DEVELOPMENT ECONOMICS
Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,
Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest
Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest
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Author: Katalin Szilágyi Supervised by Katalin Szilágyi
January 2011
Week 7
Resource curse Natural resources
• Conventional wisdom: More wealth is good
• More consumption, more leisure
• Resource curse / paradox of plenty: wealth can be dangerous
• Discovery of natural resources often goes together with: lower growth, “bad”
sectoral structure, rent-seeking, bad institutions, less human capital
Outline
• Concept, stylized facts
• Case studies
• Estimating average effects
• Cross-country regressions
• Accounting for cross-country heterogenity
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• Conditional effects
1. Concept and stylized facts Resource curse
• Discovery of new natural resources can be harmful for development.
• Phenomenon: resource curse / paradox of plenty
• Stylized facts: countries rich in natural resources
• Lower growth
• Worse institutional quality
• More conflict
• Examples: Angola, Nigeria, Sudan, Venezuela, Sierra Leone, Congo, Columbia, Bolivia
• Counter-examples:
• Botswana, Norway (Chile, Indonesia, Thailand)
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Resources and growth
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Nigeria
Nigéria (1970)
• GDP per cap (PPP): $1113
• Poverty rate: 36%
• Number of poor: 19m
• Top 2% have same bottom income as: 17%
• Oil revenues since <$2bn 1965 (1995 prices)
• Source: IMF WP/03/139
Explanations
• Dutch disease: resources → real appreciation → loss of competitiveness → ”bad”
sectoral structure
• Rent-seeking: resources → rent-seeking→ bad institutions
• Human capital: resources → false sense of security → lack of investment → lower (human) capital stock later
Dutch disease
• Dutch disease: resources → real appreciation → loss of competitiveness → ”bad”
sectoral structure (lower share of manufacturing)
Nigéria (2000)
• GDP per cap:
$1084
• Poverty Rate: 70%
• Number of poor: 90m
• Top 2% have same bottom
income as: 55%
• Oil revenues since
$350bn 1965 (1995 prices)
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• Structural transformation (tradable → nontradable)
• Transitory frictions vs. long-term structural problem
• Long-term effect if manufacturing is ”special” (industrial linkages, complementarities, growth externalities)
Structural transformation
Dutch disease
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Dutch disease: examples
• Spain in the 16th century
• Gold rush in Australia
• Norway and Holland in the 1970s
• Russia (Azerbaijan) in the 1990s (2000s)
Holland
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Columbia
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Rent-seeking
• Effect of more resources:
• Corruption (moral hazard): more wealth
• Sorting: job of politicians become more attractive
• Consequences: more rent-seeking, worse institutions
Equilibrium
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Effect of a new discovery
Human capital
• Discovery of new resources → false sense of security → less incentive to invest in (human) capital
• Implicit assumption: less human capital is needed in the (primary) resource-sector
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Natural resources and education
Natural resources and human capital
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2. Cross-country regressions Growth effects
• Sachs–Warner (1995, 2001): The curse of natural resources, NBER WP 5398
• Cross-country growth regressions (Barro, MRW) augmented with natural resources (NR)
• NR: natural resources/GDP (primary sectors/GDP, natural resources export / total export etc.)
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Interpretation
• Robust empirical finding
• Multiple measures, multiple specifications
• No structural relation
• Indirect effects: mostly through a decrease in openness
Indirect effects
• Gylfason (2000): Natural Resources, Education, and Economic Development CEPR DP 2594
• Cross-country regressions:
• Direct effect: resources → growth
• Indirect effect: resources → human capital, human capital → growth
Direct and indirect effects
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3. Cross-country heterogenity Heterogenity
• Good and bad examples:
• Norway, Botswana, Chile, Malaysia
• Sudan, Nigeria, Azerbajidan, Bolivia
• Differential effect of natural resources reflects deeper causes
• Differences in institutions is the key
• Proper question: blessing or curse given institutional quality?
Different types of capital
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Countries with presidential regime
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Countries with parliamentary regime
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Role of institutions
• Mehlum–Moene–Torvik (2006): Institutions and the resource curse EJ, 2006/1
• Institutions are a prerequisite
• Cross-country regressions (SW), but: augmented with institutional quality (IQ)
• IQ: average of Political Risk Services measures
Results
Estimated partial effect
• Estimated partial effect of reasources:
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• Interpretation:
• Threshold
• Can be blessing or curse
Political effects within a country
• Brollo–Nannicini–Perotti–Tabellini (2010): The Political Resource Curse, CEPR Discussion Paper 7672
• Municipalities in Brazil (with and without oil): the effects of new discoveries?
• Corruption
• Average human capital of political candidates decreases
• Chances of incumbents being re-elected go up
