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How Countries Can DealHow Countries Can Dealwith Commodity Price with Commodity Price
VolatilityVolatility
Jeffrey FrankelJeffrey FrankelHarpel Professor of Capital Formation & GrowthHarpel Professor of Capital Formation & Growth
G-20 Commodities Seminar, Los Cabos, Mexico, 5 de G-20 Commodities Seminar, Los Cabos, Mexico, 5 de Mayo, 2012Mayo, 2012
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Start withStart withThe Natural Resource CurseThe Natural Resource Curse
Some seminal references:Some seminal references: AutyAuty (1990, 2001, 2007) (1990, 2001, 2007)
Sachs & WarnerSachs & Warner (1995, 2001) (1995, 2001)
By now there is a large body of By now there is a large body of research, research, which I have surveyed which I have surveyed (2011, 2012a, b).(2011, 2012a, b).
Many countries that are richly endowed with oil,minerals or fertile land have failed to grow more rapidly than those without.
Examples:
Some oil producers in Africa & the Middle East have relatively little to show for their resources.
Meanwhile, East Asian economies achieved western-level standards of living despite having virtually no exportable natural resources: Japan, Singapore, Hong Kong, Korea & Taiwan; followed by China.
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Growth falls with fuelGrowth falls with fuel && mineral mineral exportsexports
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Are natural resources Are natural resources necessarilynecessarily bad? bad?
Commodity wealth needCommodity wealth need not necessarily lead not necessarily lead to inferior economic or political development. to inferior economic or political development.
Rather, it is a double-edged sword, Rather, it is a double-edged sword, with both benefits and dangers. with both benefits and dangers. It can be used for ill as easily as for good.It can be used for ill as easily as for good.
The priority should be on identifying ways The priority should be on identifying ways
to sidestep the pitfalls that haveto sidestep the pitfalls that have afflictedafflicted commoditycommodity producers in the past, producers in the past, to find the path of success. to find the path of success.
No, of course not.No, of course not.
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Some developing countries have avoided Some developing countries have avoided the pitfalls of commodity wealth.the pitfalls of commodity wealth. E.g., Chile (copper)E.g., Chile (copper) Botswana (diamonds)Botswana (diamonds)
Some of their innovations are worth Some of their innovations are worth emulating.emulating.
I will offer some policies & institutional I will offer some policies & institutional innovations to avoid the resource curse: innovations to avoid the resource curse:
especially ways of managing price volatility.especially ways of managing price volatility. Some lessons apply to commodity Some lessons apply to commodity importers importers too.too. Including lessons of policies to avoid.Including lessons of policies to avoid.
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How could abundance How could abundance of commodity wealth be a curse? of commodity wealth be a curse?
What is the mechanism What is the mechanism
for this counter-intuitive relationship? for this counter-intuitive relationship?
At least 5 categories of explanations.At least 5 categories of explanations.
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1.1. Volatility Volatility
2.2. Crowding-outCrowding-out of of manufacturingmanufacturing
3.3. Autocratic InstitutionsAutocratic Institutions
4.4. Anarchic InstitutionsAnarchic Institutions
5.5. ProcyclicalityProcyclicality includingincluding
1.1. Procyclical capital flowsProcyclical capital flows
2.2. Procyclical monetary policyProcyclical monetary policy
3.3. Procyclical fiscal policy.Procyclical fiscal policy.
5 Possible Natural Resource Curse Channels
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(1) Volatility (1) Volatility in global commodity in global commodity prices arises because prices arises because supply & demand are supply & demand are inelastic in the short inelastic in the short run. run.
Commodity prices have been especially volatile over the last
decade
0
20
40
60
80
100
120
140
160
180
60 61 63 64 66 67 69 71 72 74 75 77 79 80 82 83 85 86 88 90 91 93 94 96 98 99 01 02 04 05 07 09 10
in prices of 2010 In prices of 2000*
Commodity prices: all commoditiesIndices
*) Deflated by US consumer price index.Source: HWWA, Datastream.
Nominal prices2010=100
Real prices * = nominal in 2000
A.Saiki, Dutch Nat.Bk.
