Resource Abundance and Economic Development

Resource Abundance and Economic Development

Resource Abundance and Economic Development

Resource Abundance and Economic Development

Synopsis

Since the 1960s the per capita incomes of the resource-poor countries have grown significantly faster than those of the resource-abundant countries. In fact, in recent years economic growth has been inversely proportional to the share of natural resource rents in GDP, so that the smallmineral-driven economies have performed least well and the oil-driven economies worst of all. Yet the mineral-driven resource-rich economies have high growth potential because the mineral exports boost their capacity to invest and to import."Resource Abundance and Economic Development" explains the disappointing performance of resource-abundant countries by extending the growth accounting framework to include natural and social capital. The resulting synthesis identifies two contrasting development trajectories: the competitiveindustrialization of the resource-poor countries and the staple trap of many resource-abundant countries. The resource-poor countries are less prone to policy failure than the resource-abundant countries because social pressures force the political state to align its interests with the majority poorand follow relatively prudent policies. Resource-abundant countries are more likely to engender political states in which vested interests vie to capture resource surpluses (rents) at the expense of policy coherence. A longer dependence on primary product exports also delays industrialization,heightens income inequality, and retards skill accumulation. Fears of 'Dutch disease' encourage efforts to force industrialization through trade policy to protect infant industry. The resulting slow-maturing manufacturing sector demands transfers from the primary sector that outstrip the naturalresource rents and sap the competitiveness of the economy. The chapters in this collection draw upon historical analysis and models to show that a growth collapse is not the inevitable outcome of resource abundance and that policy counts. Malaysia, a rare example of successful resource-abundant development, is contrasted with Ghana, Bolivia, Saudi Arabia,Mexico, and Argentina, which all experienced a growth collapse. The book also explores policies for reviving collapsed economies with reference to Costa Rica, South Africa, Russia and Central Asia. It demonstrates the importance of initial conditions to successful economic reform.

Excerpt

Until recently, most economists have neglected the role that natural resources play in economic development. They have reported sharp differences in the performance of differing countries and regions, but the connection with the natural resource endowment has either been ignored or, at best, underestimated. This book corrects this neglect by synthesizing research from numerous subfields within the economics literature that have hitherto tended to be isolated from each other. The synthesis builds a strong case for the fact that since the 1960s the natural resource endowment of a developing country has strongly affected the efficiency with which it uses capital and the nature of its long-term developmental trajectory.

The book distils the basic findings into two distinct models and then increases their explanatory power by introducing permutations to allow for differences in the specific character of the natural resource endowment. The first model is the staple trap model and it is strongly associated with resource-abundant development. It shows how trade policy closure leads to the misallocation of inputs that depress investment efficiency and retard (and even reverse) the competitive diversification of the economy so that the economy becomes vulnerable to a growth collapse. The staple trap model is also associated with social tensions that stem from heightened income inequality, a retarded passage through the demographic cycle, an unfavourable dependency/worker ratio, the slow acquisition of skills and the tardy accumulation of the public social capital that an increasingly sophisticated economy requires in order to lower transaction costs. Recovery from a growth collapse is protracted because all forms of capital (natural, physical, human and social) tend to be eroded. Policies are required that go beyond the 'prudent macro and micro' measures of the Washington Consensus. Governments must also address more deep-seated issues that include bolstering the more positive features of the political state, the accumulation of public institutional capital and recognition of the various impacts that different forms of natural capital introduce into the economic trajectory.

The second model of competitive industrialization is associated with resource-poor countries, albeit not exclusively so. Appropriate policies can avert a growth collapse in resource-abundant countries as a handful of countries that includes Malaysia shows. The competitive industrialization model sustains a relatively open trade policy from a low level of per capita income that promotes labour-intensive manufactured exports that quickly absorb surplus rural labour. This sets in train a virtuous circle of equitable income distribution, the rapid accumulation of human and social capital, an accelerated passage through the demographic cycle and the speedy emergence of a dependency/worker ratio that is highly favourable to saving and investment. Rates of capital investment quickly rise above 25 per cent of GDP without significant loss in investment efficiency and the economy diversifies competitively so that growth is rapid and egalitarian as well as being environmentally and socially sustainable.

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