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The Resource Curse. Econ 2218 March 8-10 Peter Burton. The Resource Curse (The Paradox of Plenty). - PowerPoint PPT Presentation
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The Resource Curse
Econ 2218March 8-10
Peter Burton
The Resource Curse(The Paradox of Plenty)
Countries and regions with an abundance of natural resource, especially concentrated resources such as minerals and fossil fuels, tend to have lower economic growth and worse development outcomes
The Resource Curse
The Resource Curse
The Resource Curse
“Ten years from now, twenty years from now, you will see: Oil will bring us ruin...oil is the Devil’s excrement.” Juan Pablo Perez Alfonzo
(Venezuelan politician), 1973
The Resource Curse
Original References:Auty, R. (1990), Resource-Based
Industrialization: Sowing the Oil in Eight Developing Countries, Oxford U. Press
Gelb, A. (1988), Windfall Gains: Blessing or Curse? , Oxford U. Press
Good Summary:Sachs, J and A. Warner (2001), The curse of
natural resources, European Economic Review 45, 827-838
The Resource Curse
Possible Reasons:1)Conflict2)Responsible Government 3)Exchange Rate Appreciation (Dutch Disease)4)Revenue Volatility5)Excessive Debt6)Corruption7)Specialization8)Reduced Education
The Resource Curse
Counterargument:
Association could have reverse causation:
Conflicts and bad policies may discourage all other economic activity before it stops resource extraction and export
The Resource Curse
Possible Reasons:1)Conflict:
a) Jurisdictional fights over the control of resources/revenues
b) Armed conflict over resourcesc) Resource revenues may fund
other conflicts (e.g., diamonds in Zaire)
The Resource Curse
2) Responsible Governmenta) Resource taxed rather than citizens
less citizen pressure for effective gov’t. and revenues less connected with general well-being
b) Those benefiting see an effective civil service as a threat lobby to cut regulation/overview
The Resource Curse
3) Appreciation of Exchange Rate “Dutch Disease”
Refers to Netherlands in early 1960s• Natural gas exports resulted in
appreciation of exchange rate• Manufacturing (and agriculture)
harmed by high exchange rate – Their exports more expensive to others
The Resource Curse
The Resource Curse
4) Revenue Volatility
Many natural resources prices are far more volatile than other prices
Example: Last six yearsDow Jones Industrial Index
(blue)Amex Oil Index (green)
The Resource Curse
4) Revenue Volatility cont’d
–Difficult to plan–Difficult to maintain government
programmes–Not honouring contracts may
discourage investment and encourage emigration
The Resource Curse
5) Excessive Debta) Prospect of future resource
revenues encourages borrowing• Worsened by appreciation
(inexpensive to borrow)• Resources act as collateral
(others more willing to lend)
The Resource Curse
5) Excessive Debtb) Less able to repay when prices
fall or resource depleted• Worsened by currency
depreciation • Worsened by penalty charges
on late repayments
The Resource Curse
6) CorruptionConcentration of resource revenues
may fuel political corruptionUsually do not need policies that
encourage a well-functioning economy. Instead may seek• Regulation wavers(e.g.,
environmental, labour)• Reduced royalty/taxation rates
The Resource Curse
6) Corruption (cont’d)
Whether lobbied for or not, there may be incentives to reduce democratic institutions or increase oppression of those who might oppose the resource development
The Resource Curse
7) SpecializationLucrative resource sector out-competes other sectors
- lures most productive/best-educated workers
- High exchange rate discourages other exports (Dutch disease)
The Resource Curse
7) Specialization (cont’d)Expect:
a) Increased specialization over time b) Attempts at diversification often
fail/very costlyc) Resource sector generally provides
few jobs and have few (forward or backward) linkages to other areas of the economy (further concentrating power)
The Resource Curse
8) Reduced EducationIndividuals and governments
see a reduced need for education while incomes/revenues are high
Discourages innovation and further growth
The Resource Curse
What can be done?
I) Reduce appreciation of currencyDo not bring revenues into country
(i.e., put revenues in a fund that is invested abroad)- gives a more stable income stream- provides an asset for future generations
The Resource Curse
What can be done? (cont’d)
II) Increase domestic savings- run large government surpluses- tax breaks for long-term saving- reduce consumption borrowing
The Resource Curse
What can be done? (cont’d)
III) Heavy taxation/royalties on industry...try to avoid booms
- the resource will still be there if not extracted now
The Resource Curse
What can be done? (cont’d)
IV) Invest in education and infrastructure to increase competitiveness of other sectors
The Resource Curse
What can be done? (cont’d)
V) Increase anticorruption efforts• Tighten rules on lobbying • Improve rule of law• Improve monitoring of human
rights
The Resource Curse
What can be done? (cont’d)
V) Increase anticorruption efforts• Further embed democratic
procedures and institutions• Increase monitoring of all levels of
the government, civil service (including police and army) and judiciary
The Resource Curse
What can be done? (cont’d)
V)Increase anticorruption efforts• Better define property rights of all
those in resource extraction area (often indigenous peoples)
The Resource Curse
Intuition of what should with a resource?
Hartwick (1977) “Hartwick’s Rule”
- A natural resource is an asset. - If you care about future generations, any extraction of the resource should be used to acquire other assets that are at least as valuable