Rich Resource Countries and Economic Growth

Rich Resource Countries and Economic GrowthVikram Mashruwhy suck mental imagery rich economies so frequently failed to achieve continue economic evolution?In the late 20th Century, Sachs and Warner extensively record the negative correlation between a states vision endowment and their regularize of economic growth.1 They focussed on point-source immanent resources because they potful be easily traded and exploited by others. Their paper built upon former research straining to the so-called resource curse being astray accepted. However, the explanations of the phenomenon atomic number 18 disputed with the constantly fluctuating prices of lifelike resources being a possible explanation. In addition to this, other industries could be crowded start by the export-based inherent resource industry an appreciation of the real substitution rate could overly be problematic. Yet, the step of a body politics institutions could be a better explanation for starting time leve ls of economic growth because they determine the way in which natural resources are exploited and so the impact the natural resource shave on the parsimoniousness as a whole.The revenue brought about by natural resources tends to be extremely volatile because natural resources have a low price snap fastener of supply as production fuck non be adapted easily altered without incurring large costs.2 Oil prices are demoteicularly variable because they are often change by political instability, natural disasters and economic downturns. This excitableness is problematic because it pinchs to uncertainty in the bucolic and exposes the countrys economy to changes in the world price in commodities. This problem may be exacerbated if the country has non economically diversified and the majority of a countrys foreign currency comes from exports of natural resources. The fluctuating prices bottom of the inning breath to a risky cycle where the government spends a lot when prices are high, scarce have to introduce harsh austerity measures when prices drop because they can no longer afford to maintain their expenditure.3 The unpredictability of the governments monetary policy may make the country less spellbinding to foreign investors. A dependence on a volatile primary(a) product has been shown to inversely correlate with investment in education, foreign conduce investment and overall economic growth4. However, if fluctuating prices were the only cause of the low rates of economic growth there would certainly be periods of importantly higher growth when prices are high. Thus, fluctuating prices alone are non enough to explain the natural resource curse.Dutch disease is a theory that suggests the find of resources in a country may authorise to a decline in export-oriented industries and particularly the manufacturing sphere of influence. The export of natural resources alike(p) petroleum could lead to an appreciation in the real exchange rate because o f the make up in demand for the currency.5 The high exchange rate could harm the manufacturing industry as their exports would consequently be more expensive than before. Thus, the manufacturing sector would be less competitive on the spheric market and could lead to lower economic growth in the country. The term itself was originally utilise to describe this process after it happened in the Netherlands after the discovery of natural gas in 1959, merely it has since been observed elsewhere.6 Russia, for example, is one of the largest exporters of natural resources in the world and has experienced an increasing real exchange rate. Oomes and Kalcheva demonstrate that Russia has also displayed the other three major signs of Dutch disease including a retardation of the manufacturing industry, an increase in service sector growth and an increase in wage growth. While this may non be enough to once and for all state that Russia has fallen foul of Dutch disease, it does appear that likely that the country has experienced it to some degree. Furthermore, industries that compete with imports may be adversely affected as the stronger exchange rate would increase the purchasing power of consumers. The countrys labour and capital may be redistributed towards local anesthetic non-tradeable sectors and the country may then lose out on the benefits of having a strong manufacturing sector such as technological progress and pricy management.7 There were significant fears that the artificially high exchange rate from northwestern Sea inunct revenue would have this impact in the UK if restorative policies were not enacted.8On the other hand, Dutch disease appears to be an micro explanation for Nigerias poor economic performance because the sustained increase in price of tradable goods in the 1980s and azoic 1990s did not improve their economic performance and because the decline of the agricultural sector was touch off by the growth of the public sector.9 Furthermor e, Norways extraction of oil from the early 1970s has hugely improved its economic growth and allowed it to catch up with Denmark and Sweden. Its rapid growth suggests that Dutch disease is not an economic inevitableness and that there are other