Economics of the Natural Resource Trap

1. The Natural Resource Trap “Although large deposits of key resources such as oil would usually be considered a blessing for the development prospects of a country, it often turns out to be a ‘resource curse’” Professor Paul Collier 11/11/2015 21:23:54

2. “Although large deposits of key resources such as oil would usually be considered a blessing for the development prospects of a country, it often turns out to be a ‘resource curse’” Professor Paul Collier 11/11/2015 21:23:54 “Close to one third of the wealth of low-income countries comes from their “natural capital” which includes forests, protected areas, agricultural lands, energy and minerals” World Bank

3. Blessing or Curse? 11/11/2015 21:23:54 At least 80 percent of countries considered fragile or affected by conflict are home to valuable extractive resources that the global economy hungers for. Earth’s riches like oil, gas, and minerals often fuel conflict, trapping all but the elites in poverty amid vast wealth. Source: World Bank, October 2013

4. Blessing or Curse? 11/11/2015 21:23:54 At least 80 percent of countries considered fragile or affected by conflict are home to valuable extractive resources that the global economy hungers for. Earth’s riches like oil, gas, and minerals often fuel conflict, trapping all but the elites in poverty amid vast wealth. Source: World Bank, October 2013 The Paradox of Plenty The “natural resource curse" or the paradox of plenty refers to the idea that resource-rich countries often have less economic growth compared with countries which have less natural resources

5. Resource Curse 11/11/2015 21:23:54

6. HDI and Resource Rich Countries 11/11/2015 21:23:54 Source: http://www.imf.org/external/pubs/ft/fandd/2013/09/pdf/Geiregat.pdf

7. Marginal Revolution University 11/11/2015 21:23:54

8. Causes of the Natural Resource Trap 1: Risk of political conflict and corruption / conflict / land grabs 2: Vulnerability to changes in world prices which causes high levels of macro volatility 3: Danger of over-rapid extraction of finite and renewable resources 4: Rising prices can lead to a currency appreciation – damaging domestic industries A handful of countries produce the bulk of global resources. The three largest producers for 19 commodities account for 56% of total production. 11/11/2015 21:23:54

9. Causes of the Natural Resource Trap 1: Risk of political conflict and corruption / conflict / land grabs 2: Vulnerability to changes in world prices which causes high levels of macro volatility 3: Danger of over-rapid extraction of finite and renewable resources 4: Rising prices can lead to a currency appreciation – damaging domestic industries A handful of countries produce the bulk of global resources. The three largest producers for 19 commodities account for 56% of total production. 11/11/2015 21:23:54

10. Civil Wars Country Dates Resources Afghanistan 1992-2001 gems, opium Angola 1975-2002 oil, diamonds Burma 1983-1995 timber, tin, gems, opium Cambodia 1978-1997 timber, gems Congo Rep. 1997 oil DR Congo 1996 oil, diamonds, gold, cobalt DR Congo 1997-1999 oil, diamonds, gold, cobalt Liberia 1989-1996 timber, diamonds, iron, oil palm Peru 1982-1996 coca Sierra Leone 1991-2000 diamonds Sudan 1983 oil 11/11/2015 21:23:54

11. Violent Conflicts Region Participants Date Resources Cabinda Angola, Congo 1975 oil Congo War DRC, Chad, Namibia, Rwanda, Angola, Zimbabwe, Uganda, Burundi, Sudan 1990s minerals, diamonds, timber Kashmir India, Pakistan 1947 water Palestine Israel, Palestine 2007 water Baluchistan Pakistan, Iran 2004 natural gas Somali civil war Somalia, US, UK 1991 oil Afghanistan Afghanistan, US + allies 1980 gems, gold, copper, coal, opium, natural gas Iraq Iraq, US + allies 2001 oil, natural gas, phosphates, sulphur 11/11/2015 21:23:54

12. Land Grabs 11/11/2015 21:23:54

13. Causes of the Natural Resource Trap 1: Risk of political conflict and corruption / conflict / land grabs 2: Vulnerability to changes in world prices which causes high levels of macro volatility 3: Danger of over-rapid extraction of finite and renewable resources 4: Rising prices can lead to a currency appreciation – damaging domestic industries 11/11/2015 21:23:54

