Lec 23

Question 1

What are symptoms of the resource curse?

Answer 1

• large amount of natural resources
• slow growth
• high poverty
• poor governance
• weak states
• political instability

Question 2

What are the 3 causes of the resource curse?

Answer 2

income volatility
rent-seeking, patronage, and “living off the land”
Dutch Disease

Question 3

What are 3 causes of income volatility?

Answer 3

commodity price variation: inherent volatility of resource prices
rate of extraction: variation over the time in the rate of extraction
timing of receipt: depending on the agreement between governments and corporations, payment for extraction (taxation) will occur at different times

Question 4

What are consequences of income volatility? (4)

Answer 4

Consequences:
⚫ Cycles of economic boom and bust
⚫ Government spending is cyclical: high levels of spending in good years and low levels in bad years
⚫ Borrowing money during boom times: an oil boom increases access to international loans
⚫ Bust…

Question 5

What are the 5 elements of rent-seeking, patronage, and living off the land

Answer 5

 Economic rents
 Political economy of rent-seeking
 Overconsumption: non-renewable resources must be treated as capital not as sources of income. countries have a tendency to spend what they make from resources right away

 Underinvestment: in education

 Taxation

Question 6

What are the symptoms of the dutch disease?

Answer 6

The symptoms
⚫ Booming resource sector
⚫ Inflation and currency appreciation (overvalued)
⚫ Withering manufacturing/agricultural sector

Question 7

What are the causes of the dutch disease?

Answer 7

⚫ Boom v. non-boom sector: ???

⚫ Tradeables v. nontradeables: nontradeables sectors (real estate, construction) and natural resource sectors benefit at the expense of traditional export sectors

⚫ Resource allocation effect: domestic resources are allocated to the natural resources sector

⚫ Spending effect: rise in the value of natural resource exports = rise of real exchange rate = makes exporting non-natural resources more difficult = competing with imports of other commodities impossible

Question 8

How did Norway (an industrialized country) avoid the resource curse?

Answer 8

Strategy
 Sovereign wealth fund
 High taxation of oil profits
 Collective and transparent wage negotiations via gov’t
 Protection of manufacturing sector

Question 9

How can developing countries avoid the resource curse?

Answer 9

Options?
 Sovereign wealth fund
 Transparency and accountability
(Extractive Industries Transparency Initiative, EITI)
 Direct distribution mechanisms (Oil2Cash)
Unconditional v. conditional cash transfers