ESSA

ESSA

A Broader View of the so-called Resource Curse


Alice He

By

August 12th, 2012


A deeper look at the two-speed economy, afflicting Australia.


In light of ESSA’s upcoming Q&A event, this article will explore some of the effects of Australia’s two-speed economy and how it relates to the wider notion of a ‘resource curse’, ultimately branching out to include some of the social and political consequences often befalling countries which own large amounts of natural resources. From a brief overview of Australia’s current macroeconomic situation, the more unsettling aspects of a resource boom will be considered in the context of some developing nations, often regarded as examples of economic and political mismanagement.

Australia’s media-dubbed two-speed economy originates from the resource-rich western states experiencing a boom in coal and iron ore exports due to China’s rising demands, followed by an appreciation in Australia’s exchange rate. The high dollar in turn hurts export-competing sectors, such as manufacturing, tourism and export-of-education which becomes expensive compared to a lower world price, domestic import-competing sectors are also disadvantaged by the lower price of imports from other countries.

Professor Max Corden (who will be on our Q&A panel) proposes that Australia has a three-speed economy comprising of i) the boom sector i.e. the mining sector, ii) the lagging sector i.e. those sectors which are hurt by the boom such as manufacturing and tourism, which face world prices and through Australia’s appreciation, have therefore experienced a fall in terms of Australian dollar prices and iii) the non-tradeable sector whose prices are determined by domestic supply and demand. The phrase ‘Dutch Disease’ refers to the adverse effects that a resource boom, in this case from our mining industry, has on other sectors of the economy.

While the non-tradeable sector experiences increases in demand due to the expenditure of income generated from the mining boom, this sector, along with the lagging sector suffer a shift from human capital away from them and into the boom sector. Meanwhile export and import-competing industries suffer a decline in demand and productivity.

Simple trade models suggest that countries should specialise in the industries in which they have a comparative advantage, in the case of Australia, this would mean focusing on the extraction of coal and iron ore. However, simple trade models omit much of the broader consequences, and several cases in countries other than Australia have shown that resource-rich countries reaping much of their income from natural resources are often subject to price volatility, and lack government accountability to its citizens.

So called the resource curse, in which the Dutch Disease is but one consequence of a natural resource boom and often encapsulates what is essentially an economic phenomenon rather than a humanitarian or political one, many countries with an abundance of typically non-renewable resources such as minerals and fuels are afflicted with slow economic growth, a tendency of government to mismanage resources and often, corrupt institutions.

A concern for these countries is that the lucrativeness of the mining industry discourages diversification and other sectors of the economy will be neglected and under-developed. In the case of Angola, Africa’s second largest oil producer, mining and quarrying made up 46.9% of the country’s GD in 2011 (69.7% in 2006), compared to manufacturing which contributed 6.4% (.9% in 2006). Angola has a propensity of importing all necessities from abroad even in cases where there is a potential comparative advantage if it produced the good itself. The rationale is that civil conflict has destroyed much of Angola’s manufacturing base. When nations such as Angola rely largely on primary commodity exports, this can have a devastating effect when prices for natural resources fluctuate.

Other resource-rich countries in Africa display an absence of government accountability. Profits generated from the extraction industries become the major source of government revenue rather than taxing citizens. As such, there is less need to develop institutional infrastructure to regulate a productive economy outside the resource sector, and government allocates resources revenue without accountability, an easy opportunity for corruption. In Equatorial Guinea, a small oil-producing country on the west coast of Africa, 75% of the population live on less than $700/yr, yet the average capita per income is almost $35,000. It is cases such as these that provide the most convincing arguments for the resource curse. Without pressure from its citizens, and freedom from being tax-dependent, governments often become unstable and corrupt, and the country is besieged with conflict.

Not that all countries with a great quantity of natural resources inevitably go down this path. However, a global survey of the implications of a resource boom and a two-or-more-speed economy can present a much darker and broader international perspective on the topic. This unconventional approach takes us outside of discussions on Australia’s macroeconomic policies, but hopefully I have encouraged everyone to take a different view on two-speed economy, and don’t forget to bring those views to ESSA’s Q&A event on Thursday!

 

Further Reading

W. M. Corden –  The Dutch Disease in Australia: Policy options for a three-speed economy. (2012)

Ian Bannon and Paul Collier (The World Bank) – Natural Resources and Conflict: What We Can Do. (2003)

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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