natural resources: curse or blessing? · the natural resource paradox dutch disease the norwegian...

NaturalResources:CurseorBlessing?

Trinidad&Tobago,February2014

The natural resource paradox

Dutch disease

The Norwegian paradox

Natural resources governance: sustainability and the new paradigms

Outline

2

TheNaturalResourceParadox

Countries with abundant natural resources, tend inaverage to grow less than countries with few naturalresources

That phenomenon happens with particular emphasisin countries with non renewable natural resources,likeminerals and oil

Why is that?

3

Therateofgrowthofpercapitaincome islowerforresourcedependenteconomiesthanfornonresourcedependenteconomies.

Example: XLandhasnomineralresourcesandhasarateofgrowthofpercapitaGDPof2.5%

YLandhascopperandhasarateofgrowthofpercapitaGDPof1.6%


4


Evidencewasgathered.

Source:Manning(2004)

5



Source:Manning(2004)

6


Source:WorldBank

0

5,000

10,000

15,000

20,000

25,0001961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

Gross National Income PerCapita,US$

Per

Chile

Nigeria

Korea

T&T

7


Explanationswerelookedfor

Source:Gylfason (2000)8


Andalogicalconclusioncameup:

9

Resourcesareacurse!!!


TheResourceCurse

0

5

10

15

20

25

30

35

40

45

50

0 5 10 15 20 25 30 35 40 45 50

PerC

apita

GDP

Time

Whatisitallabout?

ResourceDiscoveredinYear 20

With Discovery

WithoutDiscovery

Source:RWI(2013)10

TheResourceCurse

SonaturalResourcesbroughtusthesevenplagues,butwhichoneswerethemechanisms:

DutchDiseaseandlossofcompetitiveness Decliningcommoditypricesbecauseinnovationandsubstitution

Overproductiondrivingpricesdown Volatilityofinternationalpricesofcommodities BoomBustCycle

Accesstoeasycredit debtcrisis Consumerismfever Corruptionopportunitiesfueledbyeasywealth Unproductiveuseofresources Distorteddistributionofproductionfactors

11

Soresourcesbroughtusthesevenplagues,butwhatwerethemechanismsforsuchacurse:

Clustereconomy Scarceaddedvalue onlyrawcommoditiesproduction Decreasingreturns Wealthconcentration,increasedinequality:theBelindiaSyndrome

Monoexportermentality DegradedenvironmentalandSocialdegradation Excessofrevenuefuelsfiscallazinessandirresponsibility Promotesauthoritarianandclientelistregimes

TheResourceCurse

12

TheResourceCurse

Datasupportedthisperspective:

13

TheResourceCurse

Itistrue!:goodsarereplaced

14

Andnewways toexploitaresourcecandeveloped

Thus, nobodycanbe100%sure

TheResourceCurse

15

Andnewsourcesofenergyaredeveloping

Theonlythingweknowforsureaboutthefutureisthatwearenotthereyetbutitiscoming

TheResourceCurse

16

Werethoseprojectsreallynecessary?

TheResourceCurse

17

Werethoseprojectsreallynecessary?

TheResourceCurse

18

WereaboutT&T?

TheResourceCurse

19

Andwhereaboutauthoritarian, populist,corruptregimes?

TheResourceCurse

20

Andthisishappeningrightnextdoor

TheResourceCurse

21

Country GovernmentEffectiveness

RegulatoryQuality

VoiceandAccountability

Algeria 29th 11th 18th

Egypt 32nd 41st 16th

Iraq 10th 15th 13th

Jordan 57th 57th 25th

Libya 5th 5th 6th

SaudiArabia 41st 53rd 3rd

Tunisia 57th 46th 36th

UnitedArabEmirates

78th 63rd 20th

Source:WorldBankGovernanceIndicators(2011)

TheResourceCurse

22

Andthereareserious governanceandtransparencyissues

TheDutchDisease

An economic phenomenon where the revenues from naturalresource exports damage a nation's economy , affecting itsdiversification and competitiveness

The name comes from the economic disturbances experiencedby the Netherlands after huge gas fields were discovered

Appreciation of the local currency Increase in the price of factors (labor, capital) Tradable sectors lose competitiveness in and out thecountry

Why was that?

23

TheDutchDisease

Netherlandshastraditionallybeenamanufacturingandtradingpower

Bythe1950stheDutchmanufacturingsectorwasworldclass.EverheardaboutPhillipsTVandradiosets?

