price booms lead to increased Arezki & Brückner (2010a): commodity price booms lead to increased government spending, external debt & default risk in autocracies.government spending, external debt & default risk in autocracies.

Arezki & Brückner (2010b): the dichotomy extends also to effects on Arezki & Brückner (2010b): the dichotomy extends also to effects on sovereign spreads paid by autocratic vs democratic commodity sovereign spreads paid by autocratic vs democratic commodity producers. producers.

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Summary: Channels of the Summary: Channels of the NRCNRC

(1) Commodity price volatility is high, imposing risk & (1) Commodity price volatility is high, imposing risk & costs. costs.

(2) Specialization can crowd out the manufacturing (2) Specialization can crowd out the manufacturing sector.sector.

(3) Depletion can be unsustainably rapid, (3) Depletion can be unsustainably rapid, especially if property rights are not adequately protectedespecially if property rights are not adequately protected..

(4) Mineral riches can lead to civil war.(4) Mineral riches can lead to civil war.

(5) Mineral endowments can lead to poor institutions,(5) Mineral endowments can lead to poor institutions, such as corruption, inequality, class structure, chronic power such as corruption, inequality, class structure, chronic power struggles, and absence of rule of law and property rights. struggles, and absence of rule of law and property rights.

(6) The Dutch Disease.(6) The Dutch Disease. A commodity boom: A commodity boom: => real currency appreciation and increased government => real currency appreciation and increased government spending, spending, => which expand nontraded sector and render uncompetitive => which expand nontraded sector and render uncompetitive non-commodity export sectors such as manufactures.non-commodity export sectors such as manufactures.

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The Natural Resource Curse The Natural Resource Curse should not be interpreted as a rule should not be interpreted as a rule

that resource-rich countries are that resource-rich countries are doomed to failure.doomed to failure.

The question is what policies to adopt The question is what policies to adopt to improve the chances of prosperity. to improve the chances of prosperity.

Destruction or renunciation of resource endowments, Destruction or renunciation of resource endowments, to avoid dangers such as the corruption of leaders, to avoid dangers such as the corruption of leaders, will not be one of these policies. will not be one of these policies.

The survey concludes with ideas The survey concludes with ideas for policies/institutions designed to address for policies/institutions designed to address aspects of the resource curse and thereby aspects of the resource curse and thereby increase the chance of economic success.increase the chance of economic success.

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Appendices:Appendices: 1) The possible NRC 1) The possible NRC channels in detailchannels in detail

2) Procyclical capital flows2) Procyclical capital flows3 cycles of flows to developing 3 cycles of flows to developing countriescountries

3) Skeptics of the NRC 3) Skeptics of the NRC

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Appendix 1: The possible Appendix 1: The possible NRC channels in detailNRC channels in detail

(1)(1) The claim of a The claim of a negative negative trendtrend in commodity prices on in commodity prices on world markets was already dealt world markets was already dealt with: the data do not suggest with: the data do not suggest a robust long-term trend, a robust long-term trend, certainly not a negative one if certainly not a negative one if updated to 2010.updated to 2010.

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(1) Long-term world price trend(1) Long-term world price trend (i) Determination of the price on world markets(i) Determination of the price on world markets

(ii) The old “structuralist school” (ii) The old “structuralist school” (Prebisch-Singer):(Prebisch-Singer): The hypothesis of a declining commodity price trend The hypothesis of a declining commodity price trend

(iii) Hypotheses of a rising price trend(iii) Hypotheses of a rising price trend HotellingHotelling MalthusMalthus

(iv) Empirical evidence(iv) Empirical evidence Statistical time series studiesStatistical time series studies

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(i) The determination of the (i) The determination of the export price on world export price on world

marketsmarkets Developing countries tend to be smaller Developing countries tend to be smaller

economically than major industrialized economically than major industrialized countries, and more likely to specialize in countries, and more likely to specialize in the exports of basic commodities. the exports of basic commodities.

As a result, they are more likely to fit As a result, they are more likely to fit the “small open economy” model: the “small open economy” model:

they can be regarded as price-takers, they can be regarded as price-takers, That is, the prices of their export goods are That is, the prices of their export goods are

generally taken as given on world markets. generally taken as given on world markets.

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(ii) The old “structuralist (ii) The old “structuralist school”school”

Raul Prebisch Raul Prebisch (1950)(1950) & Hans Singer & Hans Singer (1950)(1950)

The hypothesis: a declining long run The hypothesis: a declining long run trend trend inin prices of mineral & agricultural products prices of mineral & agricultural products

relative to the prices of manufactured goods.relative to the prices of manufactured goods.

The theoretical reasoning: The theoretical reasoning: world demand for primary products is world demand for primary products is inelastic with respect to world income. inelastic with respect to world income.

