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The resource curse

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Andrew Branch

on 4 May 2011

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Transcript of The resource curse

Abundant natural resources originally seen as a blessing for development.

In theory, these resources would provide capital for positive development through;
- Increased exports
- Foreign Direct Investment (FDI)
- Attraction of entrepreneurial activities

(Ross 1999) As early as 1950 opinions were divided.

Some argued that high dependency on primary commodities would cause exploitative trade.

Would only benefit developed nations.

And would widen inequality.

(Singer 1950; Ross 1999) Pre 1970s. Early opposition to this. Origins of the 'Resource Curse'. The resource curse was first reported by the Economist magazine in 1977.

First known as ‘Dutch disease’ following the Netherlands’ discovery of natural gas in the North Sea.

(Barder 2006) The theory of 'Dutch disease'. The export performance of a country will decline following the discovery and expoloitation of valuable natural resources.

Because;

Primary commodity markets are relatively inelastic;

So... demand remains relatively constant – small surpluses can affect a large drop in price.

(Todaro and Smith 2008) Inelastic price elasticity of demand. High primary commodity exports also cause an overvaluation of the exchange rate.

Affects other export industries like manufacturing that depend on low exchange rates.

More costly and less competitive on international markets.

Lose market share and diminish.

Deindustrialisation and/or slow industrialisation.

(Todaro and Smith 2008) For the Netherlands... Discovery of natural gas =

Rapid increase in gas exports =

Caused exchange rate to rise =

Damaged their manufacturing industry.

(Barder 2006) Criticisms and assumptions
of the 'Dutch disease' model. Some studies argue that unstable export markets increase Foreign Direct Investment (FDI) (Ross 1999)

But others find that instability has no effect or impacts negatively on growth. (Behrman 1987; Tan 1983; Moran 1983)

Characteristic of this debate.

Slight differences in indicators used produces contradictory data. Assumes there is no surplus of labour at point of natural resource discovery.

Unrealistic and flawed. Assumes domestic and foreign goods are perfect substitutes.

Overvalued exchange rate can make imports of intermediary goods for manufacturing sector cheaper.

Makes manufacturing more competitive. 'Rent-Seeking' as an alternative theory. Individuals in positions of power may manipulate economic environments to extract higher economic 'rents'.

Rents = Profits, bribes etc.

Natural resource production associated with high rents.

Leads to corruption, inequality, low government revenues and impeded economic growth.

(Sachs and Warner 1997) MEDCs, LEDCs and the resource curse. More economically developed countries affected with slower economic growth and instability. (Barder 2006)

Less economically developed countries however, bear these effects along with extensive civil unrest and often war, both inter and intra state. (Mehlum, Moene and Torvik 2006)

Most studies focus on the resource curse in developing countries, measuring their findings in terms of conflict.

(Ross 2003; Collier and Hoeffler 1998; Collier 2008) Ross (2003) studied the effects of natural resource dependency on the incidence of conflict.

Overall, the risk of conflict was higher in conutries highly dependent on natural resources.

High dependency on diamonds and drugs had particularly high risk of conflict.

However, timber dependency actually reduced the risk of conflict. Critique;

Sampling only covered the 1990s

Only cross-sectional.

Does not control for other factors that influence civil war.

Use of 'average risk' at 20% calculated from incidence of conflict from 1990 - 2000 => so is not generaliseable beyond this period. Point-Source resources are more dangerous than diffuse resources.

Point source resources e.g. oil, minerals and plantation crops.

Diffuse resources e.g. wheat, coffee and other agricultural products.

Point source resources cause social divisions and weaken institutional capacity.

(Isham et al. 2002) Studies that include more natural resources get less conclusive results.

Indicating that it is specific resources that are 'cursed'. Many have identified lootability as the most important indicator of the resource curse.

Lootable resources include; Drugs, some agricultural and timber products, and 'alluvial' gemstones.

Lootable resources prone to;

Corruption,
Undermining social and economic structures,
Can be easily acquired by rebel groups,
Facilitate conflict.

