12. Natural resources

Question 1

What are natural resources?

Answer 1

Resources that exist without human actions

Question 2

Why should resource rich countries be richer than resource scarce countries and what does the data say?

Answer 2

Because the production of natural resources does not require any investments, resource rich countries should be wealthier than resource scarce countries however the data does not support this notion

Question 3

What properties do resource rich countries tend to have compared to non-resource rich countries?

Answer 3

• Have higher corruption
• Have greater income inequality
• Have more poverty
• Have more conflict
• Grow more slowly

Question 4

What are some examples of the impact of good governance over natural resources?

Answer 4

Norway’s sovereign wealth fund, Alaska (The Alaska Permanent fund dividend) gives some back. Good governance is the key to maximising benefits from resources

Question 5

What is the general relationship between natural resource exports and growth in real GDP growth per capita?

Answer 5

Data from countries with high endowments of natural resources show the negative relationship between natural resources exports and growth. Those countries with high exports of natural resources in 1970 grew ore slowly on average over the next 20 years

Question 6

Name a paper that shows the negative relationship?

Answer 6

Sachs and Warner (1995) - “empirical support for the curse of natural resources is not bulletproof but it is quite strong”

Question 7

How can natural resources effect development (4)?

Answer 7

• Sectoral composition (structural change)
• Macroeconomic stability/ instability
• Institutions
• The probability of civil conflict

Question 8

What is conflict often known as?

Answer 8

Development in reverse

Question 9

What are the impacts of distortions to sectoral composition?

Answer 9

Natural resources can distort the structure of an economy leading to short-run benefits but long-term costs

Question 10

What is Dutch disease?

Answer 10

Dutch disease refers to a reduction in a country’s export performance as a result of an appreciation of the exchange rate following the discovery of natural resources such as oil

Question 11

Why is dutch disease important for labour?

Answer 11

Because many of the industries that generate dutch disease (oil and gas) are very capital intensive but not labour intensive increasing unemployment if it makes other sectors of the economy uncompetitive

Question 12

What happens to the economy structurally under dutch disease?

Answer 12

There is a restructuring of jobs in the economy to more services to serve the natural resources sector away from manufacturing as this is no longer competitive

Question 13

Why is it important to manage natural resources from a macro-economic point of view according to Stiglitz?

Answer 13

Quite often countries with larger amounts of natural resources suffer from exchange rate appreciation and the result is when they sell the natural resource. The value of the currency goes up. They produce natural resources but no jobs. You can see this all over the world. We have rich countries and poor people, that’s why it is so important to manage the natural resources from the macro economic point of view.

Question 14

What is the development of dutch disease dependent on?

Answer 14

Whether resource booms lead to dutch disease or not depends on the degree to which the exploitation of a natural resource effects production in other sectors of the economy

Question 15

What makes dutch disease less likely?

Answer 15

• Backward linkages - local outputs used as inputs by the source extraction industry
• Forward linkages (natural resources used to produce other goods locally)
• Spillovers in investments

Question 16

Why does it matter if oil is the only industry?

Answer 16

When a country’s GDP is dependent on the export of natural resources, it is very vulnerable to macroeconomic instability due to price volatility eg. Venezuela

Question 17

What happened to Venezuela?

Answer 17

Despite the country having the world’s largest proven crude oil reserves, Venezuela experience hyperinflation and sustained negative GDP growth

Question 18

How heavily reliant was Venezuela on oil exports?

Answer 18

It accounted for around 95% of exports before the collapse

Question 19

What did successive governments fail to do?

Answer 19

Neglected diversifying economic activity leaving the economy unbalanced and vulnerable so when oil prices fell in the early 2010s and in 2014, there was a sharp decline in oil revenues

Question 20

How did the government attempt to address the budget defecit?

Answer 20

Borrowing and printing money resulting in hyperinflation (5220% in 2018)

Question 21

What was the result of economic collapse in Venezuela?

Answer 21

The exodus of skilled workers hampering development

Question 22

What has the state owned oil company PDVSA been subjected to?

Answer 22

International sanctions for government corruption and human-rights violations

Question 23

How is government spending impacted by over-reliance on natural resources?

Answer 23

Government spending is much less stable in those countries specialising in oil exports such as Gabon, the Congo and Equatorial Guinea and is dictated by the price of oil. This has impacts of

Question 24

Why does the role of government and institutions matter with natural resources?

Answer 24

The role becomes even more important. Resource extraction sector is typically owned or regulated by the government meaning resource windfalls generate income for governments (directly or indirectly)
- The use of this income determines whether natural resources are a blessing or a curse

Question 25

What are the growth enhancing effects of natural resources?

Answer 25

▪ Provision of public goods: infrastructure, education, etc.
▪ Investment in other industries/sectors
▪ Paying off debts

Question 26

What are the growth-deterring effects of natural resources?

Answer 26

▪ Over-expansion of government sector, over-spending and over-borrowing
▪ Macroeconomic instability due to price volatility of resources (see previous)
▪ Incentives for corruption than can lead to a struggle over control

Question 27

Why may over-spending or over borrowing arise as a result of natural resources?

Answer 27

If government spending is derived from
state-owned companies extracting natural
resources, it easier to avoid accountability

Question 28

Name some countries that have had periods of unchecked government spending?

Answer 28

Countries such as Nigeria, Angola and
Venezuela (and others) have all had periods
of unchecked government spending. These government were later heavily
criticized for over-spending on projects that
failed to deliver real benefits

Question 29

What does less accountability lead to?

Answer 29

Corruption

Question 30

What is the relationship between conflict and national resources?

Answer 30

Many recent conflicts are observably influenced by the presence of heavy concentrations of
natural resources and in particular oil (Kuwait, Sierra Leone, Angola, Congo DRC, Bolivia)

Question 31

What is an explanation for why high amounts of natural resources may lead to civil conflict?

Answer 31

One explanation is suggested by the Collier-Hoeffler (1998) cost-benefit analysis: natural
resources are of high value, but it is often relatively easy to capture control of these resources

Question 32

What are incentives for conflict over natural resources based on?

Answer 32

Incentives to fight for these resources may depend on the quality of government, particularly
rule of law

Question 33

How did conflict for natural resources happen in Sierra Leone?

Answer 33

The 11-year civil war began in Sierra Leone during the 1990s because of alluvial diamonds in rivers

Question 34

What did Lei and Michaels (2014) find about the impact of discovery of natural resources on conflict?

Answer 34

In a study of 193 countries since 1946, Lei and Michaels (2014) show that the discovery of a large
oilfield raises the odds of a country experiencing civil conflict by 5-8 percentage points.The largest increase in the risk of conflict are in countries with a history of political violence in the last 10 years

Question 35

How do oil prices impact the likelihood of conflict?

Answer 35

In oil municipalities in Columbia attacks were far more likely when prices rose and vice-versa – making
guerilla attacks more lucrative (rapacity)

Question 36

How did coffee prices impact the likelihood of conflict?

Answer 36

In coffee municipalities violence increased with a fall in the coffee price and coffee grower’s
wages - a reduction in the opportunity cost of engaging in guerilla activities

Question 37

How do price changes in minerals influence violence?

Answer 37

In Africa: Price changes in minerals could explain up to one fourth of violence - according
to Berman et al., 2017

Question 38

What two factors are the effect of resource discoveries on conflict likely to be influenced by?

Answer 38

▪ The quality of institutions
▪ The type of natural resource (ease of extraction, demand, etc.)