That is, for every 1 % increase in income, That is, for every 1 % increase in income, raw materials demand rises by raw materials demand rises by less thanless than 1%. 1%.

Engel’s Law, an (older) proposition: Engel’s Law, an (older) proposition: households spend a lower fraction of their income households spend a lower fraction of their income on basic necessities as they get richer.on basic necessities as they get richer.

Demand => PDemand => P oil oil

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(iii) Hypotheses of rising (iii) Hypotheses of rising trendstrends

Hotelling on depletable resources;Hotelling on depletable resources;Malthus on geometric population Malthus on geometric population

growth.growth. Persuasive theoretical arguments Persuasive theoretical arguments

that we should expect oil prices to showthat we should expect oil prices to showan an upward upward trend in the long run.trend in the long run.

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Assumptions for Hotelling Assumptions for Hotelling modelmodel

(1) Non-perishable non-renewable resources: (1) Non-perishable non-renewable resources: Deposits in the earth’s crust are fixed in total supply Deposits in the earth’s crust are fixed in total supply

and are gradually being depleted.and are gradually being depleted.

(2) Secure property rights:(2) Secure property rights:Whoever currently has claim to the resource Whoever currently has claim to the resource can be confident that it will retain possession,can be confident that it will retain possession, unless it sells to someone else, unless it sells to someone else,

who then has equally safe property rights. who then has equally safe property rights. This assumption excludes cases where warlords This assumption excludes cases where warlords

compete over physical possession of the resource. compete over physical possession of the resource. It also excludes cases where private mining companies It also excludes cases where private mining companies

fear that their contracts might be abrogated fear that their contracts might be abrogated or their holdings nationalized. or their holdings nationalized.

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One more assumption, One more assumption, to keep the Hotelling model to keep the Hotelling model

simple:simple: (3) The fixed deposits are easily accessible: (3) The fixed deposits are easily accessible:

the costs of exploration & extraction the costs of exploration & extraction are small compared to the value of the mineral.are small compared to the value of the mineral.

Hotelling Hotelling (1931)(1931) deduced from these deduced from these assumptions the theoretical principle: assumptions the theoretical principle:

the price of oil in the long run should rise the price of oil in the long run should rise at a rate equal to the interest rate. at a rate equal to the interest rate.

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The Hotelling logic:The Hotelling logic:

The owner chooses how much mineral to extract The owner chooses how much mineral to extract and how much to leave in the ground. and how much to leave in the ground.

Whatever is mined can be sold at today’s price Whatever is mined can be sold at today’s price (price-taker assumption)(price-taker assumption) and the proceeds invested in bank deposits and the proceeds invested in bank deposits or US Treasury bills, which earn the current interest or US Treasury bills, which earn the current interest

rate. rate.

If the value of the commodity in the ground is If the value of the commodity in the ground is not expected to rise in the future, then the not expected to rise in the future, then the owner has an incentive to extract more of it owner has an incentive to extract more of it today, today, so that he earns interest on the proceeds. so that he earns interest on the proceeds.

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The Hotelling logic,The Hotelling logic, continued:continued:

As minng companies worldwide react in this way, As minng companies worldwide react in this way, they drive down the price today, they drive down the price today, below its perceived long-run level. below its perceived long-run level.

When the current price is below its long-run level, When the current price is below its long-run level, companies will expect the price tocompanies will expect the price to rise rise in the in the future.future.

Only when the expectation of future appreciation Only when the expectation of future appreciation is sufficient to offset the interest rate will the is sufficient to offset the interest rate will the commodity market be in equilibrium. commodity market be in equilibrium.

Only then will mining companies be Only then will mining companies be close to indifferent between extracting close to indifferent between extracting at a faster rate and a slower rate. at a faster rate and a slower rate.

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The complication: supply is not The complication: supply is not

fixed.fixed. True, at any point in time there is a certain True, at any point in time there is a certain

stock of reserves that have been discovered. stock of reserves that have been discovered. But the historical pattern has long been that, But the historical pattern has long been that,

as that stock is depleted, new reserves are as that stock is depleted, new reserves are found.found.

When the price goes up, it makes exploration When the price goes up, it makes exploration & development profitable for deposits farther & development profitable for deposits farther under the surface. under the surface.

……especially as new technologies are especially as new technologies are developed for exploration & extraction.developed for exploration & extraction.

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What is the overall statistical trend What is the overall statistical trend

in commodity prices in the long in commodity prices in the long run?run?

Some authors find a slight upward trend, Some authors find a slight upward trend,

some a slight downward trend.some a slight downward trend. [1]

The answer seems to depend, more than anything The answer seems to depend, more than anything else, on the date of the end of the sample:else, on the date of the end of the sample: Studies written after the 1970s boom found an upward Studies written after the 1970s boom found an upward

trend,trend, but those written after the 1980s found a downward but those written after the 1980s found a downward

trend, trend, even when both went back to the early 20th century. even when both went back to the early 20th century.

