DEVELOPMENT ECONOMICS

NATURAL RESOURCE
CURSE
 NATURAL RESOURCE
CURSE
 Prebisch Thesis:

 Because the World demand for primary produce is income inelastic (deriving from
Engel’s law), the terms of trade (price of exports/price of imports) will be on a
negative trend.

 Thus, primary commodity specialization is not feasible.

 Theoretical critiques come in two flavours:

 Hotelling: The price of a point resource rises with the interest rate (due to the trade
off between it’s price in the ground, and the interest you can earn from investing the
revenue post-extraction).

 Malthus: Fixed supply of resources and a rising demand due to population growth
increases prices due to increasing scarcity.

 Empirically, neither side of the argument gets much empirical support; Frankel
(2010) notes that studies tend to be highly sensitive to the end date:

 In net, both sides ignore that demand and technological innovation act whenever
prices are driven up (consumers become more eco-friendly, entrepreneurs enter the
market as a response to higher prices).

 Prebisch thesis is unlikely to be the cause of the natural resource curse.

 NATURAL RESOURCE
CURSE
 Volatile Prices:

 Frankel (2010) notes that both point and diffuse resources have price fluctuations in excess
of those experienced by manufactures.

 The volatility is driven due to the inelastic nature of both demand (cannot easily substitute
inputs in the short-term) and supply (cannot easily change crops or output in the short
term), meaning that a shift in either leads to amplified price changes.

 However, Sachs and Warner (2001) control for price volatility, and still find natural resources
to have an impact. Therefore, whilst price volatility may explain some of the effect, it does
not explain it all.

 Conflict:

 Due to the easily appropriable and spatially concentrated nature of point resources, it is
possible that those with de facto power (militias) can take control of them by force rather
than go through a slow-changing political system.

 Such conflict has ravaged much of Africa, although the Colombian and Mexican drug trades
have shown that the effect is not limited to point resources.

 Natural Resources fostering inequality:

 We have already discussed this. Bulte and Deacon (2005) note that the resultant institution
mix includes a lack of diversification and an over-taxed agricultural sector bankrolls a
bloated and inefficient public sector + nontradable sector. In addition, the level of corruption
is higher due to increased rent-seeking activity, and the revenues are used to fund inefficient
investments (white elephants).
NATURAL RESOURCE
CURSE
 NATURAL RESOURCE
CURSE

 Macroeconomic Instability:
 Developing countries with natural resources tend to practice pro-
cyclical fiscal and monetary policies; Sinnot (2009) finds that
Government revenue responds significantly to commodity prices.

 We have already noted that Government spending is associated with

‘white elephant’ investments, but it is also used to expand the public
sector, which causes macroeconomic problems during downturns
when the Government can no longer pay for it.

 Atkinson and Hamilton (2003) find that ‘Genuine Savings’ (the extent
to which a country is either liquidating or creating national wealth) is
associated with the curse; those with low levels of genuine savings
(bad policies) have been afflicted with the ‘curse’.

 In addition, A+H find that bad institutions lead to countries using

resource revenue to finance current consumption rather than invest
and save; those that do act prudently tend to have a better rate of
growth.
NATURAL RESOURCE
CURSE
CHILE
 CHILE: NRC

 Chile has successfully based its exports on its primary produce (mainly copper,
but other natural resources such as Salmon and Wine have been developed).

 However, there has been diversification of the export basket; natural resources
have fallen from 75% of total exports in 1975  51% in 2002.

 This has been compensated for by a rise in processed natural resources as

opposed to other industrial goods.
 This suggests that Chile has been expanding its comparative advantage based
on technologies linked to its comparative advantage.

 This has allowed it to enjoy the static gains from comparative advantage and
the dynamic gains resulting from spillover effects.

 No evidence of natural resources ‘crowding out’ other sectors; to the contrary,

there has been a simultaneous fall in the relative importance of the sector and
a rise in its productivity, the technological spillovers from which have created
new export products.

 Voracity effects (rent-seeking) has been prevented by a strong institutional

framework; for example, the copper stabilisation funds and the fiscal rules
preventing such funds being pillaged.
 CHILE: NRC

 Dutch disease effects haven’t appeared in Chile in part due to it

opening the copper industry to foreign investment and foreign
ownership, which limits the impact of copper exports on its real
exchange rate, as well as limiting ‘crowding out’ effects.
 There is strong evidence to refute the hypothesis that primary
produce sectors are lacking in growth-enhancing linkages with
other sectors:
 Kalter (2004) notes that there is strong evidence to suggest that
spillovers from natural-resource sectors to other levels of the
supply chain drive growth.
 After trade liberalization, the manufacturing sector restructured
itself using new technologies linked to natural resource
endowments (for example, salmon fishing requires fish feed,
medicines, special equipments and rafts to catch the salmon in).