Economic effects Resource curse

1 economic effects

1.1 dutch disease
1.2 revenue volatility
1.3 enclave effects
1.4 human resources
1.5 incomes , employment

economic effects

the imf classifies 51 countries “resource-rich.” these countries derive @ least 20% of exports or 20% of fiscal revenue nonrenewable natural resources. 29 of these countries low- , lower-middle-income. common characteristics of these 29 countries include (i) extreme dependence on resource wealth fiscal revenues, export sales, or both; (ii) low saving rates; (iii) poor growth performance; , (iv) highly volatile resource revenues.

a 2016 meta-study finds weak support thesis resource richness adversely affects long-term economic growth. authors note approximately 40% of empirical papers finding negative effect, 40% finding no effect, , 20% finding positive effect overall support resource curse hypothesis weak when potential publication bias , method heterogeneity taken account. 2011 study in journal comparative political studies found natural resource wealth can either “curse” or “blessing” , distinction conditioned domestic , international factors, both amenable change through public policy, namely, human capital formation , economic openness.

dutch disease

dutch disease first became apparent after dutch discovered huge natural gas field in groningen in 1959. netherlands sought tap resource in attempt export gas profit. however, when gas began flow out of country did ability compete against other countries exports. netherlands focus on new gas exports, dutch currency began appreciate, harmed country s ability export other products. growing gas market , shrinking export economy, netherlands began experience recession. process has been witnessed in multiple countries around world including not limited venezuela (oil), angola (diamonds, oil), democratic republic of congo (diamonds), , various other nations. of these countries considered resource-cursed .

dutch disease makes tradable goods less competitive in world markets. absent currency manipulation or currency peg, appreciation of currency can damage other sectors, leading compensating unfavorable balance of trade. imports become cheaper in sectors, internal employment suffers , skill infrastructure , manufacturing capabilities of nation. problem has historically influenced domestic economics of large empires including rome during transition republic, , united kingdom during height of colonial empire. compensate loss of local employment opportunities, government resources used artificially create employment. increasing national revenue result in higher government spending on health, welfare, military, , public infrastructure, , if done corruptly or inefficiently can burden on economy. while decrease in sectors exposed international competition , consequently greater dependence on natural resource revenue leaves economy vulnerable price changes in natural resource, can managed active , effective use of hedge instruments such forwards, futures, options , swaps, if managed inefficiently or corruptly can lead disastrous results. also, since productivity increases faster in manufacturing sector in government, economy have lower productivity gains before.

revenue volatility

prices natural resources subject wide fluctuation: example crude oil prices rose around $3 per barrel $12/bbl in 1974 following 1973 oil crisis , fell $27/bbl below $10/bbl during 1986 glut. in decade 1998 2008, rose $10/bbl $145/bbl, before falling more half $60/bbl on few months. when government revenues dominated inflows natural resources (for example, 99.3% of angola s exports came oil , diamonds in 2005), volatility can play havoc government planning , debt service. abrupt changes in economic realities result provoke widespread breaking of contracts or curtailment of social programs, eroding rule of law , popular support. responsible use of financial hedges can mitigate risk extent.

susceptibility volatility can increased governments choose borrow heavily in foreign currency. real exchange rate increases, through capital inflows or dutch disease can make appear attractive option lowering cost of interest payments on foreign debt, , may considered more creditworthy due existence of natural resources. if resource prices fall, however, governments capacity meet debt repayments reduced. example, many oil-rich countries nigeria , venezuela saw rapid expansions of debt burdens during 1970s oil boom; however, when oil prices fell in 1980s, bankers stopped lending them , many of them fell arrears, triggering penalty interest charges made debts grow more. venezuelan oil minister , opec co-founder juan pablo pérez alfonzo presciently warned in 1976: ten years now, twenty years now, see, oil bring ruin... devil s excrement.

enclave effects

economic diversification may delayed or neglected authorities in light of temporarily high profits can obtained limited natural resources. attempts @ diversification occur grand public works projects may misguided or mismanaged. however, when authorities attempt diversification in economy, made difficult because resource extraction vastly more lucrative , out-competes other industries. successful natural-resource-exporting countries become increasingly dependent on extractive industries on time. abundant revenue natural resource extraction discourages long-term investment in infrastructure support more diverse economy. lack of investment exacerbates negative impact of sudden drops in resource s price. while resource sectors tend produce large financial revenues, add few jobs economy, , tend operate enclaves few forward , backward connections rest of economy.

human resources

in many poor countries, natural resource industries tend pay far higher salaries available elsewhere in economy. tends attract best talent both private , government sectors, damaging these sectors depriving them of best skilled personnel. possible effect of resource curse crowding out of human capital; countries rely on natural resource exports may tend neglect education because see no immediate need it. resource-poor economies singapore, taiwan or south korea, contrast, spent enormous efforts on education, , contributed in part economic success (see east asian tigers). other researchers, however, dispute conclusion; argue natural resources generate taxable rents more not result in increased spending on education.

incomes , employment

a study on coal mining in appalachia suggest presence of coal in appalachian region has played significant part in slow pace of economic development. our best estimates indicate increase of 0.5 units in ratio of coal revenues personal income in county associated 0.7 percentage point decrease in income growth rates. no doubt, coal mining provides opportunities relatively high-wage employment in region, effect on prosperity appears negative in longer run.

another example spanish empire obtained enormous wealth resource-rich colonies in south america in sixteenth century. large cash inflows silver reduced incentives industrial development in spain. innovation , investment in education therefore neglected, prerequisites successful future development given up. thus, spain lost economic strength in comparison other western countries.

a study of oil booms finds positive effects on local employment , income during booms after boom, incomes per capita decreased, while unemployment compensation payments increased relative have been if boom had not occurred.