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The Risks of Natural Resources

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.

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The Risks of Natural Resources

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  1. The Risks of Natural Resources Topic 5 (1): Natural Resources: Blessing or Curse? National Graduate Institute For Policy Studies IDPTP Fall 2012 John Page

  2. Natural resourcesPromise 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 risks.

  3. The Risks of Natural Resources Resource Based Rents are Widespread and Growing

  4. 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

  5. The Risks of Natural ResourcesA 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).

  6. 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)

  7. 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.

  8. 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 results: • a 10.0 percent oil windfall is on average associated with a 3.4% fall invalueadded 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)

  9. Some Popular Explanations: Dutch disease • But, adeclining 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 employmentin the traded sector and induce endogenous growth. • If gradual movement of labor from the traded to the non-traded sector lowers the rate of labor-augmenting technical progress.

  10. 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, butcan be criticized on econometric grounds. • the share of resources in GNP (dependence) is potentially endogenous • omitted variable bias • resource dependence (primary exports as fraction of GNP) may be correlated with unobservable characteristics

  11. 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).

  12. 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, 2003). • Cross-country evidence also suggests the curse is particularly severe in countries with bad institutions and low trade openness

  13. 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 production. • 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 bureaucratsand politicians (Ades and Di Tella, 1999).

  14. 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 institutions. • It found that corruption increased by close to 10 percent after the announcements of the oil discovery, but decreased slightly after 2004.

  15. Some Popular Explanations: Volatility of prices harms growth • Asudden 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).

  16. 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 point-based resources (oil, diamonds). • If debt is also an explanatory variable in panel data estimation, the effect of resource dependence disappears. • 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.

  17. Some Popular Explanations: Conflict • 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.

  18. Some Popular Explanations: Conflict • 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.

  19. The Resource CurseWhat 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 growth.

  20. The Resource CurseWhat 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.

  21. The “Resource Curse”Some Mineral Exporters Have Achieved Shared GrowthGrowth Incidence Curves, 1995-2005

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