1111
Effects of VolatilityEffects of Volatility Volatility Volatility per seper se can be bad for economic can be bad for economic
growth.growth.
Risk inhibits private investment.Risk inhibits private investment.
Cyclical shifts of resources back & forth across Cyclical shifts of resources back & forth across sectors may incur needless transaction costs.sectors may incur needless transaction costs.
=> role for government intervention?=> role for government intervention? On the one hand, On the one hand,
the private sector dislikes risk as much as the the private sector dislikes risk as much as the government does & will take steps to mitigate it.government does & will take steps to mitigate it.
On the other hand the government On the other hand the government cannot entirely ignore the issue of volatility; cannot entirely ignore the issue of volatility;
e.g., exchange rate policy.e.g., exchange rate policy.
2. Natural resources may 2. Natural resources may crowd outcrowd out
manufacturingmanufacturing,, and manufacturing could be the sector and manufacturing could be the sector
that experiences learning-by-doing that experiences learning-by-doing or dynamic productivity gains from spillover.or dynamic productivity gains from spillover. MatsuyamaMatsuyama (1992)(1992) model.model.
So commodities could in theory be a dead-end sector.So commodities could in theory be a dead-end sector.
My own view: My own view: a country need not repress the commodity sector a country need not repress the commodity sector to develop the manufacturing sector.to develop the manufacturing sector. It can foster growth in both sectors.It can foster growth in both sectors.
E.g. Canada, Australia, Norway…E.g. Canada, Australia, Norway… Now Malaysia, Chile, Brazil…Now Malaysia, Chile, Brazil…
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3. Autocratic or oligarchic institutions may retard economic
development. Countries where physical command of natural Countries where physical command of natural
resources by government or a hereditary elite resources by government or a hereditary elite automatically confers wealth on the holders automatically confers wealth on the holders
are likely to become rent-seeking societies; are likely to become rent-seeking societies; and and are less likely to develop the institutions are less likely to develop the institutions
conducive to economic development,conducive to economic development, e.g., rule of law, decentralization, & economic e.g., rule of law, decentralization, & economic
incentives; incentives; as compared to countries where moderate taxation as compared to countries where moderate taxation
of a thriving market economy is the only way of a thriving market economy is the only way government can finance itself.government can finance itself.
Engerman-Sokoloff explanation of why industrialization came Engerman-Sokoloff explanation of why industrialization came in the North of the Western Hemisphere before the South.in the North of the Western Hemisphere before the South.
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4. Anarchic institutions4. Anarchic institutions
(i) Unsustainably rapid (i) Unsustainably rapid depletion of resources depletion of resources
(ii) Unenforceable (ii) Unenforceable property rightsproperty rights
(iii) Civil war(iii) Civil war
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(5) Procyclicality(5) Procyclicality Developing countries are Developing countries are
historically pronehistorically prone to to procyclicality,procyclicality, especially commodity producers.especially commodity producers.
ProcyclicalityProcyclicality in: in: Capital inflows; Monetary policy;Capital inflows; Monetary policy; Real exchangeReal exchange rate; Nontraded Goodsrate; Nontraded Goods Fiscal PolicyFiscal Policy
The The Dutch DiseaseDutch Disease describes unwanted describes unwanted side-effects of a commodity boom.side-effects of a commodity boom.
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The Dutch Disease: The Dutch Disease: 5 side-effects of a commodity 5 side-effects of a commodity
boomboom 1) A real appreciation in the currency 1) A real appreciation in the currency
2) A rise in government spending 2) A rise in government spending
3) A rise in nontraded goods prices 3) A rise in nontraded goods prices
4) A resultant shift of resources out of 4) A resultant shift of resources out of non-export-commodity traded goods non-export-commodity traded goods
5) Sometimes a current account deficit5) Sometimes a current account deficit
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The procyclicality of fiscal policyThe procyclicality of fiscal policy Fiscal policy has historically tended Fiscal policy has historically tended
to be procyclical in developing countries to be procyclical in developing countries Especially among commodity exportersEspecially among commodity exporters [1] [1] -- correlation of income & spending mostly positive-- correlation of income & spending mostly positive – –
particularly in comparison with industrialized countries.particularly in comparison with industrialized countries.