(Samset 2009; Ross 2003; Lujala et al. 2005) So what exactly makes
natural resources a curse? Non-lootable resources are linked to low levels of conflict.

Demonstrates the importance of looted resources for the 'resource curse'.

Profits usually held by the State, consolidating their power

Or profits go abroad to foreign companies.

Both of these promote the government to take action against dissenting groups and dangerous economic conditions.

This averts the resource curse.

(Samset 2009; le Billon and Levin 2009; Lujala et al. 2005) 'Grabber friendly' institutions incentivise corruption and bad governance;

Encourage rent-seeking behaviour.

'Producer friendly' institutions promote reinvestment of capital;

Encourage reinvestment of capital by tying rent-seeking to increased production.

Developing countries have more 'grabber friendly' institutions
Excludes entrepeneurial activities
Leads to economic problems and civil discontent

This helps to explain the high incidence of the 'resource curse' in
developing countries.

(Mehlum, Moene and Torvik 2006) Collier (2008) finds little difference between Autocracies and Democracies when it comes to the resource curse.

Autocracies;

Usually more corrupt
Economic conditions impaired by rent-seeking, poor governance and fraud.

Democracies;

Less money invested in long term ventures
Economic conditions impaired by unsustainable spending on short term policies for political popularity.
(Still some levels of rent-seeking and corruption) Some studies have assessed the problems associated with geographical location and the resource curse.

Transport costs for goods from landlocked countries is higher than from coastal countries.

Landlocked countries rely on their neighbour's infrastructure and costs. Natural resources already affect the manufacturing sector - so landlocked or not -
there is little difference

Natural resources usually get transported regardless of their country of origin.

So geography makes little difference to the resource curse.

(Collier 2008) What am I going to talk about? Rationale. Where it all began... 'Dutch disease'. 2nd Assumption of 'Dutch disease' model; 1st Assumptionof 'Dutch disease' model; Dependency. Types of resource. 'Lootability' Institutions. Geography - Landlocked or not? Governance. Botswana. Sierra Leone. Dependency Diamond mining is 1/3 of GDP.
High dependency, but no conflict. Types of resource Industrial mining - capital intensive.
Produces non-lootable resources. Dependency Types of resource Institutions Institutions Diamond mining is 2% of GDP.
Low dependency, but conflict Alluvial mining - labour intensive.
Produces lootable resources. Traditional, accountable.
Producer friendly, minimal 'rent-seeking' behaviour. Weak, corrupted by politicians.
Grabber friendly and 'rent-seeking' behaviour. Governance Governance Democratic and stable.
Best corruption index score in Africa, 36 of 180 worldwide. Has been democratic and autocratic.
Low corruption index score - 146 of 180 worldwide. Geography Geography Landlocked
As theory suggests - has made no difference. Coastal
Does not seem to have benefitted Sierra Leone. Botswana - Key facts... GDP = $14 billion

GDP growth = 3.5%

HDI = 125 of 182

Total Aid for 2008 = $716 million GDP = $2 billion

GDP growth = 2%

HDI = 180 of 182

Total Aid for 2008 = $366 million Sierra Leone - Key facts... So, what have we learned so far? We know that the resource curse theory is contested.


Its effects are more pronounced in developing countries.

and

It depends upon many factors. Natural resource dependency impacts on the severity of the resource curse. Point-source and lootable resources are more prone to the resource curse and conflict. AND - diffuse and non-lootable resources reduce the risk of the resource curse. Certain types of institutions facilitate rent-seeking behaviour and worsen the effects of the resource curse. In theory, governance and geographical location make little difference to the resource curse. Now lets compare this theory across two examples... Botswana and Sierra Leone both mine diamonds, a resource notorious for its 'cursed' nature.

e.g. Blood Diamonds. However, while Botswana is considered an economic success in Africa, free from the resource curse -

Sierra Leone has been torn by civil war and remains one of the poorest conutries in the world. Widely considered to be a victim of the resource curse. So, after considering these examples... Dependency on resources seems to be a CONTRIBUTING, not DETERMINING factor for the resource curse.