[1] Cuddington (1992), Cuddington, Ludema & Jayasuriya (2007), Cuddington & Cuddington (1992), Cuddington, Ludema & Jayasuriya (2007), Cuddington & Urzua (1989), Grilli & Yang (1988), Pindyck (1999), Hadass & Williamson (2003), Urzua (1989), Grilli & Yang (1988), Pindyck (1999), Hadass & Williamson (2003), Reinhart & Wickham (1994), Kellard & Wohar (2005), Balagtas & Holt (2009) Reinhart & Wickham (1994), Kellard & Wohar (2005), Balagtas & Holt (2009) and Harvey, Kellard, Madsen & Wohar (2010).and Harvey, Kellard, Madsen & Wohar (2010).

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(2) Effects of Volatility(2) Effects of Volatility Is volatility Is volatility per seper se bad for economic growth? bad for economic growth?

Cyclical shifts of resources back & forth across Cyclical shifts of resources back & forth across sectors may incur needless transaction costs.sectors may incur needless transaction costs.

A diversified country may indeed be betterA diversified country may indeed be betterthan one 100% specialized in minerals. than one 100% specialized in minerals.

On the other hand, the private sector dislikes On the other hand, the private sector dislikes risk as much as the government does, risk as much as the government does, and will take steps to mitigate it;and will take steps to mitigate it;

thus one must think where the market failure thus one must think where the market failure lies before assuming that a policy of deliberate lies before assuming that a policy of deliberate diversification is necessarily justified.diversification is necessarily justified.

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Effects of volatilityEffects of volatility, continued, continued

Policy-makers may not be better than individual Policy-makers may not be better than individual private agents at discerning whether private agents at discerning whether a commodity boom is temporary or not. a commodity boom is temporary or not.

But the government cannot But the government cannot ignore the issue of volatility:ignore the issue of volatility: When it comes to exchange rate or fiscal policy, When it comes to exchange rate or fiscal policy,

governments must necessarily make judgments governments must necessarily make judgments about the likely permanence of shocks. about the likely permanence of shocks.

More on medium-term cycles More on medium-term cycles when we get to the Dutch Diseasewhen we get to the Dutch Disease

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(3) Do natural resources (3) Do natural resources crowd out manufacturing?crowd out manufacturing?

Matsuyama Matsuyama (1992)(1992) provided provided an influential model: an influential model:

the manufacturing sector is assumed to be the manufacturing sector is assumed to be characterized by learning by doing, while the characterized by learning by doing, while the primary sector primary sector (agriculture, in his paper)(agriculture, in his paper) is not. is not. Also van WijnbergenAlso van Wijnbergen (1984)(1984) and Gylfason, Herbertsson & Zoegaand Gylfason, Herbertsson & Zoega (1999).(1999).

The implication:The implication: deliberate policy-induced diversification out of deliberate policy-induced diversification out of

primary products into manufacturing is justified, and primary products into manufacturing is justified, and a permanent commodity boom that crowds out a permanent commodity boom that crowds out

manufacturing can indeed be harmful. manufacturing can indeed be harmful.

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CounterargumentsCounterarguments There is no reason why learning by doing There is no reason why learning by doing

should occur only in manufacturing should occur only in manufacturing tradables. tradables.

Nontradable sectors can enjoy learning by Nontradable sectors can enjoy learning by doing. doing. [1] E.g., construction…E.g., construction…

The mineral sector can as well.The mineral sector can as well.

The USA is one example of a country that has The USA is one example of a country that has enjoyed big productivity growth in commodity enjoyed big productivity growth in commodity sectors.sectors.

Productivity gains have been aided Productivity gains have been aided by American public investment, by American public investment,

since the late 19th century, in such knowledge infrastructure since the late 19th century, in such knowledge infrastructure institutions as the U.S. Geological Survey, School of Mines, institutions as the U.S. Geological Survey, School of Mines, and Land-Grant Colleges. and Land-Grant Colleges. [2]

[1] Torvik Torvik (2001) and (2001) and Matsen & TorvikMatsen & Torvik (2005). (2005). [2] Wright & Czelusta[2] Wright & Czelusta (2003, p.6, 25; 18-21).(2003, p.6, 25; 18-21).

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Counterarguments, Counterarguments, continuedcontinued

Public investment in knowledge infrastructure Public investment in knowledge infrastructure ≠≠ government subsidy or ownership government subsidy or ownership of the resources themselves. of the resources themselves.