In1959thebiggestgasfieldinEuropewasfoundinGroningen

Fieldproductionstartedin1963andtheDutcheconomybegantoreceivemassiveinflowsofgasrevenues

24

TheDutchDisease

3effectsoftheDutchDisease

FactormovementeffectLaborandcapitalflowsintotheresourceextractionsectorattheexpenseofotherproductivesectors

SpendingeffectIncreaseddemandfromtherecipientsofresourcesrevenuespressesthenationaleconomy

Spillover losseffectLossofcompetivenessinotherproductivesectorshampersinnovationandeconomicdevelopmentinthewholeeconomy

25

TheDutchDisease

The increased supply of foreign currency brought theappreciation of the local currency

Consequences:Dutch products became more expensive for foreigners andforeign products became cheaper for Dutch people

Therefore loss of competitiveness for the tradable sector(manufacturing)

Also the demand from the oil sector increased the cost ofproductive factors for all the economic sectors

26

Oilstartsflowing Inflowofforeigncurrency

Peopleandcapitalmovefromothersectorstotheoilsector

Valueofdomesticcurrencyrisesand/orinflationrises

Exportindustriesbecomeless

competitiveanddecline

TheDutchDisease

27

TheDutchDisease

TherehavebeenalotofapparentepisodesofDutchDisease:

Spain(16th century)UnitedKingdom(1970s)Nigeria(1990s)Australia(2000s)

WhereaboutT&T?

28

Therearegainsandlossesfromfindinganaturalresource.

Thekeyistomakesurenetgainsarepositive.Inthiscase,realGDPgoesup.

Example:IfoilisfoundandGDPgoesdown,thenoilshouldnotbeproduced.Oilhasnegativevaluetotheeconomyinthiscase,andtherefore,dontproduceanyoilifproductionmakestheeconomypoorer.

Thisisthefundamentalissue:DontlookatthegrossgainsfromExtractiveIndustries.Ratherlookatthenetgains

29

TheDutchDisease

OfCoursetherearePolicyResponsestoDutchDisease

1. Macroeconomic policy to neutralize the exchange rate appreciation. Sterilization might be useful. Hold foreign exchange earnings overseas in an attempt to keep domestic consumers from increasing the relative price of non-tradables.

a. Might work for a period of time, but domestic nationals may undo in part what the government does via sterilization. That is, domestic nationals may bring their own foreign reserves back into the country and offset the net gain in the governments foreign reserve position.

b. Foreign investors might bring foreign exchange into the economy to offset the governments attempt to reduce imports.

c. The fact that the government holds more foreign exchange will tend to increase the exchange rate.

2. Fix the exchange rate (China): Keep the exchange rate undervalued. Encourages exports but discourages domestic consumption.

30

TheDutchDisease

3. Part of Dutch Disease is a distributional problem.

a. Government gets the mineral revenue.b. Citizens in affected sectors bear the cost.c. Need policies to help with the adjustment (not export subsidies but

investments in areas that will promote employment and exports).

4. Diversify the economy: Not subsidies for industries but investments in infrastructure and skills.

5. Dutch Disease works in reverse:

a. As mineral developments are depleted, foreign exchange earnings fall and the exchange rate may depreciate.

b. Need investments to take over when mines are depleted. c. There needs to be increased savings and investment.

OfCoursetherearePolicyResponsestoDutchDisease

31

TheDutchDisease

AddressingDutchDisease:FiscalSterilization

Oilstartsflowing InflowofforeigncurrencyValueofcurrencyandinflationremainstable

Fundsareinvestedoverseas

Exportindustriesremain

competitive

OtherMeansofAddressingDD: Investment,economicdiversificationandgrowth Monetarysterilization

32

TheDutchDisease

TheNorwegianParadox

However,realityiscomplex.Itisnotassimple

Norwayisagoodcaseofhowcauseeffectrelationshipsrelatedtotheresourcecursedoesntalwayswork

ThatiscalledtheNorwegianParadox

33

TheNorwegianParadox

NorwaywashistoricallythesmallerandleastdevelopedeconomyamongtheScandinavianscountries

Incomparativeterms,itwaslessdiversifiedandsophisticatedthanitsneighbors

However,in1969Norwaydiscoveredhugeoilfields,withcommercialproductionstartingin1971

Whathappenedthen?

34

TheNorwegianParadox

Norways economystarted to catch uptheir neighbors, afteroil was founds

However, Norwaywas able to keep acontinuous growtheven after oilrevenues permeatedthe economy

35

TheNorwegianParadox

Continuoushigheconomicperformance

ComparativelyreducedinvestmentinResearch&Development

Lowleveloftechnologicalinnovation

Whathappened?

