An commodities market and opening the door

An abundance of natural resources can be very beneficial to a country, but it can also have the opposite effect. Those effects include weaker economies, democracies and less development.

This is known as the resource curse. Countries abundant in natural resources are often thought to be lucky. But this can be very different in reality. Natural gifts can be a burden on an economy. Tying the fates of a country citizens to a temperamental commodities market and opening the door to corruption and exploitation. Are natural resources a blessing to be envied, or a curse? Some resource rich countries have struggled with less economic growth, less democracy, and worse development. In some cases, internal divisions can lead to violence and authoritarianism.

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Resources can leave an economy unbalanced as labor and investment becomes geared toward the abundant natural resources, foreign currencies flood the domestic market. Currency appreciation weakens other industries by making their exports unaffordable, a process that leaves countries unable to react to rapid market changes. Dependence on a single revenue stream has become the great struggle of oil-rich countries. Venezuela has the world’s largest proven oil reserves, but the low oil price means it’s finding it hard to pay its debts.

while Saudi Arabia is rebalancing its economy away from oil. Some believe this is exactly the kind of transformation that an economy like Saudi Arabia needs. Some countries and regions have found ways to mitigate the damage resource wealth can do. Oil-rich Alaska gives some revenues back to its residents, and Norway uses a sovereign wealth fund to invest in other industries.

The resource curse has been seen in South America, Asia, former Soviet states, and especially in Africa. Causes for the resource curse go beyond weak and corrupt governments, institutions and operators, we must look deeper. Resource rich countries are at the mercy of their financial partners and volatile commodities markets. Typically, these countries are not investing in sustainable broad-based industries like manufacturing and agriculture. Politicians often maintained authority by establishing comradery and colluding with corrupt multinational operators. These governments can afford militias to control their people, who are not needed for income tax revenues, they don’t have incomes. Governments learn to rely on resource revenues and related development funding.

They are not creating equal opportunities for their people, which would provide income taxes for their Treasury and would empower taxpayers to participate in government and discourage corruption. Resource rich countries are more involved in conflicts. Internally, different factions fight for their share. As in the regional conflict in Angola, soil rich Cabinda province people revolt when they see their relative standard of living decline as kleptocrats make themselves richer.

Externally, resource wars results from the petrol aggression of oil-rich countries. Iraq’s invasion of Iran and Kuwait, Venezuela’s hostility towards Columbia and the U.S. invasion of Iraq. Resource development can hurt a country’s other exports, this is called the “Dutch Disease.

” when Holland discovered natural gas in 1959, the Dutch currency strengthened, making their exchange rate less competitive for exports. Natural gas also drew labor and capital away from other industries, hurting those sectors and their exports. Conversely Holland’s improved exchange rate and wages increased imports, natural gas thus became a resource curse that created an unhealthy trade balance and domestic stagnation. The Rybczynski theorem quantifies relationship between factors of production and outputs in different sectors. When investment capital flows to resource development, other sectors suffer, as in Holland and elsewhere. Now there are ways to mitigate the resource curse. A country can bring in resource revenue slowly through special funds to even things out.

But developing countries rarely have the political will to do this. So, what’s the answer? good legislation and management of resource development are a start, but rules must be respected. Governance is key. lessons from Uganda’s oil development can apply elsewhere. Broadly shared development goals, strong apolitical groups to advise and restrain government, technical expertise, and broad consensus on how to spend resource revenues are all important to avoid the resource curse. The resource curse is not a universal experience.

Properly managed natural resources can deliver great financial security. Norway is an example of this. Norway has managed to avoid the oil curse and the oil and gas revenue has been a blessing for Norway. Firstly, Norway decided to strategize their earnings and separate their earnings from the spending of oil and gas money. The reason for this is that oil and gas prices fluctuate significantly and the prices will continue to decrease. Normally we would say that the responsible fiscal policy would be to have income equal expenditures, but in countries like Norway it would be irresponsible to have a balanced budget. You need to have a budget where the spending’s are separated from the earnings. Norway has tried to do that by establishing a pension fund, or sovereign wealth fund, and all the oil and gas revenues goes by law into that fund, and the only thing Norway spends is the financial return from that fund.

Therefore, Norway spends zero oil and gas revenue and what they spend is the financial income from the fund, never the installments. In that way, the fund can last forever because they don’t spend the installments but they spend only the expected financial real return. By doing that, Norway has been able to separate earnings from spending and is avoiding the resource curse. Many European countries spend money that they don’t have and go into debt, Norway is the opposite and does not spend the money that they do have.

The buildup of their pension fund reached $700 billion in 2013, this is more than twice their GDP and is still increasing. We have analyzed the reasons why certain countries suffer from the resource curse and some do not. It all comes down to how countries manage their earning and spending.