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Resource Rich Economies)
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OxCarre Research Paper 5
Challenges and Opportunities for Resource Rich Economies
Revised, 23 April 2010
Frederick van der Ploeg
Oxford Centre for the Analysis of Resource Rich Economies
(OxCarre)
University of Oxford
CHALLENGES AND OPPORTUNITIES FOR
RESOURCE RICH ECONOMIES
Frederick van der Ploeg* **
University of Oxford
Revised 23 April 2010
Abstract
Supporting theory and evidence for ten hypotheses resulting from stylised facts regarding the
effects of natural resources on the economy and society are surveyed. These include that a
resource bonanza induces appreciation of the real exchange rate, de-industrialisation and bad
growth prospects, and that these adverse effects are more severe in volatile countries with bad
institutions and rule of law, corruption, presidential democracies, and underdeveloped
financial systems. They also include that a resource boom reinforces rent grabbing and civil
conflict especially if institutions are bad, induces corruption especially in non-democratic
countries, and keeps in place bad policies. Finally, they include that resource rich developing
economies seem unable to successfully convert their depleting exhaustible resources into
other productive assets. The survey also offers some welfare-based fiscal rules for harnessing
resource windfalls in developed and developing economies.
Keywords: Resource curse, cross-country, panel and quasi-experimental evidence, Dutch
disease, institutions, corruption, financial development, volatility, Hotelling rule, genuine
saving, Hartwick rule, natural resource wealth management, sustainable development
JEL code: C12, C13, E01, F43, K42, O41, Q3
Address for correspondence:
OxCarre, Department of Economics, University of Oxford
Manor Road Building, Oxford OX1 3UQ, United Kingdom
Tel: +44-1865-281285, Email: rick.vanderploeg@economics.ox.ac.uk
.
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* I am grateful to the editor Roger Gordon, two anonymous referees, Rabah Arezki, Maarten Bosker,
Erwin Bulte, Paul Collier, David Hendry, Roland Hodler, Mansoob Murshed, Steven Poelhekke, Tony
Venables, David Vines, Klaus Wälde, Cees Withagen, Aart de Zeeuw and participants of the CESifo
Area Conference on Public Sector Economics, 21-23 April 2006, Munich, the 6
th
Annual Meeting of
the EEFS, Sofia, 2007, the 10
th
Anniversary Conference of the Global Development Network, 2-5
February 2009 and seminars at the Kiel Institute of World Economics, EUI, ISS, The Hague, Erasmus
University Rotterdam, Amsterdam, Tinbergen Institute, Tilburg, Pisa, Oxford University, Cambridge
University, ETH Zurich, University of Birmingham and University of Nottingham for many helpful
comments and suggestions. This work was supported by the BP funded Oxford Centre for Analysis of
Research Rich Economies.
** Also affiliated with the University of Amsterdam, Tinbergen Institute, CEPR and CESifo.
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1. Introduction
Many recognise the opportunities natural resources provide for economic growth and
development and thus the challenge of ensuring that natural resource wealth leads to sustained
economic growth and development. Still, many countries seem to be cursed by natural
resource wealth. The key question is why resource rich economies such as Botswana, Canada,
Australia or Norway are more successful while others perform badly despite their immense
natural wealth. Is it because resource booms induce appreciation of the real exchange rate and
makes non-resource sectors less competitive (Dutch disease)? Are learning by doing and other
spill-over effects strong enough in those non-resource traded sectors to warrant government
intervention? Or do the riches of a resource bonanza induce a shift from profit-making
entrepreneurship towards socially inefficient rent seeking? How much of this depends on
quality of institutions and rule of law? Is resource wealth plundered by corruption, rent
grabbing and civil war at the expense of widespread inequality and poverty? Does a resource
boom maintain unsustainable, bad policies for too long? Is depleting natural wealth
sufficiently reinvested in other productive assets?
To shed light on these important questions, we first present in section 2 the relevant
stylised facts (case studies, historical and statistical) on the heterogeneous experiences of
resource rich economies. We then put forward in section 3 eight hypotheses and offer
supporting theory and the best cross-country, panel-data and quasi-experimental evidence that
is available on each hypothesis. What transpires is not only how much the experiences of
resource rich economies differ from other economies, but also the wide variety of experiences
of different resource rich economies. In section 4 we give detailed attention to the question
why so many resource rich developing economies deviate from the so-called Hartwick rule in
the sense that they do not fully reinvest their resource rents in foreign assets or productive
capital (e.g., buildings, roads, machines, human capital) even though saving is an essential
part of economic development. The puzzle is why observed and optimal genuine saving rates
do not seem to differ much in non-resource economies, but differ sharply in resource rich
economies. We put forward the ‘anticipation of better times’ and the ‘voracious rent seeking’
hypotheses to help explain this puzzle. Section 5 offers welfare-based fiscal rules for
harnessing resource windfalls in developing economies paying special attention to capital
scarcity, absorption problems and volatile revenue streams. Section 6 concludes.
2. Stylised facts: is the natural resource curse inevitable?
Although some resource rich countries benefit from their natural wealth, others are in a
terrible state. We discuss some well-known examples of countries whose dependence on
natural resources have gone together with bad macroeconomic performance and growing
inequality among its citizens and contrast this with others which have benefited from their
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natural resource wealth (section 2.1). We also discuss historical evidence on how natural
resources has led to establishment of property rights and contributed to economic
development (section 2.2). We then discuss some cross-country stylised facts on the effects of
resources on economic and social outcomes (section 2.3). Finally, we discuss genuine saving
statistics to see to what extent natural resource wealth is converted into physical, human and
other wealth (section 2.4). The main point of these stylised facts is to point out the enormous
variety of experiences of resource rich countries and the puzzles that they suggest. We leave
theories for the effects of resources on growth and conflict and the testing thereof to section 3.