A reason for procyclical public spending: A reason for procyclical public spending: receipts from taxes or royalties rise in booms.receipts from taxes or royalties rise in booms.
The government cannot resist the temptation The government cannot resist the temptation to increase spending proportionately, or more.to increase spending proportionately, or more.
Then it is forced to contract in recessions, Then it is forced to contract in recessions, thereby exacerbating the magnitudes of swings. thereby exacerbating the magnitudes of swings.
[1] Cuddington (1989), Tornell & Lane (1999), Kaminsky, Reinhart, & Vegh (2004), [1] Cuddington (1989), Tornell & Lane (1999), Kaminsky, Reinhart, & Vegh (2004), Talvi & Végh (2005), Alesina, Campante & TabelliniTalvi & Végh (2005), Alesina, Campante & Tabellini (2008), Mendoza & Oviedo (2006), (2008), Mendoza & Oviedo (2006),
Ilzetski & Vegh (2008), Medas & Zakharova (2009), Gavin & Perotti (1997).Ilzetski & Vegh (2008), Medas & Zakharova (2009), Gavin & Perotti (1997).
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Two budget items account for much Two budget items account for much of the spending from commodity of the spending from commodity
booms:booms: (i) Investment projects.(i) Investment projects.
Investment in infrastructure in practice Investment in infrastructure in practice often consists of “white elephant” projects,often consists of “white elephant” projects,
which are stranded without funds for completion which are stranded without funds for completion or maintenance when the oil price goes back down.or maintenance when the oil price goes back down.
GelbGelb (1986)(1986) . .
(ii) The government wage bill.(ii) The government wage bill. Oil windfalls are often spent on public sector Oil windfalls are often spent on public sector
wages wages Medas & ZakharovaMedas & Zakharova (2009)(2009)
which are hard to cut when prices go back downwhich are hard to cut when prices go back down Arezki & IsmailArezki & Ismail (2010) (2010)
Correlations between Gov.t Spending & GDP1960-1999p
rocyclic
al }
G always used to be pro-cyclical for most developing countries.
countercyclic
al
Adapted from Kaminsky, Reinhart & Vegh (2004)
2020
Procyclicality has been especially strong Procyclicality has been especially strong in commodity-exporting countries.in commodity-exporting countries.
An important development -- An important development -- some developing countries, including some developing countries, including commodity producers, were able to break commodity producers, were able to break the historic pattern in the most recent the historic pattern in the most recent decade:decade: taking advantage of the boom of 2002-2008taking advantage of the boom of 2002-2008
to run budget surpluses & build reserves,to run budget surpluses & build reserves,
thereby earning the ability to expand thereby earning the ability to expand fiscally in the 2008-09 crisis.fiscally in the 2008-09 crisis.
Chile is the outstanding model.Chile is the outstanding model.
The procyclicality of fiscal policy,The procyclicality of fiscal policy, contcont..
Correlations between Government spending & GDP 2000-2009
In the last decade, about 1/3 developing countries
switched to countercyclical fiscal policy:Negative correlation of G & GDP.
Frankel, Vegh & Vuletin (2011)
procyclic
al
countercyclic
al
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The Natural Resource Curse should The Natural Resource Curse should not be interpreted as a rule that not be interpreted as a rule that
commodity-rich countries are commodity-rich countries are doomed to fail.doomed to fail.
The question is what policies to adopt The question is what policies to adopt to avoid the pitfalls and improve the chances of prosperity. to avoid the pitfalls and improve the chances of prosperity.
A wide variety of measures have been A wide variety of measures have been tried by commodity-exporters cope tried by commodity-exporters cope with volatility.with volatility.
Some work better than others.Some work better than others.
Devices to share risksDevices to share risks
1.1. Index contracts with foreign Index contracts with foreign companiescompaniesto the world commodity price.to the world commodity price.
2.2. Hedge commodity revenues Hedge commodity revenues in options marketsin options markets
3.3. Denominate debt Denominate debt in terms ofin terms of commodity pricecommodity price
7 recommendations for commodity-exporting countries
4. Allow some currency appreciation in response 4. Allow some currency appreciation in response to a commodity boom, to a commodity boom, but not a free float. but not a free float.