In Latin America, In Latin America, e.g.,e.g., public monopoly public monopoly ownership and prohibition on importing foreign ownership and prohibition on importing foreign expertise or capital has often stunted expertise or capital has often stunted development of the mineral sector, whereas development of the mineral sector, whereas privatization has set it free. privatization has set it free.

Attempts by governments to force linkages Attempts by governments to force linkages between the mineral sector and processing between the mineral sector and processing industries have often failed.industries have often failed.

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(4) Institutions(4) Institutions

Recent thinking in economic Recent thinking in economic development:development:

The quality of institutions is the deep The quality of institutions is the deep fundamental factor that determines which fundamental factor that determines which countries experience good performance.countries experience good performance. [1]

It is futile It is futile (e.g., for the IMF & World Bank)(e.g., for the IMF & World Bank) to recommend good macroeconomic or to recommend good macroeconomic or microeconomic policies if the institutional microeconomic policies if the institutional structure is not there to support them. structure is not there to support them.

[1] Barro (1991) and North (1994). Barro (1991) and North (1994).

4747

What What areare weak institutions? weak institutions?

A typical list:A typical list: inequality, inequality, corruption,corruption, insecure property rights,insecure property rights, intermittent dictatorship,intermittent dictatorship, ineffective judiciary branch, and ineffective judiciary branch, and lack of any constraints to prevent elites lack of any constraints to prevent elites

& politicians from plundering the country.& politicians from plundering the country.

““Quality of institutions” has been quantified by World Quality of institutions” has been quantified by World Bank, Freedom House, Transparency International, and Bank, Freedom House, Transparency International, and others.others.

Rodrik, Subramanian & Trebbi (2003) use a rule of law indicator and protection of property Rodrik, Subramanian & Trebbi (2003) use a rule of law indicator and protection of property rights rights (taken from Kaufmann, Kraay & Zoido-Lobaton, 2002). (taken from Kaufmann, Kraay & Zoido-Lobaton, 2002).

Acemoglu, Johnson, & Robinson (2001) use a measure of expropriation risk to investors.Acemoglu, Johnson, & Robinson (2001) use a measure of expropriation risk to investors. Acemoglu, Johnson, Robinson, & Thaicharoen (2003) use the extent of constraints on the Acemoglu, Johnson, Robinson, & Thaicharoen (2003) use the extent of constraints on the

executive. executive.

4848

Institutions can be endogenous:Institutions can be endogenous: the the resultresult of economic growth rather than the cause. of economic growth rather than the cause.

The same problem is encountered with other proposed The same problem is encountered with other proposed fundamental determinants of growth, fundamental determinants of growth, e.g., openness to trade e.g., openness to trade and and freedom from tropical diseases.freedom from tropical diseases.

Many institutions tend to evolve endogenously, Many institutions tend to evolve endogenously, in response to the level of income, in response to the level of income, such as the structure of financial markets, such as the structure of financial markets, mechanisms of income redistribution & social safety nets, mechanisms of income redistribution & social safety nets,

tax systems, and intellectual property rules…tax systems, and intellectual property rules…

4949

Addressing endogeneity of Addressing endogeneity of institutions statisticallyinstitutions statistically

Econometricians address the problem of Econometricians address the problem of endogeneity by means of the technique of endogeneity by means of the technique of instrumental variables. instrumental variables.

What is a good instrumental variable What is a good instrumental variable for institutions, an exogenous determinant? for institutions, an exogenous determinant?

Acemoglu, Johnson & Robinson Acemoglu, Johnson & Robinson (2001)(2001) introduced introduced the mortality rates of colonial settlers. the mortality rates of colonial settlers. The theory is that, out of all the lands that Europeans colonized, The theory is that, out of all the lands that Europeans colonized,

only those where Europeans actually settled were given good only those where Europeans actually settled were given good European institutions. European institutions.

Acemoglu Acemoglu et alet al figured that initial settler mortality figured that initial settler mortality determined whether Europeans settled in large numbersdetermined whether Europeans settled in large numbers..[1]

[1] Glaeser, et al, Glaeser, et al, (2004)(2004) argue against the settler variable. argue against the settler variable. Hall & Jones Hall & Jones (1999)(1999) consider latitude and the speaking of English consider latitude and the speaking of English or other European languages as proxies for European institutions. or other European languages as proxies for European institutions.

5050

Institutions: Econometric Institutions: Econometric findingsfindings

The finding is the same, regardless of IV:The finding is the same, regardless of IV: ““Institutions trump everything else” – Rodrik et al Institutions trump everything else” – Rodrik et al

(2002)(2002) Acemoglu et al Acemoglu et al (2002) (2002) Easterly & Levine Easterly & Levine (2002) (2002) Hall & Jones Hall & Jones (1999)(1999)

Geography and history matter Geography and history matter mainly as determinants of institutions;mainly as determinants of institutions; which is not to say that institutions don’t which is not to say that institutions don’t

also have other important determinants.also have other important determinants.

