Neither Curse nor Destiny: NR’s in LA Development

1. Neither Curse nor Destiny: NR’s in LA Development Fedesarrollo 2013 Bill Maloney World Bank Development Economics Research Group And Universidad de los Andes

2. Based on: • Does What you Export Matter?(2012, forthcoming, Los Andes) • Engineers, Innovative Capacity and Development in the Americas (2012) • In Search of the Elusive Resource Curse (2009) • Natural Resources: Neither Curse nor Destiny (2007) • Missed Opportunities: Innovation and Natural Resources in Latin America (2007) www.worldbank.org/wmaloney

3. The missing resource curse: no negative growth effect on average • Most cited resource curse findings fragile (eg. Sachs and Warner) • Lederman & Maloney (2007, 2008), Alexeev and Conrad (2009) , Meller et. al (2013) • Subsoil mineral wealth endowments robustly correlated with growth: • Davis (1995), Sala-i-Martin et al. (2004), Stijns (2005), Brunnschweiler (2008, 2009). • Higher commodity prices raise growth • Deaton and Miller (1995), Raddatz (2007) for poor countries. NRs: Not cursed.. but they do have “issues” 1. Governance, 2. Concentration, 3. Productivity/dynamism

4. NR issues: Concentration • Terms of trade: level of prices probably not the problem it was once thought • Prices have a strong random walk –not a downward trend (Cuddington, Ludema, Jayasuriya 2007) • Rents more protected than in manufactures • But volatility of prices does negatively affect growth • NR have a negative affect on growth through export concentration (Lederman and Maloney 2007) • But any kind of concentration does: • Copper 30% of Chile’s exports • Nokia 20% of Finland’s exports • Intel 20% of Costa Rica’s exports • Diversification agenda becomes a channel to manage risk… but how?

5. NR Issues: Low productivity/growth • Smith (1776), Matsuyama (1996), Sachs et. al (1995 to 2001) • Rationale for Dutch disease concern • Rich Country Goods better • Hausmann, Hwang, Rodrik 2007, Lall 2007 • Country should produce the highest productivity good within its CA • PRODY, EXPY correlated with higher growth.

6. NRs have very mixed PRODYs..

7. High PRODY or High Investment?

8. But the Key- to understand the heterogeneity of experience Leamer Measure: Net Exports of NR/Worker Resource Scarce Resource Abundant Maloney 2007

9. Historically, natural resources have been a dynamic source of growth, but not in LA • Agriculture • Productivity growth is higher in agriculture than manufactures (Bernard and Jones 1996, Martin and Mitra 2001) • But not in LA (or LDCs more generally) • Forestry • Dynamic in Finland, Sweden • Moribund in Brazil, Chile until late 20th century • Mining • Foundation for sustained prosperity in Australia, Canada, US • Latin America: “mineral underachievers” (Wright 2007) • True enclave economies

10. Ancient History: MiningSame good, different outcomes • Mexico, Chile in 1800 were dominant global powers in Mining but nearly dead by 1900 • US experience with exactly the same goods exactly the opposite. • US dominates mining in Mexico, Chile-Able to employ and perfect the Bessemer process, leverage human capital accumulation • Wright (1987) - US Copper industry-an example of national learning as a network effect. • Not product mix-LAC unprepared for the 2nd industrial revolution (See Does what you export matter?- Lederman and Maloney 2012)

11. Innovative/Entrepreneurial capacity the driver?

12. MEn Density of Engineers~ 1900 Quintil Bajo Quintil 2 Quintil 3 Quintil 4 Quintil Alto Source: Maloney and Valencia (2013)

13. Hausmann: NRs as isolated trees? • Theoretically, does it matter if monkey climbing one very tall tree vs jumping among trees? Diversification? • Demand side? • Rodriguez (again): being a tree in a dense area is like a ME • If easy to jump from one tree to others, then easy to jump to.. • Better to jump to goods that don’t exist yet • The past as predictor? • With death of distance, past NR monkey jumps may not happen-Steam Engine, Saab, Nokia • If it happened in Sweden, will it happen in Chile or Colombia?

14. Better trees, or better monkeys? Scandanavia’s Forestry Cluster Nokia: Site of an early pulp mill in Finland Learn how to learn

15. Hot High Tech products on RT 128-why not Chile? • Frankenfish • Splice in growth gene from Ocean Pout (eel) • Salmon grows twice as fast as normal • AquaBounty Maynard, MA

16. Managing risk: lessons from unit values • Quality measure by price/unit value • Huge variance within products (Schott 2004) • Average quality rises with development • Low possibilities for UV growth in NR (Hwang) • Yes, there is convergence • But are quality ladders shorter? • Yes for most

17. NRs do seem to show a lower risk-return combination Figure 4: Unit Values: Drift and Standard Deviation, Country Fixed Effects, HS-1 1990-2001 Krishna and Maloney 2009

18. Innovation/Learning capacity, managing risk is key • The variance in development impact around any particular production basket is large • The focus on particular goods (trees/forests) diverts attention from more important issues: • LAC needs better Monkeys. Asia has been training (networks of) Monkeys for decades. China struggling now • Do we have the institutions for managing risk of innovation? • Middle income trap? Countries exploit simple rents (NR, cheap labor) and then can’t make the transition to adopting or invention eqs.?

19. Fin