THE RESOURCE CURSE

November 2nd, 2016

Prepared by:James

Middleton

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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

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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 conflictHowever, 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

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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.)

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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)

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Historically Indonesia has been resource dependent, although it has gradually diversified its economy

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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

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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

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So has Australia 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?