In any case, institutions are important. In any case, institutions are important.

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The “rent cycling theory” The “rent cycling theory” as enunciated by Autyas enunciated by Auty (1990, 2001, 07, 09) (1990, 2001, 07, 09)

::

Economic growth requires recycling rents Economic growth requires recycling rents via markets rather than via patronage. via markets rather than via patronage.

In oil countries the rents elicit In oil countries the rents elicit a political contest to capture ownership, a political contest to capture ownership,

whereas in low-rent countries the whereas in low-rent countries the government must motivate people to government must motivate people to create wealth, create wealth, e.g., by pursuing comparative advantage, e.g., by pursuing comparative advantage,

promoting equality, & fostering civil society. promoting equality, & fostering civil society.

5252

A related view by economic A related view by economic

historians Engerman & Sokoloffhistorians Engerman & Sokoloff (1997, (1997,

2000, 2002)2000, 2002)

Why did industrialization take place in North Why did industrialization take place in North America,America, not Latin America?not Latin America?

Lands endowed with extractive industries & plantation Lands endowed with extractive industries & plantation crops developed slavery, inequality, dictatorship, and crops developed slavery, inequality, dictatorship, and state control, state control,

whereas those climates suited to fishing & small farms whereas those climates suited to fishing & small farms developed institutions of individualism, democracy, developed institutions of individualism, democracy, egalitarianism, and capitalism. egalitarianism, and capitalism.

When the Industrial Revolution came, the latter When the Industrial Revolution came, the latter areas were well-suited to make the most of it. areas were well-suited to make the most of it.

Those that had specialized in extractive industries were Those that had specialized in extractive industries were not, not, because society had come to depend on class structure & because society had come to depend on class structure &

authoritarianism, rather than on individual incentive and authoritarianism, rather than on individual incentive and decentralized decision-making.decentralized decision-making.

5353

Econometric findings that Econometric findings that “point-source resources” “point-source resources” such as oil and mineralssuch as oil and minerals lead to poor institutionslead to poor institutions

Isham,Isham, Woolcock, Pritchett, & Busby Woolcock, Pritchett, & Busby (2005)(2005) Sala-I-Martin & Subramanian Sala-I-Martin & Subramanian (2003) (2003) Bulte, Damania & Deacon Bulte, Damania & Deacon (2005) (2005)

Mehlum, Moene & Torvik Mehlum, Moene & Torvik (2006)(2006) Arezki & Brückner Arezki & Brückner (2009).(2009).

The theory is thought to fit Middle Eastern oil The theory is thought to fit Middle Eastern oil exporters well.exporters well.

E.g., Iran. Mahdavi (1970), Skocpol (1982E.g., Iran. Mahdavi (1970), Skocpol (1982, p. 269, p. 269), and Smith ), and Smith (2007). (2007).

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Which comes first,Which comes first,minerals or institutions?minerals or institutions?

Some question the assumption that mineral Some question the assumption that mineral discoveries are exogenous and institutions discoveries are exogenous and institutions endogenous.endogenous.

Mineral wealth is not necessarily the cause Mineral wealth is not necessarily the cause and institutions the effect, and institutions the effect, rather than the other way around. rather than the other way around. Norman Norman (2009): (2009): the discovery & development of oil the discovery & development of oil

is not purely exogenous, but rather is endogenous is not purely exogenous, but rather is endogenous with respect to the efficiency of the economy. with respect to the efficiency of the economy.

5555

The important determinant is whether The important determinant is whether the country already has good the country already has good

institutions institutions at the time that minerals are at the time that minerals are

discovered, discovered,

in which case it is put to use for the national in which case it is put to use for the national welfare, instead of the welfare of an elite, on welfare, instead of the welfare of an elite, on

average.average. Mehlum, Moene & Torvik Mehlum, Moene & Torvik (2006),(2006), Robinson, Torvik & Verdier Robinson, Torvik & Verdier (2006), (2006), McSherry McSherry (2006), (2006), Smith Smith (2007)(2007) and and Collier & Goderis Collier & Goderis (2007).(2007).

Luong & Weinthal (2010), in a study of Luong & Weinthal (2010), in a study of the 5 oil-producing former Soviet republics:the 5 oil-producing former Soviet republics:the choice of ownership structure makes the difference the choice of ownership structure makes the difference as to whether oil turns out a blessing rather than a as to whether oil turns out a blessing rather than a curse.curse.

The The combinationcombination of ofdevelopment + weak institutions development + weak institutions

+ oil+ oil Bhattacharyya & Hodler Bhattacharyya & Hodler (2009)(2009) find that find that

natural resource rents lead to corruption, but natural resource rents lead to corruption, but only in the absence of high-quality democratic only in the absence of high-quality democratic institutions.institutions.