16. Causes of the Natural Resource Trap 1: Risk of political conflict and corruption / conflict / land grabs 2: Vulnerability to changes in world prices which causes high levels of macro volatility 3: Danger of over-rapid extraction of finite and renewable resources 4: Rising prices can lead to a currency appreciation – damaging domestic industries Extraction tends to be capital intensive Risk of higher unemployment with limited welfare safety net Rent extraction worsens inequality Wealthy resources increase rewards to being in power 11/11/2015 21:23:54

21. More from Paul Collier on the Natural Resource Revenue Issue 11/11/2015 21:23:54

22. More from Paul Collier on the Natural Resource Revenue Issue The revenues from exhaustible natural resources are distinctive in two key respects: since they are derived from depleting a finite stock of resources they are intrinsically temporary, and since commodity prices are highly volatile they are unreliable. Both exhaustibility and volatility potentially give rise to unsustainable increases in consumption 11/11/2015 21:23:54

23. More from Paul Collier on the Natural Resource Revenue Issue The revenues from exhaustible natural resources are distinctive in two key respects: since they are derived from depleting a finite stock of resources they are intrinsically temporary, and since commodity prices are highly volatile they are unreliable. Both exhaustibility and volatility potentially give rise to unsustainable increases in consumption Investing resource revenue in capital assets abroad makes sense for a capital-intensive economy like Norway, but most African economies need a lot of capital themselves. So they need something like sovereign investment funds, institutions that contribute to building infrastructure, raising education levels and so on.

24. What policies might help a country avoid a natural resource trap? Better government – including more transparency & accountability to tax payers Stabilisation Fund / Sovereign Wealth Fund – e.g. to fund human capital and critical infrastructure Higher taxes of natural resource profits (extracting resource rents) Diversification to reduce dependency and build new competitive advantages “Resource-rich countries often do not pursue sustainable growth strategies. They fail to recognise that if they do not reinvest their resource wealth into productive investments above ground, they are becoming poorer. Conflict over access to resource rents gives rise to corrupt and undemocratic governments” Professor Joe Stiglitz 11/11/2015 21:23:54

25. What policies might help a country avoid a natural resource trap? “Resource-rich countries often do not pursue sustainable growth strategies. They fail to recognise that if they do not reinvest their resource wealth into productive investments above ground, they are becoming poorer. Conflict over access to resource rents gives rise to corrupt and undemocratic governments” Professor Joe Stiglitz 11/11/2015 21:23:54 Countries that manage these natural assets carefully are able to move up the development ladder – investing more and more in manufactured capital, infrastructure and “intangible capital” like human skills and education, strong institutions, innovation and new technologies. Source: World Bank “The Changing Wealth of Nations, 2011)

29. What policies might help a country avoid a natural resource trap? Better government – including more transparency & accountability to tax payers Stabilisation Fund / Sovereign Wealth Fund – e.g. to fund human capital and critical infrastructure Higher taxes of natural resource profits (extracting resource rents) Diversification – investment in processing and manufacturing – giving higher value added “Resource-rich countries often do not pursue sustainable growth strategies. They fail to recognise that if they do not reinvest their resource wealth into productive investments above ground, they are becoming poorer. Conflict over access to resource rents gives rise to corrupt and undemocratic governments” Professor Joe Stiglitz 11/11/2015 21:23:54

30. Norway Norway's sovereign wealth fund is the biggest in the world at £460bn. The fund generates money from its ownership of petroleum fields, taxes on oil and gas, and dividends from a 67% stake in Statoil, the country's largest energy company. Norway is the world's second-largest gas exporter and the seventh-largest oil exporter. 11/11/2015 21:23:54

31. Process – don’t just extract! Build capabilities to sustain growth Many African countries with limited natural capital have out-performed on the Continent since 2000 Evaluation Corner 11/11/2015 21:23:54

32. Africa and Natural Resources 11/11/2015 21:23:54

33. 11/11/2015 21:23:54 The fundamental goal of resource- rich economies should be to transform their exhaustible natural resources into assets— human, domestic, and private capital and foreign financial assets— that will generate future income and support sustained development. But the record is mixed Source: IMF Finance and Development, September 2013

34. Recommended Answer Structure One Main Point/Argument per paragraph Analyse / Build Connectives Use Supporting Examples & Evidence Then evaluate the actual point made Evaluate Assess Discuss To what extent Examine Questions Requiring Evaluation

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Economics of the Natural Resource Trap

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Economics of the Natural Resource Trap