2. 2|
What is the
Resource Curse?
A phenomenon where the existence of significant natural
resource reserves can have a negative impact on long-
term economic growth and development
Also referred to as the paradox of plenty, or Dutch Disease
3. 3|
How does it impact
on development
outcomes?
A range of economic and political mechanisms contribute
to the negative impacts that are attributed to the
resource curse
Economic
• Overvalued currency weakens
export competitiveness (Dutch
Disease)
• Crowding out of other sectors
• Loss of positive externalities from
other activities (eg; learning by
doing in manufacturing)
• Increased economic and revenue
volatility
Political
• Incentivizing rent-seeking
behaviour over more productive
economic activities (eg; education,
entrepreneurial activity)
• Revenue channel can:
• Encourage corruption
• Weaken of political and legal
institutions
• Encourage both political and
violent conflict
However, whilst resource wealth can weaken institutional quality and retard their development, strong
institutions and good governance can help a country avoid the resource curse or at least help temper
its effects
4. 4|
But the Resource
Curse isn’t inevitable
Not all countries with natural resource reserves fall victim
to the resource curse – Aust, Norway etc.
Australia
• #5 in GDP p.c. (2014)
• Natural resource rents – 7.1% of GDP (2014)
• Resource taxation regime
• Strong macroeconomic management (eg; inflation
targeting, fiscal management)
• Strong independent political & social institutions
(eg; independent Central Bank, rule of law etc.)
Norway
• #2 in GDP p.c. (2014)
• Natural resource rents – 9.1% of GDP (2014)
• World’s largest Sovereign Wealth Fund (SWF)
• Strong macroeconomic management (eg; inflation
targeting, fiscal management)
• Strong independent political & social institutions
(eg; independent Central Bank, rule of law etc.)
5. 5|
Indonesia also
managed to avoid
the resource curse
Despite its resource dependence, Indonesia has recorded
strong economic growth and significant improvements in
a range of development indicators
Indonesia’s economy, and in particular its government
finances, are heavily dependent on natural resources
• Natural resource rents averaged 14% of GDP since 1967
• Oil & gas accounted for 8%
• The petroleum industry accounted for 18% of government
revenues in 2011
This hasn’t prevented strong growth and development
outcomes, in fact it’s aided them
• Average growth in GDP of 6% p.a. since 1967
• Its Human Development Index has steadily risen since 1980
• Reached 0.684 in 2014 – 110th out of 188
• Now in the ‘medium human development’ UN category
• Health and education indicators have improved
• The poverty headcount ratio has fallen from 65.3% in 1998
to 8.3% in 2014 ($1.90 per day, USD 2011 PPP)
6.3
3.90
10
20
30
40
1970
1975
1980
1985
1990
1995
2000
2005
2010
Resourcerentsasa%of
GDP
Indonesia
World
Historically Indonesia has been resource dependent,
although it has gradually diversified its economy
6. 6|
But it has since
decentralized
significantly
Indonesia’s federal structure devolves significant
responsibility and fiscal autonomy to its provinces and
districts. Resource rents in particular provide significant
revenue to regional governments
• Transfers from the Centre to
subnational governments makes
up approx. 70% of their budgets
• 11% of this is oil & gas
• The provinces of Aceh, Papua
and West Papua receive even
higher proportions than most
provinces thanks to their special
autonomous status and previous
negotiations.
• The province of East Kalimantan
received approx. $400 million
USD in 2012
• These flows aim to promote fiscal
equity between the resource-rich
and poor provinces
Indonesia’s resource revenue sharing regime distributes a significant amount of the money from
natural resources to subnational governments
7. 7|
Do these revenue
flows provide a
boost or not?
These significant flows are meant to provide a positive
economic and social benefit, but can also create a
revenue channel through which a regional resource curse
can eventuate
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
0 500,000 1,000,000 1,500,000 2,000,000 2,500,000
Avg.annual%GRPgrowth(2001-13)
excl.oil&gas
Avg. annual DBH revenue sharing 2000-12 (million IDR)
-15
-10
-5
0
5
10
15
20
25
30
0 500,000 1,000,000 1,500,000 2,000,000 2,500,000
%pointfallinpovertyincidence2002-13
Avg. annual DBH revenue sharing 2000-12 (million IDR)
0
2
4
6
8
10
12
0 500,000 1,000,000 1,500,000 2,000,000 2,500,000
IncreaseintheHDI(2004-13)
Avg. annual DBH revenue sharing 2000-12 (million IDR)
40
45
50
55
60
65
70
75
80
0 500,000 1,000,000 1,500,000 2,000,000 2,500,000
EconomicGovernanceIndex2007
Avg. annual DBH revenue sharing 2000-12 (million IDR)
8. 8|
So hasAustralia
completely avoided
the resource curse?
Whilst Indonesia has generally managed to avoid the
curse, the results were mixed at a regional level. How has
Australia fared?
During the heights of the mining boom Australia experienced:
• A heightened exchange rate
• Rising input prices (such as labour), particularly in mining regions
• Deindustrialization in export-competing markets such as car manufacturing
• Loss of fiscal discipline – overreliance on resource revenue flows
• How much can these issues actually be attributed to the resource sector?
• What sort of policy responses can be taken in response?
• Do they even require a policy response?
Editor's Notes
The phenomenon was identified as far back as the 1950s but the phrase was coined by Richard Auty in 1993 and the relationship was formalised in a study by Jeffrey Sachs & Andrew Warner in 1995, and updated in 2001
Most commonly associated with oil, but is also evident with other non-renewable resources (eg; diamonds, gas etc.)
There’s still plenty of debate as to whether the curse actually exists or whether it is a benefit (refer to chart)
Middle East is the perfect example
Nigeria, African nations with diamonds
Not particularly surprising from countries as developed as this
They were able to build up the necessary institutions and mechanisms before the windfalls associated with resources skewed the incentive structures
A developing country like Indonesia would be expected to face more difficulties in avoiding the curse, but…
Indonesia successfully followed orthodox macroeconomic and fiscal management policies to avoid the resource curse
Significant reason why Indonesia was able to avoid the Resource Curse was thanks to its strong centralised Government under Suharto. This helped the Government successfully use the windfall from resource revenues to underpin industrialisation and diversification across the economy
Fairly simplistic analysis
I also took a closer look at two resource rich provinces (E Kalimantan & West Papua) to see what sort of influence the deterioration in institutional quality had on socioeconoimc & development outcomes
Similarly to at the national level (Oz & Norway) provinces which already had strong institutions were better able to manage the money (E Kalimantan), but those without saw much more negative impacts (W Papua)
So that was the gist of my research. Whilst it doesn’t necessarily prove the existence of a curse it does highlight the risks associated with over-dependence on the resource sector.
I thought I’d finish by bringing it back home and asking whether we think Australia has remained able to avoid
