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Developing resources – resource curse or resource blessing?

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Isabelle Ramdoo, ECDPM
Bangkok, Thailand, 11 – 13 June 2013

Published in: Business, Economy & Finance
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Developing resources – resource curse or resource blessing?

  1. 1. Isabelle Ramdoo European Centre for Development Policy Management Bangkok, Thailand, 11 – 13 June 2013 Developing Resources – Resource Curse or Resource Blessing?
  2. 2. 1. What is the resource curse? Page 2ECDPM
  3. 3. • 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 ECDPM Page 3
  4. 4. Source: Frankel, 2012 Empirical evidence show that growth slower as share of minerals in exports are higher ECDP Page 4
  5. 5. 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? ECDPM Page 5
  6. 6. 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 activities 2. Non renewable: more like an asset than a source of income 3. Resources are unevenly spread 4. Unequal geological knowledge and negotiation expertise These 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 ECDPM Page 6
  7. 7. What is the mechanism for this counter-intuitive relationship? At least 4 categories of explanations 1. Price volatility 2. Dutch Disease 3. Procyclicality including 1. Procyclical capital flows 2. Procyclical monetary policy 3. Procyclical fiscal policy. 4. Inhibited development of institutions 3. Channels of resource curse: ECDPM Page 7
  8. 8. Source: Frankel i. Volatility in commodity prices ECDPM Page 8
  9. 9. 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 ECDPM Page 9
  10. 10. 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 export 3) 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 ECDPM Page 10
  11. 11. How the Dutch Disease works ECDPM Page 11
  12. 12. • 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 Goods Fiscal Policy iii. Pro-cyclical behaviours ECDPM Page 12
  13. 13. iv Inhibited development of institutions: ECDPM Page 13
  14. 14. 1. Economic challenges a. Excessive dependence on exports and rents b. Undiversified economic structures c. Fast growth but high income inequality 2. Governance and political challenges a. Weakened accountability and citizens legitimacy b. Transparency and corruption c. At times conflicts and war 4. Major challenges facing countries ECDPM Page 14
  15. 15. 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) ECDPM Page 15
  16. 16. Number of export products representing more than 75% of total merchandise exports, 2010 1.b Undiversified economic structures (Africa) ECDPM Page 16
  17. 17. Mineral rich, GNI per capita, $2010 Oil rich, GNI per capita, $2010 1.c High income inequality (Africa) Source: WB, 2012, WDIs Page 17 ECDPM
  18. 18. ii.a Weak accountability and legitimacy ECDPM Page 18
  19. 19. ii.b Transparency and corruption ECDPM Page 19
  20. 20. ii.c At times war and conflicts ECDPM Page 20
  21. 21. • 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 ECDPM Page 21
  22. 22. ECDPM Page 22
  23. 23. Thank you www.ecdpm.org www.slideshare.net/ecdpm Contact: ir@ecdpm.org Twitter: @ir_ramdoo Page 23

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