36

TheNorwegianParadox

AfundamentalfacthastobeconsideredinordertoexplaintheNorwegianParadox:

Adequatepoliticalandeconomicinteractionbetween

Institutions

Specialinterestgroups

Electorate

Inotherwords:astrongSocialContract

37

TheNorwegianParadox

There was a set of public policies and institutionsplaying a role supporting economic growth

Norway was unsuccessful developing non resourcebased industries, BUT was successful developingresource based industries

There was an entrepreneurship sector available,eager to take advantage of the opportunities broughtby the oil boom

38

NorwegianParadox

TheNorwegianstateimplementedafullsetofpolicies

FactorMovementPolicy SpendingEffectPolicy SpilloverEffectPolicy EducationresearchanddevelopmentpolicyActivecountercyclicalpolicy Labormarketpolicies Industrialpolicy

39

TheNorwegianParadox

As a consequence:

Factor movement was controlled through incomecoordination, and a centralized wage formation system

Spending effect was controlled by fiscal discipline andinvesting abroad

Spilloverloss effect was compensated by industrial policy andlearning by doing in the oil extraction sector

40

TheNorwegianParadox

WhatthecaseofNorwaytellus?

Thereisacurse,butalldepends

ItispossibletoescapetheDutchDisease,butalldepends

Itispossibletoescapethecurse,butalldepends

Therecanbesustainablegrowth,butalldepends

Ineconomics:alldepends

41

TheNorwegianParadox

Natural resources can be a blessing, if managedcorrectly

Two key conditions:

Discourage rent seeking and redistribution conflicts. Theremust be a strong social contract, reflecting an integratedsociety, with a common vision and shared principles

Proper planning and allowance for the impact from thebooming sector on the whole economy

42

RecentworkhasbeguntocastdoubtontheResourceCurse

IthasbeenshownthatpercapitaGDPishigherforcountrieswithmineralresourcesrelativetothosethatdonothavemineralresources.

Thereareseveralresourcerichcountriesthathavemanagedtogrowthconsistently

NaturalResourcesManagement

43


Several countries, other than Norway, have been quitesuccessful managing the wealth coming from naturalresources: Canada, Chile, Australia, New Zealand

All those countries had to learn and adapt to their newcircumstances

In this process of adjustment (economic, social, political, evenenvironmental) there are gains and losses

With a clear understanding and agreement on how to betteruse the natural resources, those resources are a true blessing

There is always going to be an impact, but we can manage thatimpact

44

Someresourcerichcountriesarenotdoingbad.

Source:WorldBank

0

20,000

40,000

60,000

80,000

100,000

120,0001961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

Gross National Income PerCapita,US$

NorwayChileNewZealandAustraliaCanadaT&T

45


ThedebateabouttheResourceCursemaybeacademic,butpoliciesareimportant

Goodinstitutionsmakeeverythingbetter.

Transparencycanincreaseinstitutionalquality.

Savingisimportantandprudenceinhowsavingsareinvestedisequallyimportant.

Carefulplanningandevaluationisessentialfordomesticinvestments


46


WhereaboutRevenueManagement&Investment? Challengesofresourcerevenueandexpendituremanagement:

Resourcedependence Revenuemanagement Economicdiversification

ThatmeansimplementationofadequateInstitutionsandmechanisms

47


ResourceCurseNO YES

DutchDisease

NOOverallgrowthanddiverseexportbase

Stagnantgrowth,butdiverseexportbase

YESOverallgrowth,butstronglycontractedmanufacturing

Stagnantgrowth,andstronglycontractedmanufacturing

Source:Larsen(2004)48


4Issuestoaddressregardingrentdistributionfromtheextractivesector

Largescaledistributionconflicts

Smallscaleillegalrentseeking

Smallscalelegalrentseeking

Politicalpurchaseofpowerthroughelectoralclientelism

49


Howtoaddressrentseekinganddistributionconflicts:

Strongsocialnorms

Transparentdemocracy

Propermonitoring

Effectivejudicialsystem

50

TheNaturalResourceCharter Purpose: to assist governmentsand societies of resource richcountries to manage thoseresources generating economicgrowth, promoting welfare andenvironmentally sustainability

Drafted by an independent groupof economists, lawyers andpolitical scientists under anoversight board of distinguishedinternational figures


51

TheNaturalResourceCharter


Precept1:MaximizingBenefits

Precept2:AccountabilityPrecept3:FiscalRegimesPrecept4:Competitive

ProcessesPrecept5:Environment

andSocietyPrecept6:National

Companies

Precept7:PromotingGrowthPrecept8:Smoothing

SpendingPrecept9:Effective

SpendingPrecept10:PrivateSectorPrecept11:International

ActorsPrecept12:RoleofCompanies

52

TheExtractiveIndustriesTransparencyInitiative(EITI)NaturalResourcesManagement

Joint initiative of governments,companies and civil society toimprove openness and accountablemanagement of revenues fromnatural resources

Countries implement the EITIStandard to ensure full disclosure oftaxes and other payments made togovernments

EITI Reports allow citizens to knowhow much their government isreceiving from their countrys naturalresources

53

TheExtractiveIndustriesTransparencyInitiative(EITI)NaturalResourcesManagement

54

Currently, T&T is a candidate country to the EITI Standard

So,whowantstoberesourcerich,yet?