important factors. Larsen argues that Norways success where so many other countries have failed is indicative of the superior quality of its pre-existing institutions, an attribute that most primary product dependent countries do not have.10 Norways government explicitly discussed the problems natural resources posed in fan tan and used policies to counteract these negative impacts. For example, they tried to protect the economy from inordinate demand and exchange rate appreciation by establishing a oil color Fund abroad and paying back foreign debts.11 The discovery of natural resources often leads to disputes over the ownership of them and rent-seeking behaviour such as courtly wars which may crowd out other beneficial behaviour. Nig eria demonstrates the institutional problems with the discovery of a large pool of natural resources. Corruption and waste has undone the country and prevented the large quantity of oil in the country from devising a positive contribution to the national economy. Conflicts over ownership of oil fields such as the Biafran war of the 1960s and successive forces dictatorships have not only disturbed the extraction of oil but have disrupted unrelated economic activity.12Moreover, poor institutional quality leads to a lack of trust in government especially when rottenness is widespread and widely known about. Multinational corporations respond to problems of corruption by taking part in enclave development where they minimise their activity in the country so that they can avoid all the problems associated with poor institutions. thumping firms extract oil from these countries but process it elsewhere, which means that there is little value added in the resource rich country. Consequ ently, countries like Nigeria are strained to rely on exports of raw materials and there is little value added to commodities in their economies so little profit is made within the country. Overall, it seems that oil is not enough on its own to create economic and civil disturbances, but instead exacerbates pre-existing issues. In the Niger Delta, oil was discovered amidst a backdrop of weak institutions and thus struggles and exploitation follows.13 However, part of the problem is that the discovery of oil and consequent accumulation of wealth at the top of the political hierarchy, as Birdsall points out, may hinder the development and improvement of institutions that could have otherwise taken place.14The explanation for resource rich countries lack of growth is particularly complex. The volatility of raw material prices are in part to blame for this because they lead to uncertainty in the economy and exposes the country to price changes on the global market. This is made wors e by the following unpredictability of government fiscal decisions. However, the volatility is not enough to truly understand why these countries have such slow rates of economic growth. The Dutch disease is a slightly better explanation, with the export of raw materials leading to an appreciation in the exchange rate. However, multiple examples like Norway show that Dutch disease can be avoided through careful macroeconomic planning on the part of the government. This demonstrates that the most important explanation is the quality of institutions at the time of resource discovery. If they are weak, like Nigerias, natural resources can lead to civil conflict and economic hardship. Yet a country with strong institutions like Norway allows natural resources to boost prosperity and economic growth.BIBLIOGRAPHYBirdsall, N Subramanian, A. (2004) pitch Iraq From Its Oil. Foreign personal matters 83.4Larsen, E.R. (2004) Escaping the Resource agony and the Dutch distemper? Statistics N orway, Research DepartmentOomes, N. Kalcheva, K. (2007) diagnosing Dutch Disease Does Russia have the Symptoms? IMF Working PaperThe Dutch Disease (1977) The EconomistSachs, J.D. Warner, A.M. (1995) infixed Resource Abundance and Economic Growth. National means of Economic Research Working PaperSala-i-Martin, X. Subramanian, A. (2003) Addressing The earthy Resource odium An Illustration From Nigeria. National Bureau of Economic ResearchRamey, G. Ramey, V.A. (1995) Cross-Country inference on the Link Between unpredictability and Growth. American Economic round offWatts, M. (2004) Resource Curse? Governmentality, Oil and Power in the Niger Delta, Nigeria. Geopolitics11 Sachs Warner, Natural Resource Abundance and Economic Growth2 Oomes Kalcheva, Diagnosing Dutch Disease, p.73 Birdsall Subramanian, Saving Iraq From Its Oil4 Ramey Ramey, Cross-Country Evidence on the Link Between Volatility and Growth, pp.1138-11515 Oomes Kalcheva, Diagnosing Dutch Disease, p.76 The Econ omist, The Dutch Disease, pp.82-837 Birdsall Subramanian, Saving Iraq From Its Oil8 Forsyth Kay, The Economic Implications of north-central Sea Oil Revenues, p.179 Sala-i-Martin Subramanian, Addressing The Natural Resource Curse, p. 1610 Larsen, Escaping the Resource Curse and the Dutch Disease?11 Larsen, Escaping the Resource Curse and the Dutch Disease? P.1312 Sala-i-Martin Subramanian, Addressing The Natural Resource Curse, pp.12-1513 Watt, Resource Curse? pp.73-7614 Birdsall Subramanian, Saving Iraq From Its Oil