Friday, March 30, 2012

The Curse of Oil


Economists have long talked of the “resource curse” that can affect economies with lots of energy and minerals. The curse comes in two main forms. First, high revenues from resource development allow governing politicians to be “rent-seekers”, seizing control of the assets and using the income to buy off opposition to their rule. Mobutu Sese Seko, a former dictator of what was then Zaire, is the most glaring example of this tendency. The result is that more stable forms of government fail to develop.

The second form of the curse is dubbed “Dutch disease”, a term coined by The Economist to describe the problems of the manufacturing sector in the Netherlands in the 1970s. Dutch ownership of natural-gas resources pushed up the country’s real exchange rate, making manufacturing less competitive. Although the problem of poor governance has particularly affected developing countries, Dutch disease is more of a problem for the developed world. Another example was sterling’s brief heyday as a “petrocurrency” in the early 1980s, which coincided with a slump in Britain’s manufacturing industry.


The curse was highlighted in 1995 in a paper by Jeffrey Sachs and Andrew Warner, then of Harvard University, which found that countries with a higher proportion of resource exports had experienced a slower rate of economic growth. But more recent work by Christa Brunnschweiler and Erwin Bulte, two Swiss-based economists, draws a very different conclusion.

The Swiss-based academics make a crucial distinction between abundance (having lots of resources) and dependence (having a high proportion of exports in resource-related industries). They found that greater resource abundance leads to better political institutions and more rapid growth, and suggest that the Sachs-Warner paper, which focused on dependence, got the causation the wrong way round. Countries with poor political institutions (like Zaire) are unlikely to develop other sectors of the economy to reduce their dependence on natural resources. But countries with good institutions are able to do so.


I hope we move from dependence to abundance in Kuwait. 

Thursday, March 29, 2012

Starting up in a Bust

THE list of famous companies founded during economic downturns is long and varied. It includes General Motors, AT&T, Disney and MTV, all founded during recessions. A 2009 study found that over half of Fortune 500 companies got their start during a downturn or a bear market.
http://www.economist.com/node/21542390

The article continues why starting up in a bust can lead to positive results:

Why should this be? One plausible explanation is that recessions affect the way people take decisions. Management styles are surely in part the result of the kinds of problems a person has had to grapple with. Even a risk-lover may end up taking more conservative financial decisions in a weak economy. If these decisions serve him well in lean times, then he may conclude that fiscal prudence is a stance worth sticking with in years of plenty.