Natural Resources, Development and Conflict:

Channels of Causation and Policy Intervention

Article by Paul Collier Click to edit Master subtitle style
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Presented by: Ali Saifuddin (8094)

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Introduction

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Random distribution of natural resources across the planet Random distribution leads to unequal outcome Some countries have few or no valuable resources Abundance brings opportunity for enhanced income Often serves as critical triggers of development

Unfulfilled economic growth potential High risk of large scale violent conflict

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International community is working on feasible collective actions to mitigate the problem Remedy for a problem, need not address the cause Unless the cause is not understood, we can have little confidence in proposed remedies

The association between Natural 5/13/12 Resources and poor outcomes

Association between natural resources and risk of civil war has been explored through econometrics and case studies: Collier and Hofler 1998/2003: Analyze 54 large scale civil wars from 65-99 Countries with 10-25% of GDP coming from natural resources hold an increased risk (from 11 to 29%) of a civil war in the subsequent five years

Natural resources are not the only factor 5/13/12 influencing the conflict .. Per capita income strongly influences the risk of conflict:

At high levels of per capita income the risk of civil war is negligible with or without natural resources. Hence, societies such as Norway and Australia, which are highly dependent upon natural resource exports but are also rich, do not face any significant risk coming from

5/13/12 They can distinguish between initial dependence and the effect of the world price of the commodity exports during the conflict.

The advantage being that the world prices are almost entirely external to an individual conflict and very easily observed, so it is a particularly reliable causal variable. Effect of the price depends upon the initial level of resource exports.
Eg. High level of primary commodity exports of 30% of GDP at start of conflict a subsequent and sustained increase in world price of the export by 10% would extend the duration of conflict by 12%

5/13/12 Association between natural resource dependence and disappointing growth performance is also supported both by econometric evidence and case studies:

Sachs and Warner (1995):

Finds that natural resources reduce growth.

Routes from Natural Resource 5/13/12 Dependence to Development Problems six causal mechanisms, relying primarily upon a Author suggests
mixture of theory and case study evidence:

1. Rent-seeking of honeypots

Aid an analogy to honeypots Nevertheless natural resources are more evident source of rent than aid E.g. Fiji and RUF rebel group rent seeking of natural resources played a substantial part in motivating their actions is surely unavoidable

Objectives can change over time

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Eg. FARC began as a rural radical political movement, but is now a drugs operation Eg. Delta region of Nigeria a movement that was initially protesting injustice and environmental degradation has evolved into gang warfare to control the right to run protection and kidnapping rackets

2. Making secessionist movements credible 5/13/12

A variant on the honeypot hypothesis for which there is much better evidence is that .. natural resource abundance promotes violent secession Just as the distribution of natural resources between countries is not equal, so within favored countries some locations are favored more than others.
People living in the vicinity of the natural resource endowment have an obvious economic interest in claiming the resources for themselves to the exclusion of their fellow nationals.

In many situations, natural resources will be 5/13/12 located in regions where some political groups are already claiming independence. The presence of natural resources enables such groups to add a credible economic argument
Eg. Scottish nationalism -1970 and 1974 elections
At the former election, as in all previous elections, the Scottish National Party won only a tiny share of the vote and gained only a single seat in parliament In the two 1974 elections its vote rose to 30% The transforming event that brought about this change was the dramatic rise in world oil price in late 1973 as a result of the Yom Kippur war The oil off the shores of Scotland was suddenly seen as valuable:

3. Financing rebel groups

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A further way in which primary commodities in general and natural resources in particular can increase the risk of civil war is through their vulnerability to predation by rebel groups who need finance to pursue violence... Rebellion is usually expensive The most spectacular examples of natural resource funded rebel groups come from diamonds UNITA & RUF

4. Detaching the government from the 5/13/12 electorate

A common political economy argument, applied to both natural resource revenues and aid, is that by reducing the need for taxation they also reduce popular scrutiny of government.
People are less concerned about misuse of public money if they have not been taxed in order to generate it The power of this argument depends upon the sophistication of the electorate Governments that misuse public funds can more easily disguise the extent of natural resource revenues than they can disguise taxation

5. Dutch disease

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Dutch disease : the tendency for natural resource exports to appreciate the real exchange rate and so make the production of other tradable goods less competitive.
The response is simply an efficient resource reallocation resources move into the non tradable sector, producing the goods that the now-richer society demands but that cannot be supplied through imports To be a disease one or other of two additions are commonly invoked: The real appreciation is temporary but that the implied inter-

1.

