13/04/2023 08:11:07 AM

A2 Macro: 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

13/04/2023 08:11:08 AM

A2 Macro: 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

“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

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Resource Curse

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Marginal Revolution University

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Causes of the Natural Resource Trap1: 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.

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Causes of the Natural Resource Trap1: 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.

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Civil WarsCountry 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

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Violent ConflictsRegion 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

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Land Grabs

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Causes of the Natural Resource Trap1: 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

13/04/2023 08:11:12 AM

Causes of the Natural Resource Trap1: 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

13/04/2023 08:11:13 AM

Causes of the Natural Resource Trap1: 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

13/04/2023 08:11:14 AM

Causes of the Natural Resource Trap1: 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

13/04/2023 08:11:15 AM

Causes of the Natural Resource Trap1: 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

13/04/2023 08:11:15 AM

Causes of the Natural Resource Trap1: 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

13/04/2023 08:11:15 AM

Causes of the Natural Resource Trap1: 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

13/04/2023 08:11:15 AM

Causes of the Natural Resource Trap1: 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

13/04/2023 08:11:15 AM

More from Paul Collier on the Natural Resource Revenue Issue

13/04/2023 08:11:15 AM

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

13/04/2023 08:11:15 AM

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.

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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

13/04/2023 08:11:16 AM

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

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)

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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

13/04/2023 08:11:17 AM

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

13/04/2023 08:11:18 AM

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

13/04/2023 08:11:18 AM

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

13/04/2023 08:11:19 AM

NorwayNorway'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.

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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

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