Collier & Hoeffler Collier & Hoeffler (2009)(2009) find that when find that when developing countries have democracies, as developing countries have democracies, as opposed to advanced countries, they tend to opposed to advanced countries, they tend to feature weak checks and balances; feature weak checks and balances; thus, when developing countries also have high thus, when developing countries also have high

natural resource rents the result is bad for natural resource rents the result is bad for economic growth.economic growth.

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(5)(5) Unsustainably rapid Unsustainably rapid depletiondepletion

What happens when a depletable What happens when a depletable natural resource is indeed depleted?natural resource is indeed depleted?

This question is important for 3 reasons:This question is important for 3 reasons: Protection of Protection of environmental qualityenvironmental quality..

A motivation A motivation forfor the the strategy strategy of of economic economic diversificationdiversification..

A motivation for the “A motivation for the “Hartwick ruleHartwick rule”: ”: All rents from exhaustible natural resources should be invested All rents from exhaustible natural resources should be invested

in other assets, so that future generations do not suffer in other assets, so that future generations do not suffer a diminution in total wealth (natural resource plus reproducible a diminution in total wealth (natural resource plus reproducible capital) and therefore in the flow of consumption. capital) and therefore in the flow of consumption.

Hartwick (1977) and Solow (1986).Hartwick (1977) and Solow (1986).

5858

Rapid depletion,Rapid depletion, continuedcontinued

Each of these problems would be much less Each of these problems would be much less severe if full assignment of property rights severe if full assignment of property rights were possible, were possible, thereby giving the owners adequate incentive thereby giving the owners adequate incentive

to conserve the resource in question. to conserve the resource in question.

But often this is not possible, But often this is not possible, either physically either physically or politically. or politically. Especially in a frontier situation.Especially in a frontier situation.

The difficulty in enforcing property rights over The difficulty in enforcing property rights over some non-renewable resources constitutes a some non-renewable resources constitutes a category of natural resource curse of its own.category of natural resource curse of its own.

5959

Unenforceable property Unenforceable property rights over depletable rights over depletable resourcesresources

Some natural resources do not lend themselves Some natural resources do not lend themselves to property rights, whether the government to property rights, whether the government wants to apply them or not. wants to apply them or not.

Very different from the theory that the physical possession of point-Very different from the theory that the physical possession of point-source mineral wealth undermines the motivation for the source mineral wealth undermines the motivation for the government to establish a regime of property rights for the rest of government to establish a regime of property rights for the rest of the economy.the economy.

Overfishing, overgrazing, & over-use of water are Overfishing, overgrazing, & over-use of water are classic examples of the “tragedy of the commons” classic examples of the “tragedy of the commons” that applies to “open access” resources. that applies to “open access” resources.

Individual fisherman or farmers have no incentive Individual fisherman or farmers have no incentive to restrain themselves, while the fisheries or to restrain themselves, while the fisheries or pastureland or water aquifers are collectively pastureland or water aquifers are collectively depleted.depleted.

6060

Unenforceable property rights,Unenforceable property rights, continuedcontinued

The difficulty in imposing property rights The difficulty in imposing property rights is particularly severe is particularly severe when the resource is when the resource is dispersed over a wide dispersed over a wide area, as timberland.area, as timberland.

But even the classic point-source resource, But even the classic point-source resource, oil, can suffer the problem, especially when oil, can suffer the problem, especially when wells drilled from different wells drilled from different plots of land hit the same plots of land hit the same underground deposit.underground deposit.

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Unenforceable property rights,Unenforceable property rights, continuedcontinued

This market failure can invalidate some This market failure can invalidate some standard neoclassical economic theorems standard neoclassical economic theorems in the case of open access resources. in the case of open access resources.

The resource will be depleted more rapidly than The resource will be depleted more rapidly than the optimization of the Hotelling calculation calls the optimization of the Hotelling calculation calls for. for. [1] [1]

The benefits of free trade may be another The benefits of free trade may be another casualty:casualty:

If exports exacerbate If exports exacerbate the excess rate of exploitation,the excess rate of exploitation,

the country might be better worse off. the country might be better worse off. [2][2]

[1] [1] E.g.,E.g., Dasgupta & Heal Dasgupta & Heal (1985).(1985). [2] [2] Brander & TaylorBrander & Taylor (1997).(1997).

6262

(6)(6) War War Where a valuable resource such as oil or Where a valuable resource such as oil or

diamonds diamonds is there for the taking, factions will likely fight is there for the taking, factions will likely fight over it. over it.

Oil & minerals are correlated with civil war.Oil & minerals are correlated with civil war. Collier & Hoeffler (2004), Collier (2007), Collier & Hoeffler (2004), Collier (2007),

Fearon & Laitin (2003) and Humphreys (2005).Fearon & Laitin (2003) and Humphreys (2005).

