12. Natural resources Flashcards
What are natural resources?
Resources that exist without human actions
Why should resource rich countries be richer than resource scarce countries and what does the data say?
Because the production of natural resources does not require any investments, resource rich countries should be wealthier than resource scarce countries however the data does not support this notion
What properties do resource rich countries tend to have compared to non-resource rich countries?
- Have higher corruption
- Have greater income inequality
- Have more poverty
- Have more conflict
- Grow more slowly
What are some examples of the impact of good governance over natural resources?
Norway’s sovereign wealth fund, Alaska (The Alaska Permanent fund dividend) gives some back. Good governance is the key to maximising benefits from resources
What is the general relationship between natural resource exports and growth in real GDP growth per capita?
Data from countries with high endowments of natural resources show the negative relationship between natural resources exports and growth. Those countries with high exports of natural resources in 1970 grew ore slowly on average over the next 20 years
Name a paper that shows the negative relationship?
Sachs and Warner (1995) - “empirical support for the curse of natural resources is not bulletproof but it is quite strong”
How can natural resources effect development (4)?
- Sectoral composition (structural change)
- Macroeconomic stability/ instability
- Institutions
- The probability of civil conflict
What is conflict often known as?
Development in reverse
What are the impacts of distortions to sectoral composition?
Natural resources can distort the structure of an economy leading to short-run benefits but long-term costs
What is Dutch disease?
Dutch disease refers to a reduction in a country’s export performance as a result of an appreciation of the exchange rate following the discovery of natural resources such as oil
Why is dutch disease important for labour?
Because many of the industries that generate dutch disease (oil and gas) are very capital intensive but not labour intensive increasing unemployment if it makes other sectors of the economy uncompetitive
What happens to the economy structurally under dutch disease?
There is a restructuring of jobs in the economy to more services to serve the natural resources sector away from manufacturing as this is no longer competitive
Why is it important to manage natural resources from a macro-economic point of view according to Stiglitz?
Quite often countries with larger amounts of natural resources suffer from exchange rate appreciation and the result is when they sell the natural resource. The value of the currency goes up. They produce natural resources but no jobs. You can see this all over the world. We have rich countries and poor people, that’s why it is so important to manage the natural resources from the macro economic point of view.
What is the development of dutch disease dependent on?
Whether resource booms lead to dutch disease or not depends on the degree to which the exploitation of a natural resource effects production in other sectors of the economy
What makes dutch disease less likely?
- Backward linkages - local outputs used as inputs by the source extraction industry
- Forward linkages (natural resources used to produce other goods locally)
- Spillovers in investments
Why does it matter if oil is the only industry?
When a country’s GDP is dependent on the export of natural resources, it is very vulnerable to macroeconomic instability due to price volatility eg. Venezuela
What happened to Venezuela?
Despite the country having the world’s largest proven crude oil reserves, Venezuela experience hyperinflation and sustained negative GDP growth
How heavily reliant was Venezuela on oil exports?
It accounted for around 95% of exports before the collapse
What did successive governments fail to do?
Neglected diversifying economic activity leaving the economy unbalanced and vulnerable so when oil prices fell in the early 2010s and in 2014, there was a sharp decline in oil revenues
How did the government attempt to address the budget defecit?
Borrowing and printing money resulting in hyperinflation (5220% in 2018)
What was the result of economic collapse in Venezuela?
The exodus of skilled workers hampering development
What has the state owned oil company PDVSA been subjected to?
International sanctions for government corruption and human-rights violations
How is government spending impacted by over-reliance on natural resources?
Government spending is much less stable in those countries specialising in oil exports such as Gabon, the Congo and Equatorial Guinea and is dictated by the price of oil. This has impacts of
Why does the role of government and institutions matter with natural resources?
The role becomes even more important. Resource extraction sector is typically owned or regulated by the government meaning resource windfalls generate income for governments (directly or indirectly)
- The use of this income determines whether natural resources are a blessing or a curse
What are the growth enhancing effects of natural resources?
▪ Provision of public goods: infrastructure, education, etc.
▪ Investment in other industries/sectors
▪ Paying off debts
What are the growth-deterring effects of natural resources?
▪ Over-expansion of government sector, over-spending and over-borrowing
▪ Macroeconomic instability due to price volatility of resources (see previous)
▪ Incentives for corruption than can lead to a struggle over control
Why may over-spending or over borrowing arise as a result of natural resources?
If government spending is derived from
state-owned companies extracting natural
resources, it easier to avoid accountability
Name some countries that have had periods of unchecked government spending?
Countries such as Nigeria, Angola and
Venezuela (and others) have all had periods
of unchecked government spending. These government were later heavily
criticized for over-spending on projects that
failed to deliver real benefits
What does less accountability lead to?
Corruption
What is the relationship between conflict and national resources?
Many recent conflicts are observably influenced by the presence of heavy concentrations of
natural resources and in particular oil (Kuwait, Sierra Leone, Angola, Congo DRC, Bolivia)
What is an explanation for why high amounts of natural resources may lead to civil conflict?
One explanation is suggested by the Collier-Hoeffler (1998) cost-benefit analysis: natural
resources are of high value, but it is often relatively easy to capture control of these resources
What are incentives for conflict over natural resources based on?
Incentives to fight for these resources may depend on the quality of government, particularly
rule of law
How did conflict for natural resources happen in Sierra Leone?
The 11-year civil war began in Sierra Leone during the 1990s because of alluvial diamonds in rivers
What did Lei and Michaels (2014) find about the impact of discovery of natural resources on conflict?
In a study of 193 countries since 1946, Lei and Michaels (2014) show that the discovery of a large
oilfield raises the odds of a country experiencing civil conflict by 5-8 percentage points.The largest increase in the risk of conflict are in countries with a history of political violence in the last 10 years
How do oil prices impact the likelihood of conflict?
In oil municipalities in Columbia attacks were far more likely when prices rose and vice-versa – making
guerilla attacks more lucrative (rapacity)
How did coffee prices impact the likelihood of conflict?
In coffee municipalities violence increased with a fall in the coffee price and coffee grower’s
wages - a reduction in the opportunity cost of engaging in guerilla activities
How do price changes in minerals influence violence?
In Africa: Price changes in minerals could explain up to one fourth of violence - according
to Berman et al., 2017
What two factors are the effect of resource discoveries on conflict likely to be influenced by?
▪ The quality of institutions
▪ The type of natural resource (ease of extraction, demand, etc.)
