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The Risks of Natural Resources
Topic 5 (1): Natural Resources: Blessing or Curse?
National Graduate Institute For Policy Studies
IDPTP Fall 2012
John Page
Natural resources
Promise and Challenge
• Africa hosts about 30 percent of the world's
mineral reserves.
• For a growing number of countries the
discovery and exploitation of natural
resources is a huge opportunity
• But one that is accompanied by considerable
The Risks of Natural Resources
Resource Based Rents are Widespread and Growing
Sao Tome &
Burkina Faso
Cape Verde
Cote d'Ivore
Sierra Leone
South Africa
Cen. Afr. Rep.
Congo, DR
Eq. Guinea
Congo, R
Share in Total Exports
The Risks of Natural Resources
Resource Based Rents are Widespread and Growing
 Between 2000-2010, $200 billion in oil revenue
accrued to African Governments;
 The oil windfall ranges from 9 percent of
Government Revenues in Gabon to 56 percent in
Equatorial Guinea (and average 21 percent);
 65% of all FDI is concentrated in oil, gas and mining
The Risks of Natural Resources
A Poor Track Record
• Oil revenues per capita in Nigeria increased from US$33 in 1965 to US$325
in 2000.
– Income per capita has stagnated at around US$1100 in PPP terms since 1960
– Nigeria is among the poorest countries in the world.
• Mineral Dependent Economies in Africa tend to have:
– Higher poverty rates
– Greatly income inequality
– Less spending on health care
– Higher child malnutrition
– Lower literacy and school enrollments
– More growth volatility
than non-mineral economies at the same income level.
• Based on historical performance, after two decades output for the typical
African commodity exporter will be around 25 percent lower than it would
have been without the resource boom (Collier and Goderis).
The “Resource Curse”
Africa is not alone
• Resource rich countries grew on average about one percentage
point less during 1970-89 even after controlling for initial
income per capita, investments during the period, openness and
rule of law (Sachs and Warner, 1995).
• Other oil exporters (Iran, Venezuela, Libya, Iraq, Kuwait, Qatar)
experienced negative growth during the last few decades.
• OPEC as a whole saw a decline in GNP per capita while other
countries with comparable GNP per capita enjoyed growth.
• Of 65 resource rich developing countries, only four managed to
achieve long-term investment exceeding 25 percent of GDP and
an average GDP growth exceeding 4 per cent ( Botswana,
Indonesia, Malaysia and Thailand)
The “Resource Curse”
• Another explosion of cross country regressions
shows resource dependence is associated with:
– Lower growth performance
– Less non-resource exports and openness to trade
– Lower gross domestic investment and foreign direct
investment as percentage of GDP
– Less financial development
– Lower school enrolment at all levels, expected years
of schooling and public spending on education.
– More macroeconomic volatility.
Some Popular Explanations:
Dutch disease
• Natural resources and exchange rate appreciation
– Relative decline of Dutch manufacturing as a result of worsening of
competitiveness associated with the export of natural gas
• 135 countries response to a resource windfall (1975-2007):
– save about 30 percent,
– decrease non-resource exports by 35-70 percent,
– increase non-resource imports by 0-35% (Harding and Venables, 2010)
• Detailed, disaggregated sectoral data for manufacturing obtains similar
– a 10.0 percent oil windfall is on average associated with a 3.4% fall invalue
added across manufacturing
• Using the Chenery-Syrquin (1975) norm for the size of tradables sector
(manufacturing and agriculture), countries in which the resource sector
accounts for more than 30% of GDP have a tradables sector 15 percentage
points lower than the norm (Brahmbhatt, et al., 2010)
Some Popular Explanations:
Dutch disease
• But, a declining traded sector is the appropriate
market response to a resource windfall.
• Why might it be bad for growth?
– If the traded sector is the engine of growth and
benefits most from learning by doing and other
positive externalities (learning by exporting).
– If human capital spill-over effects in production are
generated only by employment in the traded sector
and induce endogenous growth.
– If gradual movement of labor from the traded to the
non-traded sector lowers the rate of laboraugmenting technical progress.
Some Popular Explanations:
Dutch disease
• Empirical support
– Taking account of traditional growth determinants, there is
a strong negative effect of resource dependence
(measured by the share of exports of primary products in
GNP in 1970) on growth.
• These regressions are the cornerstone of many
discussions of Dutch disease, but can be criticized on
econometric grounds.
– the share of resources in GNP (dependence) is potentially
– omitted variable bias
– resource dependence (primary exports as fraction of GNP)
may be correlated with unobservable characteristics
Some Popular Explanations:
Poor Institutions
• Resource rich countries with bad institutions typically
are poor and remain poor.
• Natural resources make it attractive for political elites
to block technological and institutional improvements,
since this can weaken their power (Acemoglu and
Robinson, 2006).