Chronic conflict in such oil-rich countries as Chronic conflict in such oil-rich countries as Angola Angola & Sudan comes to mind.& Sudan comes to mind.

Civil war is, in turn, very bad Civil war is, in turn, very bad for economic development.for economic development.

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Procyclicality in developing countriesProcyclicality in developing countries

Appendix 2: Appendix 2: Procyclical capital flowsProcyclical capital flows

According to theory According to theory (“intertemporal optimization”),(“intertemporal optimization”), countries should borrow during temporary downturns, countries should borrow during temporary downturns, to sustain consumption & investment, and should repay or to sustain consumption & investment, and should repay or accumulate net foreign assets during temporary upturns. accumulate net foreign assets during temporary upturns.

In practice, it does not always work this way. In practice, it does not always work this way. Capital flows are more procyclical than countercyclical. Capital flows are more procyclical than countercyclical. [1][1]

Theories to explain this involve capital market Theories to explain this involve capital market imperfections, imperfections,

e.g., asymmetric information or the need for collateral. e.g., asymmetric information or the need for collateral.

[1] Kaminsky, Reinhart, & Vegh [1] Kaminsky, Reinhart, & Vegh (2005);(2005); Reinhart & Reinhart Reinhart & Reinhart (2009);(2009); Gavin, Gavin, Hausmann, Perotti & Talvi Hausmann, Perotti & Talvi (1996);(1996); and Mendoza & Terrones and Mendoza & Terrones (2008).(2008).

6464

Procyclicality in developing Procyclicality in developing countriescountries

Procyclical capital flowsProcyclical capital flows,, continuedcontinued

As countries evolve more market-oriented As countries evolve more market-oriented financial systems, the capital inflows during financial systems, the capital inflows during the boom phase show up in prices for land & the boom phase show up in prices for land & buildings, buildings, and also in prices of financial assetsand also in prices of financial assets. .

Prices of equities & bondsPrices of equities & bonds are summary are summary measures of the extent of speculative measures of the extent of speculative enthusiasm, enthusiasm,

often useful for predicting which countries often useful for predicting which countries are vulnerable to crises in the future.are vulnerable to crises in the future.

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Appendix 2: Procyclical capital flowsAppendix 2: Procyclical capital flows

3 cycles in capital flows to emerging 3 cycles in capital flows to emerging marketsmarkets

11stst developing country lending boom developing country lending boom (“recycling petro dollars”): 1975-1981(“recycling petro dollars”): 1975-1981 Ended in international debt crisis 1982Ended in international debt crisis 1982 7 Lean years (“Lost Decade”): 1982-19897 Lean years (“Lost Decade”): 1982-1989

22ndnd lending boom (“emerging markets”): 1990- lending boom (“emerging markets”): 1990-9696 Ended in East Asia crisis 1997Ended in East Asia crisis 1997 7 Lean years: 1997-20037 Lean years: 1997-2003

33rdrd boom boom (incl. China & India this time):(incl. China & India this time): 2003-2008 2003-2008 44thth boom? 2010- boom? 2010-

6666

This time, many countries used the This time, many countries used the inflowsinflows

to build upto build up forex reservesforex reserves,, rather thanrather thanto finance to finance Current AccountCurrent Account deficits deficits

Net Capital Flow

Change in Reserves

Current Account Balance

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

% o

f G

DP

in % of GDP(Low- and

middle-income countries)

2003-07

boom1991-97

boom

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Procyclical capital flowsProcyclical capital flows,, continuedcontinued

In the commodity & emerging market booms In the commodity & emerging market booms of 2003-11, net capital flows have typically of 2003-11, net capital flows have typically gone gone to countries with current account surpluses, to countries with current account surpluses, especially Asians and commodity producers especially Asians and commodity producers in the Middle East & Latin America, in the Middle East & Latin America, where they showed up in record accumulation where they showed up in record accumulation

of foreign exchange reserves. of foreign exchange reserves. This is in contrast to the two previous cycles, This is in contrast to the two previous cycles,

1975-1981 and 1990-97, when the capital 1975-1981 and 1990-97, when the capital flows to developing countries largely went to flows to developing countries largely went to finance current account deficits.finance current account deficits.

Procyclicality in developing Procyclicality in developing countriescountries

6868

One interpretation of procyclical capital flows is One interpretation of procyclical capital flows is that they result from procyclical fiscal policy:that they result from procyclical fiscal policy: when governments increase spending in booms, when governments increase spending in booms,

the deficit is financed by borrowing from abroad. the deficit is financed by borrowing from abroad. When they are forced to cut spending in downturns, When they are forced to cut spending in downturns,

it is to repay the excessive debt incurred during the it is to repay the excessive debt incurred during the upturn. upturn.