6. Exposure to shocks

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The final route by which natural resources, and indeed other primary commodities, can be problematic for development is due to their exposure of the economy to price shocks. Large negative shocks tend to produce episodes of severe economic contraction which compound the direct loss of income.
Such episodes directly increase poverty due to the fall in export income They also tend to reduce the growth rates of output over the medium term (Collier and Dehn, 2001) Over and above the income and out put losses, episodes of rapid

International Policy Responses to 5/13/12 these Problems

1. Revenue Transparency

Revenue transparency is useful in several respects:

It is evidently a necessary input

2. Scrutiny

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Transparency of revenues is itself an input into the scrutiny of expenditures Scrutiny is predominantly a domestic process: this is because citizens and their representatives are the legitimate beneficiaries of public revenues While ever scrutiny depends solely upon the complaints of foreign governments and international agencies it will be easy for offending governments to deflect the exposure using the tried and tested defensive strategy of nationalism

3. Commodity Tracking

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Commodity tracking has recently been pioneered through the Kimberley process for tracking diamonds. The process is still in its infancy and there is a need to establish how effective it is.

Primary purpose of commodity tracking is to make it more difficult for rebel groups to profit from looting valuable natural resources.
Eg. UNITA and the RUF have used this as their primary source of revenue

Physical tracking of commodities can usefully be combined with information on financial transactions that are the counterpart of their physical movement

4. Reduced exposure to shocks

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The final route by which natural resources and primary resources can be problematic is due to its exposure of the economy to price shocks.

Severe contractions lead to export losses that ultimately affect the poverty and middle term output.

Positive shocks can also destabilize economic management.

Are Resource-Abundant Economies Disadvantaged ?

Click to edit Master subtitle Article by Kym Anderson style

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Introduction

The article states the resource abundance economies have relatively grown slower than other economies Possible explanation is declining term and rising restriction to primary product market abroad. How the impact of greening of world preference and politics on the prospects for resource abundant economics.

Why have resource-rich economies 5/13/12 grown relatively slowly ?

Worlds fastest growing economies are poorly endowed with natural resources Japan, Hong Kong and China. These countries are densly populated Slowest growing economies African countries, Argentina, Australia. One possible explanation for this negative

Why have resource-rich 5/13/12 economies grown relatively slowly ? Another often-claimed and related explanation for
growth rate differences is cultural determinism. Another doomsdayers is that resource-abundant economies face continual decline in their terms of trade. Resource-poor economies have more scope to grow via technological catch-up. exporters of resource-abundant countries face larger protectionist barriers abroad than do exporters of nonprimary products.

Why have resource-rich 5/13/12 economies grown relatively slowly ?

Deteriorating terms of trade

Why have resource-rich economies 5/13/12 grown relatively slowly ?

More growth-inducing externalities in industry?
More growth inducing externalities associated with manufacturing industries than with the primary production

Manufacturing are subject to increasing returns whereas primary production face decreasing returns

Manufacturing is characterized by learning by doing

Why have resource-rich economies 5/13/12 grown relatively slowly ?

More scope for technological catch-up in resource poor economies? Backward economy are likely to grow faster then those who require investment in innovation. Resource rich here does not refer to aggregate endowment of resources but rather to the ratio of natural resources to other resources such as labor and produced capital.

Why have resource-rich economies 5/13/12 grown relatively slowly ?

Ever higher protectionist barriers facing primary exports?

Resource abundant economies grow less rapidly because their export face higher protectionist barriers than do exporters of non primary products Protectionism against Coal in western Europe and Asia makes Australia and New Zealand feel their growth is being hampered

Why have resource-rich economies 5/13/12 grown relatively slowly ?

Above-average distortions at home?

Hypothesis that resource abundant economies are less open to trade, investment and technology Internal reasons are higher then the external factors limiting the growth.

Conclusion

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The growth in concerns for natural resource conservation and the environment has the potential to raise the value of natural resources and thereby enhance the economic prospects of resourceabundant economies. But whether that potential is realised depends heavily on the policy choices made by governments. Looking for free-lunch policy outcomes should be a priority, where the economy and the environment are improved simultaneously.