- Accumulate some forex reserves.- Accumulate some forex reserves.- Raise banks’ reserve requirements, esp. on $ liabilities.- Raise banks’ reserve requirements, esp. on $ liabilities.
5. If the monetary anchor is to be Inflation Targeting, 5. If the monetary anchor is to be Inflation Targeting, consider using as the target, in place of the CPI, consider using as the target, in place of the CPI, a price measure that puts weight a price measure that puts weight on the export commodity (Pon the export commodity (Productroduct PPricerice TTargetingargeting).).
6. Emulate Chile: to avoid over-spending in boom 6. Emulate Chile: to avoid over-spending in boom times, allow deviations from a target surplus only times, allow deviations from a target surplus only in response to in response to permanentpermanent commodity price rises commodity price rises..
7 recommendations for commodity producers continued
Countercyclical macroeconomic Countercyclical macroeconomic policypolicy
PPT
7. Manage Commodity Funds 7. Manage Commodity Funds transparently & professionally, transparently & professionally,
like Botswana’s Pula Fundlike Botswana’s Pula Fund -- -- notnot subject to politics subject to politics like Norway’s Pension Fund. like Norway’s Pension Fund.
Summary: 7 recommendations for commodity producers, concluded
Good governance Good governance institutionsinstitutions
Elaboration on two proposals to reduce the procyclicality of
macroeconomic policy for commodity exporters
I) To make monetary policy less procyclical: Product Price Targeting
II) To make fiscal policy less procyclical: emulate Chile.
PPT
I) The challenge of designinga currency regime for countries where
terms of trade shocks dominate the cycle
Fixing the exchange rate leads to procyclical monetary policy: credit expands in commodity booms.
Floating accommodates terms of trade shocks. But volatility can be excessive; also floating does not provide a nominal anchor.
Inflation Targeting, in terms of the CPI, provides a nominal anchor; but can react perversely to terms of trade shocks
Needed: an anchor that accommodates trade shocks
Professor Jeffrey Frankel
Product Price Targeting:
Target an index of domestic production prices. [1]
• Include export commodities in the index and exclude import commodities,
• so money tightens & the currency appreciates when world prices of export commodities rise
• (accommodating the terms of trade),• not when world prices of import commodities
rise.
• The CPI does it backwards:• It calls for appreciation when import prices rise,• not when export prices rise !
[1] Frankel (2011).
PPT
II) Chile’s fiscal institutionsII) Chile’s fiscal institutions sincesince
20002000
11st st rule – Governments must set a budget target,rule – Governments must set a budget target, set = 0 in 2008 under Pres. Bachelet.set = 0 in 2008 under Pres. Bachelet.
22ndnd rule – The target is structural: rule – The target is structural: Deficits allowed only to the extent thatDeficits allowed only to the extent that (1) output falls short of trend, in a recession, or(1) output falls short of trend, in a recession, or (2) the price of copper is below its trend.(2) the price of copper is below its trend.
33rdrd rule – rule – The trends are projected by 2 panels The trends are projected by 2 panels of independentof independent experts, outside experts, outside thethe political political process.process. Result: Chile avoids the pattern of 32 other Result: Chile avoids the pattern of 32 other
governments, governments, where forecasts in booms are biased toward over-where forecasts in booms are biased toward over-
optimism.optimism. Chile ran surpluses in the 2003-07 boom,Chile ran surpluses in the 2003-07 boom,
while the U.S. & Europe failed to do so.while the U.S. & Europe failed to do so.
Many of the policies that have Many of the policies that have been intended to fight been intended to fight
commodity price volatility commodity price volatility do not do not work out so wellwork out so well
Producer subsidies Stockpiles Marketing boards Price controls Export controls
Blaming derivatives
Resource nationalism
Nationalization Banning foreign
participation
Unsuccessful policies to reduce commodity price Unsuccessful policies to reduce commodity price volatility:volatility:
1) Producer1) Producer subsidies subsidies toto ““stabilizestabilize” ” prices at highprices at high levels, levels, often via wasteful stockpiles & protectionist import often via wasteful stockpiles & protectionist import
barriers.barriers.
