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. 

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