natural resources Flashcards
Natural resources
o Natural resources are resources that exist without human actions
o Because production of natural resources does not require any investments, resource-rich countries should be wealthier than resource-scarce countries
Resource rich countries (relative to non-resource rich countries) are found to:
▪ Have higher corruption,
▪ Have greater income inequality,
▪ Have more poverty
▪ Have more conflict
▪ Grow more slowly
Evidence on Resources and Growth
o Data from countries with high endowments of natural resources show the negative relationship between natural resource exports and growth
o Those countries with high exports of natural resources in 1970, grew more slowly (on average) over the next 20 years
“Empirical support for the curse of natural resources is not bulletproof, but it is quite strong”- Sachs and Warner (1995)
Sectoral Composition and Natural Resources
o Natural resources can distort the structure of an economy leading to short-run benefits but long-run costs
An example:
o Assume natural resource prices increase – this increases the value of these resources
o The demand for labour in the resources sector increases – typically also services
o This raises wages in the resources sector drawing labour away from other export sectors and manufacturing
o The exchange rate appreciates because of increased demand for the currencies of resource-exporting countries
o An appreciated exchange rate and inflated wages ‘kill off ’ the manufacturing sector and any competing non-resource exporting industries
Dutch disease
o 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 a natural resource such as oil
o Called Dutch Disease because of an article published in The Economist (1977) which refers to the impact on the economy of the Netherlands of the discovery of natural gas in the North Sea
o The large foreign exchange earnings from the export of gas led to a shift in prices and in the exchange rate - previously competitive exporters (manufacturing) lost market share, and the production of those exports collapsed
o It matters all the more because mining and hydrocarbons are capital intensive activities, generating relatively few jobs ⟹ unemployment
Whether resource booms lead to Dutch disease or not depends on
the degree to which the exploitation of a natural resource affects production in other sectors of the economy
Dutch disease is less likely with:
▪ Backward linkages - Local outputs used as inputs by the resource extraction industry
▪ Forward linkages - Natural resources used to produce other goods locally
▪ Spillovers in investment - Investments in infrastructure which benefits non-resource sectors
Why Does it Matter if Oil is the Only Industry?
o When a country’s GDP is dependent on the export of natural resources, it is very vulnerable to macroeconomic instability due to price volatility
o An over-reliance on oil contributed to the recent catastrophic collapse of the Venezuelan economy
o Despite the country having the world’s largest crude oil reserves, Venezuela experienced hyperinflation and sustained negative GDP growth
Economic Collapse in Venezuela
o Historically, Venezuela has relied heavily on oil exports - accounting for about 95% of exports
o During periods of high oil prices, successive Venezuelan governments neglected diversifying economic activity, leaving the economy unbalanced and vulnerable
o When oil prices fell in the early 2010s and in 2014, there was a sharp decline in oil revenue
o The government attempted to address the growing budget deficit by borrowing and printingmoney. The result was hyperinflation - estimated at 5,220% by 2018
o This led to widespread protests, social instability, and an exodus of skilled workers, further undermining the country’s economic prospects
o Presidential elections were held in Venezuela in 2018 with incumbent Nicolás Maduro re-elected for a second six-year term. The result was denounced by the US, EU and others
o International sanctions were imposed against the state-owned oil company PDVSA for longstanding government corruption and human-rights violations
Natural Resources, Government and Institutions
o The resource extraction sector is typically owned or regulated by the government
o Resource windfalls generate income for governments (directly or indirectly)
o The use of this income, as well as the quality of regulations, help determine if natural resources are a blessing or a curse for a country’s development
Potential growth-enhancing effects:
▪ Provision of public goods: infrastructure, education, etc.
▪ Investment in other industries/sectors
▪ Paying off debts
Potentially growth-deterring effects:
▪ Over-expansion of government sector, over-spending and over-borrowing
▪ Macroeconomic instability due to price volatility of resources
▪ Incentives for corruption than can lead to a struggle over control
The Role of Government and Institutions and Quality of institutions
o Whether natural resources are beneficial or not may depend on the quality of institutions
o Mehlum, Moene and Torvik (2006) look at the relationship between GDP growth and quality of institutions among 42 resource-rich countries
o The relationship between resource dependency(% of primary goods in exports) and GDP growth is clearly negative overall, and for countries with bad institutions
o For countries with good institutions the relationship is much less clear
Natural Resources and Government Spending
o Natural resources may lead to lower scrutiny on government spending - especially with weak institutions
o If government spending is derived from state-owned companies extracting natural resources, it easier to avoid accountability
o Countries such as Nigeria, Angola and Venezuela (and others) have all had periods of unchecked government spending
o These government were later heavily criticized for over-spending on projects that failed to deliver real benefits
o Less accountability also leads to corruption
Natural Resources leading to Civil Conflict
o 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)
o 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
o Incentives to fight for these resources may depend on the quality of government, particularly rule of law
