Saturday, April 20, 2013

The natural resource curse and the Dutch disease – for the economist in me and you! ;)

As the World Bank states in its 2010 report: “Although it is sometimes said that natural resources are "a curse" when referring to the disappointing performance of many commodity-exporting countries, work carried out recently has shown that an abundance of natural resources is not, in itself, a factor inhibiting growth.”

Jeffrey Sachs (and Warner 1997,2001) coined the term „the natural resource curse“ when they thought they had discovered a negative correlation between natural resources (measured by their share of exports or GDP) with growth = this is a paradox that in simple words means that natural resources (such mining products as diamonds, coltan, gold, copper, tin etc. that all can be found in the DRC) actually hinder growth of a country.

However, other studies have found this theory to be wrong and put forward another explanation for the apparent negative correlation between natural resources and growth. It is as follows: When a country moves from a rapid phase of growth underpinned by diversification of exports to a phase of institutional crisis, mining usually withstands upheavals better than other activities because it is confined to a particular area. Because other activities are declining, the share of commodities (mining products) in exports automatically increases. As the crisis sees growth decline, the increase in mining's share of exports during the crisis appears to cause a fall in growth. It is, however, the institutional crisis which simultaneously reduces growth and increases the export share of commodities. In other words, the negative correlation between growth and the share of natural resources in exports is the result of a forgotten factor (the institutional crises) and is simply a statistical illusion.”

An abundance of natural resources is not, in itself, therefore, a factor inhibiting growth. It is nevertheless true that their exploitation raises specific problems. In economic terms, the exploitation of natural resources for export creates inflationary tension (because of the demand for intermediate goods and skilled labour). It also exerts upward pressure on the national currency.

The Dutch disease

The combination of inflation because of costs and over-valuation of the currency (due to the focus of natural resource exploitation) is highly detrimental to exporters of manufactures and can, in extreme cases, lead to the country's deindustrialization. This syndrome, known as "the Dutch disease" (with reference to the first case noted in the Netherlands when natural gas deposits began to be exploited) has been observed on numerous occasions. It can, however, be offset by appropriate labour and foreign exchange policies.

In addition, in the past the exploitation of natural resources often occasioned unlawful payments when concessions were awarded. This is particularly opaque when there is a war on, as was the case in the DRC between 1998 and 2002, and in some cases may even help to finance the war. Even when cases are not so extreme, the exploitation of mining resources is usually of little benefit to the local population. Jobs are scarce, the mining industry is more capital-intensive, and working conditions are often deplorable, frequently causing political tension and the repression of the local population. This syndrome can be tackled through initiatives such as the EITI (Extractive Industries Transparency Initiative) and, more broadly, through efforts to enhance governance and ensure equitable benefit-sharing.

The main problem that arises in resource rich countries therefore is, that redistribution of wealth falls entirely into the hands of governments, which poses numerous governance problems, whereas agriculture and manufacturing revenues are generated directly by households.

… so the Bertelsmanns Report (2012) summarized the situation as follows:

The structural constraints on governance in the DRC are massive, and they will not be overcome in the foreseeable future; they require a fundamental adjustment of the country’s current power structure.
Structural constraints include a difficult political geography, entailing a huge territory with a thinly spread population, the near total lack of infrastructure (e.g., roads), extreme levels of poverty, a poorly educated workforce whose survival depends on the informal economy, various burdensome legacies of a decade of violent conflict and, finally, the total absence of popular trust in institutions and agents of the state. The huge reserves of precious natural resources (e.g., copper, cobalt, diamonds and oil) may call for a more optimistic view. However these resources have never been used for the development of the country but have, instead, stimulated corruption and external interventions.

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