Unique version of resources curse is not helpful

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We often speak of "striking oil" or being a "mine" of information, analogies from the world of minerals exploitation that suggest huge value to be realised. However, commentary on large natural resource discoveries commonly warns that they may be detrimental to their countries’ future economic wellbeing. Sometimes this pessimism is due to environmental concerns. But it also reflects a belief that, far from benefiting host nations, mining and oil production actually damage their economic performance.

In 1997, US economists Jeffrey Sachs and Andrew Warner showed that countries with abundant natural resources usually grew poorly over the period 1970-90. They suggested several reasons for this. The exchange rates of countries with large exports of natural resources often become overvalued when commodity prices are high. Such good times for mining mean bad times for manufacturing and other exporting industries, which cannot compete in global markets. As a result, they shrink or even disappear. When commodity prices fall, countries have nothing to replace lost export earnings. Far from being a blessing, the development of natural resources is a "curse".

Over-reliance on commodities handicaps broader economic development in other ways. Talented locals with the energy and vision to start new domestic businesses end up employed by foreign multinationals, earning global salaries. The development of local businesses is stifled as a consequence. Most worrying, as concentrated sources of economic value, mines and oil wells are too tempting a target for corrupt politicians. The benefits of production are appropriated by powerful elites and fail to reach the poor.

Although findings were questioned by several commentators, the concept of the "resource curse" became entrenched in economic discourse. But is it still valid?

Rhodes University graduate student Mumamba Mwansa recently tested the analysis for 1995-2010. He found no contemporary evidence to suggest that exports of natural resources negatively affected economic growth. One reason for this change, Mwansa finds, is that it is now rare for countries with high volumes of natural resource exports to suffer from overvalued exchange rates. The lessons have been learnt and most commodity exporters manage their exchange rates to prevent overvaluation when commodity prices are high. One way is for central banks to buy surplus dollars earned in good times and transfer them into sovereign wealth funds. This also creates reserves as buffer when commodity prices weaken.

Mwansa rectified an important weakness of the Sachs and Warner study. While they spoke of measuring resource abundance, they actually measured resources as a share of exports. These are not necessarily the same thing. A country such as the US has an abundance of natural resources but also exports vast quantities of other goods. Resources as a share of total exports are low. It is possible for dysfunctional countries with few natural resources to export little else. Under the Sachs and Warner measure, such countries will be classified as resource abundant.

Mwansa used World Bank calculations of countries’ natural resources wealth as a measure of abundance. He found no negative effects of natural resource abundance on economic growth in Sachs and Warner’s original time period, nor in 1995-2010. The claim that resources are a "curse" is a myth.

These findings are critical for policy formulation. They affirm development of available natural resources as an essential part of countries’ growth strategies. However, resources are not an automatic economic blessing either. Policy makers must ensure that currency exchange rates do not become overvalued when commodity prices are high. At the same time as developing their natural resources, they also need other policies that encourage wider industrial and manufacturing growth. This will militate against exports falling victim to fluctuating global commodity prices. Actors in civil society, too, should be vigilant. Corrupt elites must not be allowed to divert the benefits of commodity production into their own pockets.

Historically, natural resources were a key part of SA’s development. Mining buoyed the economy for decades and stimulated much secondary industry. However, it also created very damaging legacies, such as migrant labour and acid mine drainage.

Mining remains vital to SA’s future. The major stakeholders — management, labour and the government — together need to find remedies for the multiple factors threatening the sector. The government plans to limit mining exports and cap prices for local sales are not helpful. Without a radical revisioning of the natural resources sector, SA stands to create its own version of the "resource curse" — lost jobs, lost income and lost opportunity all of our own making. Future generations will not thank us for this.

Article by Gavin Keeton

Article Source: Business Day Live

Keeton is with the economics department at Rhodes University.