2.1. Diverse experiences of illustrative resource rich countries
Accounts of the resource curse are available for many countries (e.g., Gelb, 1988; Karl,
1997ab; Wood, 1999; Auty, 2001b). The most dramatic example is perhaps Nigeria (Bevan et
al., 1999; Sala-i-Martin and Subramanian, 2003). Oil revenues per capita in Nigeria increased
from US$33 in 1965 to US$325 in 2000, but income per capita has stagnated at around
US$1100 in PPP terms since its independence in 1960 putting Nigeria among the 15 poorest
countries in the world. Between 1970 and 2000 the part of the population that has to survive
on less than US$1 per day shot up from 26 to almost 70 percent. In 1970 the top 2 percent had
the same income as the bottom 17 percent, but in 2000 as much as the bottom 55 percent.
Clearly, huge oil exports have not benefited the average Nigerian. Although Nigeria has
experienced rapid growth of physical capital at 6.7 percent per year since independence, it has
suffered a declining TFP of 1.2 percent per year. Capacity utilisation in manufacturing now
hovers around a third. Two thirds of capacity, often owned by the government, thus goes to
waste. Successive military dictatorships have plundered oil wealth and Nigeria is known for
its stories about transfers of large amounts of undisclosed wealth. Oil wealth has
fundamentally altered politics and governance in Nigeria. It is hard to maintain that the
standard Dutch disease story of worsening competitiveness of the non-oil export sector
explains its miserable economic performance. Instead, exchange rate policy seemed to be
driven by rent and fiscal imperatives and relative price movements were almost a by-product
of the resource boom (Sala-i-Martin and Subramanian, 2003).
Other oil exporters (Iran, Venezuela, Libya, Iraq, Kuwait, Quatar) experienced
negative growth during the last few decades. OPEC as a whole saw a decline in GNP per
capita while other countries with comparable GNP per capita enjoyed growth. The gold price
boom in the 1970’s led to initial appreciation followed by gradual depreciation of the real
exchange rate; together with increased barriers to technological adoption, this explains the de-
industrialisation and disappointing growth experience of South Africa (Stokke, 2007). The
disruption of the ‘air bridge’ from 1994 onwards shifted the production of coca paste from
Peru and Bolivia to Columbia and led to a huge boom in the demand for Columbian coca leaf.
3
This has led to more self-employment and work for teenage boys in rural areas, but not to
widespread economic spill-over effects, and the financial opportunities that coca provides has
fuelled violence and civilian conflict especially outside the major cities (Angrist and Kugler,
2008). Greenland benefits from a large annual grant from Denmark to ensure a similar GDP
per capita to the Danish one. It has suffered from an appreciated real exchange rate as well as
rent seeking from a comprehensive system of state firms and price regulations (Paldam, 1997).
Others discuss more positive experiences. Forty percent of Botswana’s GDP stems
from diamonds, but Botswana has managed to beat the resource curse. It has the second
highest public expenditure on education as a fraction of GNP, enjoys the world’s highest
growth rate since 1965 and its GDP per capita is at least ten times that of Nigeria (Sarraf and
Jiwanji, 2001). The Botswana experience is especially noteworthy, since it started its post-
colonial experience with minimal investment and substantial inequality. Of 65 resource rich,
developing countries only four managed to achieve long-term investment exceeding 25
percent of GDP and an average GDP growth exceeding 4 per cent, namely Botswana,
Indonesia, Malaysia and Thailand (Gylfason, 2001). These three resource rich Asian countries
have achieved this by economic diversification and industrialisation. Still, they fared less well
than their neighbours Hong Kong, Singapore and South Korea with little raw material wealth.
Norway has shown remarkable growth of manufacturing and the rest of the economy
compared with its neighbours despite phenomenal growth in oil exports since 1971
(Anderssen, 1993; Larsen, 2004). Norway is the world’s third largest petroleum exporter after
Saudi-Arabia and Russia, but is one of the least corrupt countries in the world and has well
developed institutions, far sighted management and market friendly policies.
United Arab Emirates account for close to 10 percent of the world’s crude oil and 4
percent of the world’s natural gas reserves, but has turned its resource curse into a blessing
(Fasano, 2002). Its government debt is very small, inflation is low and hydrocarbon wealth
has been used to modernise infrastructure, create jobs and establish a generous welfare system.
Major strides in life expectancy and literacy have been made through universal and free
access to education and health care. In anticipation of depletion of its natural resources, oil-
rich Abu Dhabi has emphasised petrochemical and fertilisers, Dubai has diversified into light
manufacturing, telecommunications, finance and tourism, and the other emirates have focused
on small-scale manufacturing, agriculture, quarrying, cement and shipping services. Many
Latin American countries have abandoned misguided state policies, encouraged foreign
investment in mining and increased the security of mining investment. Since the 1990’s Latin
America appears to be the fastest growing mining region, well ahead of Australia, Canada,
Africa and the US in terms of spending on exploitation. Chile has recently achieved
remarkable annual growth rates of 8.5 percent while the mining industry accounted for almost
half of total exports. Peru ranks second in the world in the production of silver and tin, fourth