Examples:Examples: The EU’s Common Agricultural PolicyThe EU’s Common Agricultural Policy
Bad for EU budgets, economic efficiency, Bad for EU budgets, economic efficiency, international trade, & consumer pocketbooks.international trade, & consumer pocketbooks.
Or fossil fuel subsidiesOr fossil fuel subsidies which are equally distortionary & budget-busting,which are equally distortionary & budget-busting, and disastrous for the environment as well.and disastrous for the environment as well.
Or US corn-based ethanol subsidies, Or US corn-based ethanol subsidies, with tariffs on Brazilian sugar-based ethanol.with tariffs on Brazilian sugar-based ethanol.
Unsuccessful policies, Unsuccessful policies, continuedcontinued
2) Price controls to “stabilize” prices at low 2) Price controls to “stabilize” prices at low levelslevels Discourage investment & productionDiscourage investment & production..
Example: African countries adopted Example: African countries adopted commodity boards for coffee & cocoa at commodity boards for coffee & cocoa at the time of independence. the time of independence.
The original rationale: to buy the crop in years The original rationale: to buy the crop in years of excess supply and sell in years of excess of excess supply and sell in years of excess demand.demand.
In practice the price paid to cocoa & coffee farmers In practice the price paid to cocoa & coffee farmers
was always below the world price.was always below the world price. As a result, production fell.As a result, production fell.
Microeconomic policies, Microeconomic policies, continuedcontinued
Often the goal of price controls is to shield Often the goal of price controls is to shield consumers of stapleconsumers of staple foodsfoods && fuel from fuel from increasesincreases. .
But the artificially suppressed priceBut the artificially suppressed price discourages domestic supply, anddiscourages domestic supply, and requires rationing to domestic households.requires rationing to domestic households.
Shortages & long lines can fuel political Shortages & long lines can fuel political rage as well as higher prices can.rage as well as higher prices can.
Not to mention when the government Not to mention when the government is forced by huge gaps to raise prices.is forced by huge gaps to raise prices.
Price controls can also require imports, Price controls can also require imports, to satisfy excess demand. to satisfy excess demand.
Then they raise the world price even more.Then they raise the world price even more.
Microeconomic policies, Microeconomic policies, continuedcontinued
3) In producing countries, prices are 3) In producing countries, prices are artificially suppressed by means of artificially suppressed by means of export controls export controls to insulate domestic consumers from a price to insulate domestic consumers from a price
rise. rise. In 2008, India capped rice exports. In 2008, India capped rice exports. Argentina did the same for wheat exports, Argentina did the same for wheat exports, as did Russia in 2010.as did Russia in 2010. India banned cotton exports in March 2012.India banned cotton exports in March 2012.
Results: Results: Domestic supply is discouraged.Domestic supply is discouraged. World prices go even higher.World prices go even higher.
An initiative at the G20 meeting An initiative at the G20 meeting of agriculture ministers in Paris of agriculture ministers in Paris
in June 2011 deserved to succeed:in June 2011 deserved to succeed:
Producing and consuming countries in grain Producing and consuming countries in grain markets should cooperatively agree to refrain markets should cooperatively agree to refrain from export controls and price controls.from export controls and price controls.
The result would be The result would be lowerlower world price volatility. world price volatility.
One hopes for steps in this direction, One hopes for steps in this direction, perhaps working through the WTO.perhaps working through the WTO.
An initiative that has less merit:
4) Attempts to blame speculation for volatility and so to ban derivatives markets.
Yes, speculative bubbles sometimes hit prices.
But in commodity markets, prices are more often the signal for fundamentals.
Don’t shoot the messenger. Also, derivatives are useful for hedgers.
The overall lesson for The overall lesson for microeconomic policymicroeconomic policy
Attempts to prevent Attempts to prevent commodity prices from commodity prices from fluctuating generally fail.fluctuating generally fail.
Even though enacted Even though enacted in the name of reducing volatility & income in the name of reducing volatility & income inequality, their effect is often different.inequality, their effect is often different.
