Thursday, December 3, 2015

The Natural Resource Curse is Alive and Well

From the latest round of IMF working papers (abstract):

Natural Resource Booms in the Modern Era : Is the curse still alive?
Andrew M. Warner

The global boom in hydrocarbon, metal and mineral prices since the year 2000 created huge economic rents - rents which, once invested, were widely expected to promote productivity growth in other parts of the booming economies, creating a lasting legacy of the boom years. This paper asks whether this has happened. To properly address this question the empirical strategy must look behind the veil of the booming sector because that, by definition, will boom in a boom. So the paper considers new data on GDP per person outside of the resource sector. Despite having vast sums to invest, GDP growth per-capita outside of the booming sectors appears on average to have been no faster during the boom years than before. The paper finds no country in which (non-resource) growth per-person has been statistically significantly higher during the boom years. In some Gulf states, oil rents have financed a migration-facilitated economic expansion with small or negative productivity gains. Overall, there is little evidence the booms have left behind the anticipated productivity transformation in the domestic economies. It appears that current policies are, overall, prooving [sic} insufficient to spur lasting development outside resource intensive sectors.

Pretty much self-explanatory. The benefits of extraction of natural resources has always been fairly narrow.

In many countries, this comes in the form of monopolies, but even without such a structure, the overflow into overall employment, skills, and technology acquisition are commonly overstated. A country can get rich on natural resources, but that doesn’t mean its citizens will. The oil & gas industry for example is highly capital intensive, which means employment opportunities (as highly paid as they may be) are few.

In the meantime, high prices for commodity exports, as we’ve seen from 2006-2014, have tended to increase real exchange rates. This makes non-resource based industries less competitive, and result in lower investment in these industries – the dreaded Dutch Disease. The paradox is that high commodity prices result in an economy that is more (not less) vulnerable to commodity price swings.

Technical Notes

Warner, Andrew M., "Natural Resource Booms in the Modern Era : Is the curse still alive?", IMF Working Paper No. 15/237 NOvember 2015

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