55

ToTshock+Procyclicalfinancialsector+Procyclicalfiscalandmonetarypolicy

Outputvolatility

Lowergrowth+Poorinvestment

(2)RevenueVolatility,MacroeconomicVolatilityandProcyclicality

DutchDiseaseDefinition:Asituationinwhichtheintroductionofanewasset

intoaneconomyadverselyaffectseconomicactivityinothersectors.

Example: OilwasdiscoveredintheNorthSea. OilproductionincreasedinTheNetherlands. Exportsoftulipbulbswentdownandunemploymentinsome

sectorswentup.

DutchDiseaseFormalized(123Model) Onecountry Two sectors (ProductionandConsumption) Three goods (Imports(M),Domestic Production(D)andExports(X))

Producers can substitutebetween DandEimperfectly Consumers can substitutebetween DandMimperfectly Differs from modelwith tradeables andnontradeables byallowing tradedness

tobe amatter ofdegree

Production Consumption

CET CES

D MX

BoT

Therearegainsandlossesfromfindinganaturalresource.

Mustmakesurenetgainsarepositive.Inthiscase,realGDPgoesup.IfoilisfoundandGDPgoesdown,thenoilshouldnotbeproduced.Oilhasnegativevaluetotheeconomyinthiscaseifitisproduced.Weneedtomakesurethatthelowestvalueiszero.Therefore,dontproduceanyoilifproductionmakestheeconomypoorer.

Thisisreallyanexampleofthebasicpoint:acountrymustnotlookatthegrossgainsfrommineralproduction.Rather,acountryneedstolookatthenetgains.

Ifcashflowsaremeasuredperfectly,thenthereisnoproblembecauseDutchDiseaseeffectswouldbeautomaticallytakenintoaccount.

Cashflowsarenotperfectlymeasuredandthussomeadjustmentforlossestoothersectorsisnecessary.

DutchDisease:Summary

FramingtheChallenge

IsthereaResourceCurse? Naturalresourceshavethepotentialtobetransformativeiftheyareproperlyharnessedfordevelopment

Butthedecisionchainfromdiscoveryofmineralsthroughtheirconversionintoaproductiveeconomyislongandcomplex.

FramingtheChallenge

Effectivelynavigatingthislongandcomplexdecisionchainrequiresanuancedunderstandingofpowerstructuresandincentiveswithinthenaturalresourcesector,aswellastechnicalskills.

Governmentpolicymakers,civilsocietyrepresentatives,membersofParliamentsandtheMedia:allhaveimportantrolestoplay.

Precept1:MaximizingBenefits

Precept2:AccountabilityPrecept3:FiscalRegimesPrecept4:Competitive

ProcessesPrecept5:Environment

andSocietyPrecept6:National

Companies

Precept7:PromotingGrowthPrecept8:Smoothing

SpendingPrecept9:Effective

SpendingPrecept10:PrivateSectorPrecept11:International

ActorsPrecept12:RoleofCompanies

NaturalResourceCharter:12Precepts

Natural Resources: Curse or Blessing?The natural resource paradoxDutch diseaseThe Norwegian paradoxNatural resources governance: sustainability and the new paradigmsThe Natural Resource ParadoxSlide Number 4The Natural Resource ParadoxThe Natural Resource ParadoxSlide Number 7Slide Number 8Slide Number 9The Resource CurseThe Resource CurseSlide Number 12The Resource CurseThe Resource CurseSlide Number 15Slide Number 16Slide Number 17Slide Number 18Slide Number 19Slide Number 20Slide Number 21Slide Number 22The Dutch DiseaseThe Dutch DiseaseThe Dutch DiseaseThe Dutch DiseaseSlide Number 27The Dutch DiseaseSlide Number 29Of Course there are Policy Responses to Dutch DiseaseOf Course there are Policy Responses to Dutch DiseaseSlide Number 32The Norwegian ParadoxThe Norwegian ParadoxThe Norwegian ParadoxThe Norwegian ParadoxThe Norwegian ParadoxThe Norwegian ParadoxNorwegian ParadoxThe Norwegian ParadoxThe Norwegian ParadoxThe Norwegian ParadoxSlide Number 43Natural Resources ManagementSlide Number 45The debate about the Resource Curse may be academic, but policies are importantNatural Resources ManagementNatural Resources ManagementNatural Resources ManagementNatural Resources ManagementThe Natural Resource CharterThe Natural Resource CharterThe Extractive Industries Transparency Initiative (EITI)The Extractive Industries Transparency Initiative (EITI)Slide Number 55Slide Number 57Dutch DiseaseSlide Number 59Dutch Disease: SummaryFraming the ChallengeFraming the ChallengeNatural Resource Charter: 12 Precepts

natural resources: curse or blessing? · the natural resource paradox dutch disease the norwegian...

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