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Resource abundance: A curse or blessing?

Resource abundance: A curse or blessing?

Contents Review of the

Contents Review of the literature.................................................................................................................... 3 Regression analysis and statistical portrait ........................................................................................ 5 Data ........................................................................................................................................ 5 Macroeconomic indicators in resource rich countries .............................................................. 7 Institutions ............................................................................................................................. 10 Industrial policy ...................................................................................................................... 12 Low domestic fuel prices and the quality of institutions .......................................................... 17 Low RER versus low domestic fuel prices ................................................................................ 20 Conclusions .................................................................................................................................... 21 References ....................................................................................................................................... 21 Appendix: Notations ....................................................................................................................... 24 Figures 1 Risk index (ICRG), Corruption perception index (CPI) and murder rate (per 100,000 inhabitants), 2002 ............................................................................................. 6 2 Fuel production per capita, kg of oil equivalent, 2005, top countries ...................................... 7 3 Average investment climate index in 1984-90 and average annual inflation in 1975-99, % ..... 9 4 Relative fuel prices (ratio of domestic to US fuel prices as a % of same ratio for all goods) and annual average growth rates of GDP per capita in 1975-99, % ............................................... 16 5 Residual index of investment climate in 1984-90 (after controlling for GDP per capita) and real exchange rate of national currencies to the US dollar in 1975-99 (ratio of domestic to the US prices), % .................................................................................................................... 19 Table 1 Different indicators of resource abundance – correlation coefficients ....................................... 6 UN/DESA Working Papers are preliminary documents circulated in a limited number of copies and posted on the DESA website at http://www.un.org/esa/desa/papers to stimulate discussion and critical comment. The views and opinions expressed herein are those of the author and do not necessarily reflect those of the United Nations Secretariat. The designations and terminology employed may not conform to United Nations practice and do not imply the expression of any opinion whatsoever on the part of the Organization. Editor: Anisuzzaman Chowdhury Typesetter: Małgorzata Juszczak United Nations Department of Economic and Social Affairs 2 United Nations Plaza, Room DC2-1428 New York, N.Y. 10017, USA Tel: (1-212) 963-4761 • Fax: (1-212) 963-4444 e-mail: esa@un.org http://www.un.org/esa/desa/papers

Resource abundance: A curse or blessing? Victor Polterovich, Vladimir Popov, and Alexander Tonis “So here’s my prediction: You tell me the price of oil, and I’ll tell you what kind of Russia you’ll have. If the price stays at $60 a barrel, it’s going to be more like Venezuela, because its leaders will have plenty of money to indulge their worst instincts, with too few checks and balances. If the price falls to $30, it will be more like Norway. If the price falls to $15 a barrel, it could become more like America—with just enough money to provide a social safety net for its older generation, but with too little money to avoid developing the leaders and institutions to nurture the brainpower of its younger generation.” [Will Russia Bet on Its People or It’s Oil Wells?–Thomas L. Friedman, New York Times, February 16, 2007] “How do we know that the God loves the Arabs? If he didn’t, why would He give them all the oil?” [American folklore] It seems that a country endowed with larger quantities of natural resources has an advantage and (other conditions being similar) has to grow faster than resource poor countries. This is not exactly the case, however. Between 1960 and 1990 the per capita incomes of resource poor countries grew two to three times faster than the per capita income of resource abundant countries, and the gap in the growth rates appears to widen with time (Sachs and Warner, 1999; Auty, 2001). This surprising phenomenon became a subject of intensive research, both empirical and theoretical. A large number of papers have been published in recent years supporting the “resource curse” thesis and effects that may inhibit growth in resource rich economies. Several recent papers, however (Alexeev and Conrad, 2005; Stijns, 2005; Brunnschweiler, 2006), question the mere existence of the “resource curse” and make it necessary to reconsider the hypotheses about the impact of resource abundance on economic growth. Even without rigorous calculations, it is obvious that not all resource rich countries failed. “Thirty years ago, Indonesia and Nigeria—both dependent on oil—had comparable per capita incomes. Today, Indonesia’s per capita income is four times that of Nigeria. A similar pattern holds true in Sierra Leone and Botswana. Both are rich in diamonds. While Botswana averaged 8.7% annual economic growth over the past thirty years, Sierra Leone plunged into civil strife.” (Stiglitz, 2004). Norway, where large oil deposits were detected in the seventies, was able to avoid Dutch Disease consequences (Gylfason, 2001). Moreover, Norway increased its PPP GDP per capita very significantly, leaving behind its neighbours, and almost catching up with the USA. Thus, the relationship between resource abundance and economic growth is not clear-cut; it could be either positive or negative. It is also possible that resource abundance has no significant impact on economic growth, in the absence of other complementary factors. As a matter of fact, searching for growth

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