• Resource riches raise the value of being in power and
induce politicians to expand public sectors, bribe voters
by offering them well paid, but unproductive jobs and
inefficient subsidies and tax handouts, especially if
accountability and state competence are lacking
(Robinson et al., 2006).
Some Popular Explanations:
Poor Institutions
• Empirical support
– Weak institutions may explain poor performance of oil-rich
states such as Angola, Nigeria, Sudan and Venezuela,
diamond rich Sierra Leone, Liberia and Congo, and drug
states Columbia and Afghanistan.
– Cross-country evidence strongly suggests that natural
resources - oil and minerals in particular – exert a negative
and nonlinear impact on growth via their impact on
institutional quality (Sala-i-Martin and Subramanian,
– Cross-country evidence also suggests the curse is
particularly severe in countries with bad institutions and
low trade openness
Some Popular Explanations:
Resource windfalls increase corruption
• If institutions and the legal system are weak and
transparency is low, rent seeking has a higher return.
• A natural resource bonanza elicits more rent seekers.
• More rent seekers lower returns to both rent seeking and
entrepreneurship with possibly large marginal effects on
• Empirical support
– In a sample of 55 countries resource dependence is strongly
associated with a worse corruption perceptions (from
Transparency International, Berlin) which in turn is associated
with lower growth (Mauro, 1995).
– Cross-country regressions suggest that natural resource wealth
stimulates corruption among bureaucrats and politicians (Ades
and Di Tella, 1999).
Some Popular Explanations:
Resource windfalls increase corruption
• A quasi-experimental study
– Compared changes in perceived corruption in the
Sao Tomé which had a significant oil discovery
announcement in 1997-99 with Cape Verde which
did not find oil.
– Both have similar histories, culture and political
– It found that corruption increased by close to 10
percent after the announcements of the oil
discovery, but decreased slightly after 2004.
Some Popular Explanations:
Volatility of prices harms growth
• A sudden resource bonanza tends to erode critical faculties
of politicians and induce a false sense of security.
• Natural resource wealth may encourage countries to
engage in ‘excessive’ borrowing.
• Resource revenues are highly volatile (much more so than
GDP), because their supply has a low price elasticity.
• During the 1970’s when commodity prices were high,
resource rich countries used them as collateral for debt but
during the 1980’s commodity prices fell significantly and
many experienced debt crises.
• Volatility is bad for growth, but also for investment, income
distribution, poverty and educational attainment
(Aizenman and Marion, 1999; Flug et al., 1999).
Some Popular Explanations:
Volatility of prices harms growth
• Empirical support
– Cross country regressions indicate the adverse growth
effect of natural resources results mainly from
volatility of commodity prices, especially for pointbased resources (oil, diamonds).
– If debt is also an explanatory variable in panel data
estimation, the effect of resource dependence
– The empirical results suggest that the effect of
resource dependence is mainly driven by boom-bust
cycles induced by volatile commodity prices, debt
overhang and credit constraints.
Some Popular Explanations:
• Production and resource income have
differential impact on armed conflict.
– Higher production income makes warfare less
attractive and conflict less likely to occur.
– Higher resource income makes warfare more
attractive -- there is more to fight over.
Some Popular Explanations:
• Empirical support
– There is a positive relationship between resource
income and conflict (Collier and Hoeffler, 2004;
Fearon, 2005).
– The export share of primary commodities is the
largest single influence on the risk of conflict and the
effect is nonlinear (Collier and Hoeffler, 2004).
– But, cross-country evidence for the effect of resources
on conflict can be confounded by the effects of quality
of institutions, rule of law, etc. on conflict.
The Resource Curse
What do we think we know?
• The best available empirical evidence suggests that countries
with a large share of primary exports in GNP have:
– poor growth records,
– high inequality,
– especially if the quality of institutions, rule of law and
corruption are bad.
• This potential curse is particularly severe for point-source
resources such as diamonds and precious metals.
• A resource bonanza induces appreciation of the real exchange
rate and a decline of non-resource export sectors may slow
The Resource Curse
What do we think we know?
• Cross-country and panel-data econometric evidence
shows that natural resource dependence may
undermine the quality of institutions.
• Resource bonanzas also reinforce rent seeking,
especially if institutions are bad, and keep bad policies
in place (debt overhang, poor investments, etc.).
• Resource rich countries are also vulnerable to the high
volatility of commodity prices, especially if their
financial system is not well developed.
• Resource rich countries with good institutions, trade
openness and high investments in exploration
technology have largely avoided the resource curse.
The “Resource Curse”
Some Mineral Exporters Have Achieved Shared Growth
Income growth %
Growth Incidence Curves, 1995-2005
Middle 40%
Top 20%