Non-lootable resources are indeed less 'cursed' than lootable ones.

Producer friendly institutions facilitate better economic development.

Governance and Geography make little difference, however...

Corruption and rent-seeking in government makes a BIG difference. In conclusion... Evidence suggests there IS a resource curse.

It has devastating effects on developing countries.

But...
The most important factors in facilitating or mitigating the resource curse are;

- The strength and orientation of institutions

- The levels of corrupt and 'rent-seeking' behaviour


This explains Botswana's resilience to the resource curse and also explains why MEDCs with better institutions and corruption scores are less prone to the debilitating effects of the resource curse. The background to the 'resource curse', what it is and where the theory comes from - as well as early criticism of this.

What exactly makes natural resources a curse? An assessment of the key factors involved in the resource curse argument.

I will then apply this theory to two examples, Botswana and Sierra Leone - and assess the relevance of the theory.

I will then conclude that there IS in fact a resource curse; its effects are dangerous and devastating, and I will identify institutional weakness and corruption as the two most important factors in facilitating the resource curse. In recent years the 'resource curse' phenomenon has become more widely accepted, but also more strongly contested.

Therefore it is necessary to understand the theory behind the resource curse argument, and to evaluate its validity, applicability and implications. The Resource Curse. Any Q. s ? References. Barder, O. (2006) A Policymakers' Guide to Dutch Disease [Internet]. Washington, Center for Global Development. Available from; <http://ssrn.com/abstract=983124> [Accessed 20/04/2010].

Behrman, J. (1987) Commodity price instability and economic goal attainment in developing countries. World Development. 15 (5): 559-573.

Collier, P. (2008) The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It. New York, Oxford University Press.

Collier, P. and Hoeffler, A. (1998) On economic causes of civil war. Oxford Economic Papers. 50 (4): 563-573.

Isham, J. et al. (2002) The varieties of rentier experience: how natural resource export structures affect the political economy of economic growth [Internet]. Available from: <> [Accessed 20/04/2010].

le Billon, P. and Levin, E. (2009) Building Peace with Conflict Diamonds? Merging Security and Development in Sierra Leone. Development and Change. 40 (4): 693-715.

Lujala, P. et al. (2005) A Diamond Curse? Civil War and a Lootable Resource. Journal of Conflict Resolution. 49 (4): 538-562.

Mehlum, H., Moene, K. and Torvik, R. (2006) Institutions and the Resource Curse. Economic Journal. 116 (508): 1-20.

Moran, C. (1983) Export fluctuations and economic growth: An empirical analysis. Journal of Development Economics. 12 (1-2): 195-218.

Ross, M. (1999) The Political Economy of the Resource Curse. World Politics. 51 (2): 297-322.

Ross, M. (2003) Oil, Drugs and Diamonds: The Varying Roles of Natural Resources in Civil War. In: Ballentine, K. and
Sherman, J. eds. The Political Economy of Armed Conflict – Beyond Greed and Grievance. London, Lynne Rienner. pp. 47-72.

Sachs, J. and Warner, M. (1997) Natural resource abundance and economic growth [Internet]. Available from: <> [Accessed 20/04/2010].

Samset, I. (2009) Natural Resource Wealth, Conflict and Peacebuilding [Internet]. Available from: <http://www.cmi.no/publications/file/3283-natural-resource-wealth-conflict.pdf> [Accessed on 20/04/2010].

Singer, H. (1950) The Distribution of Gains between Investing and Borrowing Countries. American Economic Review. 40 (2): 473-485.

Tan, G. (1983) Export instability, export growth and GDP growth. Journal of Development Economics. 12 (1-2): 219-227.

Todaro, M. and Smith, S. (2009) Economic Development. Harlow, Pearson Education. By Andrew Branch Student ID: 33198542
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