Another interpretation of procyclical Another interpretation of procyclical capital flows to developing countries capital flows to developing countries is that they pertain especially to mineral exporters. is that they pertain especially to mineral exporters.

We consider procyclical fiscal policy, return to the We consider procyclical fiscal policy, return to the mineral commodity cycle mineral commodity cycle (Dutch disease)(Dutch disease) in their own in their own sub-sections. sub-sections.

Procyclicality in developing Procyclicality in developing countriescountries

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What characteristics have helped What characteristics have helped emerging markets resist financial emerging markets resist financial

contagion?contagion? High FX reserves and/or floating currencyHigh FX reserves and/or floating currency Low foreign-denominated debtLow foreign-denominated debt (currency mismatch)(currency mismatch)

Low short-term debtLow short-term debt (maturity mis-match)(maturity mis-match) High Foreign Direct InvestmentHigh Foreign Direct Investment Strong initial budget,Strong initial budget, allowing room to ease.allowing room to ease. High export/GDP ratio,High export/GDP ratio,

Sachs Sachs (1985);(1985); Eaton & Gersovitz Eaton & Gersovitz (1981),(1981), Rose Rose (2002); (2002); Calvo, Izquierdo & Talvi Calvo, Izquierdo & Talvi (2003);(2003); Edwards Edwards (2004); (2004); Cavallo & Frankel Cavallo & Frankel ( 2008).( 2008).

In the 2008-09 crisis, many of the historical Early Warning Indicators In the 2008-09 crisis, many of the historical Early Warning Indicators worked, especially reservesworked, especially reserves

Frankel & Saravelos (2010)Frankel & Saravelos (2010)

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Appendix 3: Skeptics argue that Appendix 3: Skeptics argue that commodity exports are commodity exports are

endogenous. endogenous. [1] On the one hand, basic trade theory says:On the one hand, basic trade theory says:

A country may show a high mineral share in A country may show a high mineral share in exports, exports, not necessarily because it has a higher endowment not necessarily because it has a higher endowment of minerals than others (of minerals than others (absoluteabsolute advantage) advantage) but because it does not have the ability to export but because it does not have the ability to export manufactures (manufactures (comparativecomparative advantage). advantage).

This could explain negative statistical correlations This could explain negative statistical correlations between mineral exports and economic between mineral exports and economic development,development, invalidating the common inference that minerals are bad for invalidating the common inference that minerals are bad for

growth. growth.

[1] Maloney Maloney (2002)(2002) andand Wright & CzelustaWright & Czelusta (2003, 04, 06). (2003, 04, 06).

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Commodity exports are endogenous,Commodity exports are endogenous, continued.continued.

On the other hand, skeptics also have plenty On the other hand, skeptics also have plenty of examples where successful institutions and of examples where successful institutions and industrialization went hand in hand with rapid industrialization went hand in hand with rapid development of mineral resources.development of mineral resources.

Countries that were able to develop efficiently Countries that were able to develop efficiently their resource endowments as part of their resource endowments as part of strong strong economy-wideeconomy-wide growth include: growth include: the USA during its pre-war industrialization period the USA during its pre-war industrialization period [1],, Venezuela from the 1920s to the 1970s, Venezuela from the 1920s to the 1970s,

Australia since the 1960s, Norway since 1969 oil Australia since the 1960s, Norway since 1969 oil discoveries, Chile since adoption of a new mining discoveries, Chile since adoption of a new mining code in 1983, code in 1983, Peru since a privatization program in 1992, and Peru since a privatization program in 1992, and Brazil since the lifting of restrictions on foreign mining Brazil since the lifting of restrictions on foreign mining participation in 1995. participation in 1995. [2]

[1] David & Wright (1997). David & Wright (1997). [2] Wright & Czelusta (2003, [2] Wright & Czelusta (2003, pp. 4-7, 12-13, 18-22pp. 4-7, 12-13, 18-22).).

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Commodity exports are endogenous,Commodity exports are endogenous, continued.continued.

Examples of countries that were Examples of countries that were equally well-endowed geologically but equally well-endowed geologically but that failed to develop their natural that failed to develop their natural resources efficiently include:resources efficiently include: Chile and Australia before World War I, Chile and Australia before World War I, and Venezuela since the 1980s.and Venezuela since the 1980s.[3]

[3] Hausmann Hausmann (2003(2003, p.246, p.246):): “Venezuela’s growth collapse took place after “Venezuela’s growth collapse took place after 60 years of expansion, fueled by oil. If oil 60 years of expansion, fueled by oil. If oil explains slow growth, what explains the explains slow growth, what explains the previous fast growth?”previous fast growth?”