L16 Flashcards
If country is dependent on natural resources is determined by
- Abundance of resource
- Size of economy (if there is other economic activities)
- Policy choices on how much natural resources is extracted and exported
Dutch disease
- Spending effect
Nominal exchange rate appreciation
Higher domestic prices - Resource movement effect
Capital and labor shifted to non-tradable sector and natural resource sector
Manufacturing is source of long term growth (skill and labor intensive, linked to other sectors)
Volatility
Large fluctuations in commodity prices
Creates market instability and uncertainty
Planning is very difficult when investing
Can hamper innovation and investment when do not have money at the right time
Boom and bust cycles in government spending (high investment when high price in natural resource and low investment when low prices - when bad situation it is even worse)
International lending - more lending when high prices and reinforce boom but when low prices lenders do not want to give loans but that is when it is needed. Debt crisis Latin America
Myopic behavior
Short-sighted behavior connected to volatility
Myopic sloth = do not do necessary things to achieve economic development because think oil money will be forever
Myopic exuberance = invest a lot and lend because think that money will be forever. Do things that do not have social value
Unaccountable government
Taxing citizens leads to common interest and accountability
Natural resources means that government is not dependent on citizens and is not responsible for citizens
Endowment effect
Possession increase perceived value
People feel different about money the is taken away from you and money that you never got
When taxes is taken people want to know what happens with it
Natural resources is never in the hands of people and they do not care as much what the government do
Do not keep the government as accountable
Extractive multinationals
Challenge for government when dealing with international corporations
Limited competition
Asymmetric information - government have less information about resources than companies that are experts and they can give higher prices
Agency problem - deals that is personally rewarding for government agent and company at expenses of society
Little transparency - company can say that they extracted less resources than what they actually did
Rentier state theory
Natural resource hamper democracy
3 effects
1. Rentier effect (bribing)
a. Taxation effect (government do not need income taxes and public do not demand accountability)
b. Spending effect (oil money allows buying support or diminish opposition)
c. Group formation effect (use resources to ensure that people do not form groups or unions that might demand political rights)
2. Repression effect
Revenue allow rulers to invest in army
Higher risk of people want to overthrow government and get access to resource
But it can also be used to quiet down any form of opposition
3. Modernization
Will not have modernization that is usually connected with development
Will not have social change that comes along with economic development through other things
Will not have increased education that also increase demand for democracy
Will not have more specialization and unions rising with greater bargaining power
Threat to democracy
It is a sector with large barriers of entry - it is controlled by few actors with a lot of money and power
Powerful groups distribute revenue to people they like
Rent-seeking activities - want to be friends with people that have access to natural resources
It does not add to country’s development
People reallocate resources to lobbying etc.
Associated with corruption
Conflict
Motives:
• Greedy rebels
Want to benefit from resources independent from the state
Support separatist movements
Increase value of capturing the state
• Greedy outsiders
Incentives from third parties - states of companies - to engage in civil conflicts
• Grievance
Extraction leads to externalities
Natural resources, forced moving, inequalities because of unequal distribution
Access to financing spreads conflict even further
Impacts the resource curse
Conditions (quality of institutions, electoral competition, human capital)
Type of resource (diffuse or point-source natural)
Escaping resource curse
Transparency - more competition, accountability and limit rent-seeking and corruption
But depends on ability to understand information and act upon it
Sovereign wealth funds - avoid boom-bust, save for future generations
Direct dividend-people will hold government accountable