Better to accept volatility and cope with it.Better to accept volatility and cope with it. For the poor: well-designed transfers,For the poor: well-designed transfers,
along the lines of Oportunidades or Bolsa Familia.along the lines of Oportunidades or Bolsa Familia.
“Resource nationalism”
Another motive for commodity export controls: 5) To subsidize downstream industries. E.g., “beneficiation” in South African
diamonds But it didn’t make diamond-cutting competitive, and it hurt mining exports.
6) Nationalization of foreign companies. Like price controls, it discourages investment.
“Resource nationalism” continued
7) Keeping out foreign companies altogether. But often they have the needed technical expertise. Examples: declining oil production in Mexico &
Venezuela.
8) Going around “locking up” resource supplies. China must think that this strategy will
protect it in case of a commodity price shock. But global commodity markets are increasingly
integrated. If conflict in the Persian Gulf doubles world oil prices,
the effect will be pretty much the same for those who buy on the spot market and those who have bilateral arrangements.
References by the author Project Syndicate,,
““Escaping the Oil Curse,” Dec. 9, 2011.,” Dec. 9, 2011. ““Combating Agricultural Price Volatility,” June 27, 2011.” June 27, 2011. ""Barrels, Bushels & Bonds: : How Commodity Exporters Can Hedge Volatility," ," Oct.17, 2011. Oct.17, 2011.
““The Natural Resource Curse: A Survey of Diagnoses and Some Prescriptions,” ,” 2012, 2012, Commodity Price Volatility and Inclusive Growth in Low-Income CountriesCommodity Price Volatility and Inclusive Growth in Low-Income Countries , R.Arezki & Z.Min, eds.. , R.Arezki & Z.Min, eds.. HKS HKS RWP12-014. . High Level Seminar, IMF Annual Meetings, DC, Sept.2011., IMF Annual Meetings, DC, Sept.2011.
""The Curse: Why Natural Resources Are Not Always a Good Thing,” ,” Milken Institute Milken Institute Review, vol.13, 4, vol.13, 4thth quarter quarter 2011..
"Increases in Global Commodity Prices: Macroeconomics and Policy Responses of "Increases in Global Commodity Prices: Macroeconomics and Policy Responses of Developing Countries," Developing Countries," slides, V Jornada Monetario, Central Bank of Bolivia, July 2011. , V Jornada Monetario, Central Bank of Bolivia, July 2011.
““The Natural Resource Curse: A Survey,” 2012, ,” 2012, Chapter 2 in in Beyond the Resource Curse, , B.Shaffer & T. Ziyadov, eds. (B.Shaffer & T. Ziyadov, eds. (U.Penn. Press); ); proofs & & notes; ; Summary. . CID WP195, 2011.
“How Can Commodity Exporters Make Fiscal and Monetary Policy Less Procyclical?” Natural Resources, Finance & Development, R.Arezki, T.Gylfason & A.Sy, eds. (IMF), 2011. HKS RWP 11-015.
“On Graduation from Procyclicality,” with C.Végh & G.Vuletin, 2012. “
A Solution to Fiscal Procyclicality: The Structural Budget Institutions Pioneered by Chile,” in Fiscal Policy and Macroeconomic Performance, 2012. Central Bank of Chile WP 604, 2011.
""Product Price Targeting -- A New Improved Way of Inflation Targeting," ," in MAS MAS Monetary Review Monetary Review Vol.XI, issue 1, April 2012 (Monetary Authority of Singapore)., April 2012 (Monetary Authority of Singapore).
“A Comparison of Product Price Targeting and Other Monetary Anchor Options, for Commodity-Exporters in Latin America," Economia, vol.11, 2011 (Brookings), NBER WP 16362.
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Appendix I: Anarchic Appendix I: Anarchic InstitutionsInstitutions
i) Unsustainably i) Unsustainably rapid depletion rapid depletion
When depletable resources When depletable resources are in fact depleted, are in fact depleted, the country may be left with nothing.the country may be left with nothing.
Three concerns:Three concerns: Protection of Protection of environmental qualityenvironmental quality..
A motivation A motivation forfor a a strategy strategy of of economic economic diversificationdiversification..
A motivation for the HartwickA motivation for the Hartwick (1997)(1997) rule: rule: Invest rents from exhaustible resources in other assets. Invest rents from exhaustible resources in other assets.
4343
(ii) Unenforceable property (ii) Unenforceable property rightsrights
Depletion would be much less of a problem Depletion would be much less of a problem if full property rights could be enforced, if full property rights could be enforced, thereby giving the owners adequate incentive thereby giving the owners adequate incentive
to conserve the resource in question. to conserve the resource in question.
But often this is not possibleBut often this is not possible Especially under frontier conditions.Especially under frontier conditions.
Overfishing, overgrazing, & over-logging are classic Overfishing, overgrazing, & over-logging are classic examples of the “tragedy of the commons.” examples of the “tragedy of the commons.”
Individual fisherman, farmers or loggers have no Individual fisherman, farmers or loggers have no incentive to restrain themselves, while the fisheries incentive to restrain themselves, while the fisheries or pastureland or forests are collectively depleted.or pastureland or forests are collectively depleted.
4444
(iii) War(iii) War Where a valuable resource such as oil or Where a valuable resource such as oil or
diamonds diamonds is there for the taking, factions will likely fight is there for the taking, factions will likely fight over it. over it.
Oil & minerals are correlated with civil war.Oil & minerals are correlated with civil war. Collier & Hoeffler Collier & Hoeffler (2004),(2004), Collier Collier (2007),(2007),
Fearon & Laitin (2003) and Humphreys (2005).Fearon & Laitin (2003) and Humphreys (2005).
Chronic conflict in such countries Chronic conflict in such countries as Sudan comes to mind.as Sudan comes to mind.
Civil war is, in turn, very bad Civil war is, in turn, very bad for economic development.for economic development.
4545
Appendix IIAppendix IIThe Dutch Disease: The 5 effects elaboratedThe Dutch Disease: The 5 effects elaborated
1) Real appreciation in the 1) Real appreciation in the currencycurrency taking the form of nominal currency taking the form of nominal currency
appreciation appreciation if the exchange rate floatsif the exchange rate floats
e.g., floating-rate oil exporters, Colombia, Kazakhstan & Russia.e.g., floating-rate oil exporters, Colombia, Kazakhstan & Russia.
or the form of money inflows, credit & or the form of money inflows, credit & inflation inflation if the exchange rate is fixed;if the exchange rate is fixed;
e.g. fixed-rate oil-exporters, Saudi Arabia & UAE.e.g. fixed-rate oil-exporters, Saudi Arabia & UAE.
4646
The Dutch Disease: The 5 effects elaboratedThe Dutch Disease: The 5 effects elaborated
2) A rise in government spending 2) A rise in government spending in response to increased availability in response to increased availability
of tax receipts or royalties.of tax receipts or royalties.
4747
The Dutch Disease: 5 side-effects of a commodity The Dutch Disease: 5 side-effects of a commodity boomboom
3) An increase in nontraded goods 3) An increase in nontraded goods prices prices (goods & services such as housing that are not internationally (goods & services such as housing that are not internationally traded), traded), relative to internationally traded goodsrelative to internationally traded goods
esp. manufactures.esp. manufactures.
4) A resultant shift of resources out of 4) A resultant shift of resources out of non-export-commodity traded goods non-export-commodity traded goods pulled by the more attractive returns pulled by the more attractive returns
in the export commodity in the export commodity and in non-traded goodsand in non-traded goods..
4848
The Dutch Disease: 5 side-effects of a commodity The Dutch Disease: 5 side-effects of a commodity boomboom
5) A current account deficit,5) A current account deficit, as international investors lend into the boomas international investors lend into the boom
thereby incurring international debt that thereby incurring international debt that is hard to service when the boom ends.is hard to service when the boom ends.
E.g. the 1982 end of the 1970s commodity boom.E.g. the 1982 end of the 1970s commodity boom.
Many developing countries avoided incurring debts Many developing countries avoided incurring debts in the 2003-11 boom.in the 2003-11 boom.
E.g., by taking capital inflows more in the form of FDI, andE.g., by taking capital inflows more in the form of FDI, and building reserves rather than running current account building reserves rather than running current account
deficits.deficits.
