The Mining Resource The Mining Resource ‘Curse’‘Curse’

and How Countries Can and How Countries Can Fight ItFight It

  

Jeffrey FrankelJeffrey FrankelHarpel Professor of Capital Formation & GrowthHarpel Professor of Capital Formation & Growth

Toronto, June 20, 2012Toronto, June 20, 2012Global Mining Global Mining ConferenceConference

Many countries richly endowed with oilor minerals 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.

The Mining Resource Curse

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Growth falls with fuelGrowth falls with fuel && mineral mineral exportsexports

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Are mining resources Are mining 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 otherother miningmining 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 mining wealth.the pitfalls of mining wealth. E.g., Chile (copper)E.g., Chile (copper) Botswana (diamonds)Botswana (diamonds)

They have done some things worth They have done some things worth emulating.emulating.

The last section of my paper explores The last section of my paper explores policies policies & institutional innovations that might help & institutional innovations that might help avoid the natural resource curse and avoid the natural resource curse and achieve natural resource blessings instead. achieve natural resource blessings instead.

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How could abundance How could abundance of mineral wealth be a curse? of mineral 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. AutocracyAutocracy

4.4. AnarchyAnarchy

5.5. ““Dutch disease,”Dutch disease,” includingincluding

1.1. Procyclical money flows.Procyclical money flows.

2.2. Procyclical fiscal policy.Procyclical fiscal policy.

5 Possible Mining Resource Curse Channels

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(1) Volatility (1) Volatility in global mining in global mining prices arises because prices arises because supply supply & demand are & demand are inelastic in the short inelastic in the short run. run.

Commodity prices have been especially volatile over the last

decade

Source: UNCTAD

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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. Mining may2. Mining may crowd outcrowd out

manufacturingmanufacturing,, and manufacturing could be the sector and manufacturing could be the sector

that experiences learning-by-doingthat experiences learning-by-doing or dynamic productivity gains from spillover.or dynamic productivity gains from spillover.

So mining could be a dead-end sectorSo mining could be a dead-end sector justifying “import substitution industrialization.”justifying “import substitution industrialization.”

Counter-arguments:Counter-arguments: Classic economic theory: follow comparative Classic economic theory: follow comparative

advantage.advantage. Productivity gains are not limited to manufacturing;Productivity gains are not limited to manufacturing;

they come also in mining.they come also in mining.

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3. Autocratic/oligarchic

institutions may retard economic development.

Countries where physical command of mines by Countries where physical command of mines by government or a hereditary elite automatically government or a hereditary elite automatically confers wealth on the holders 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.

Historians explain thus why North America Historians explain thus why North America industrialized.industrialized.

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4. Anarchic institutions4. Anarchic institutions

1.1. Unsustainably rapid Unsustainably rapid depletion of resources depletion of resources

2.2. Unenforceable Unenforceable property rightsproperty rights

3.3. Civil warCivil war

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5. Procyclicality5. Procyclicality Commodity-exporting countries are Commodity-exporting countries are

historically pronehistorically prone to to procyclicalityprocyclicality..

ProcyclicalityProcyclicality in: in: Capital inflows; Monetary policy;Capital inflows; Monetary policy; Real exchangeReal exchange raterate 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 1) A real appreciation in the currency 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 production 4) A resultant shift of production out of manufactured goods out of manufactured goods

5) Sometimes a current account 5) Sometimes a current account deficitdeficit

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The Dutch Disease: The 5 effects elaboratedThe Dutch Disease: The 5 effects elaborated

1) A real appreciation in the 1) A 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, Kazakhstan, Mexico, & Russia.e.g., floating-rate oil exporters, Kazakhstan, Mexico, & Russia.

or the form of money inflows & inflation or the form of money inflows & inflation if the exchange rate is fixed if the exchange rate is fixed ;;

e.g. fixed-rate oil-exporters, UAE & Saudi Arabia.e.g. fixed-rate oil-exporters, UAE & Saudi Arabia.

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.

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The Dutch Disease: 5 side-effects of a commodity boomThe Dutch Disease: 5 side-effects of a commodity boom

3) An increase in nontraded goods prices 3) An increase in nontraded goods prices

(goods & services such as housing that are not internationally traded), (goods & services such as housing that are not internationally traded), relative to internationally traded goodsrelative to internationally traded goods

esp. manufactures.esp. manufactures.

4) A resultant shift of resources 4) A resultant shift of resources out of manufactured traded goods out of manufactured traded goods pulled by the more pulled by the more

attractive returns attractive returns in the mining sector in the mining sector & in non-traded goods& in non-traded goods..

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The Dutch Disease: 5 side-effects of a commodity The Dutch Disease: 5 side-effects of a commodity boomboom

5) A current account deficit5) A current account deficit

Booming countries attract capital Booming countries attract capital flows, flows,

leaving international debt that leaving international debt that is hard to service when the boom is hard to service when the boom ends.ends. E.g. the 1970s commodity boomE.g. the 1970s commodity boom..

ended in the international debt crisis of ended in the international debt crisis of 1982,1982,

Esp. in Latin America. Esp. in Latin America.

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The procyclicality of fiscal policyThe procyclicality of fiscal policy Fiscal policy has historically been Fiscal policy has historically been

procyclical in developing countries procyclical in developing countries especially among mining exportersespecially among mining exporters

-- correlation of income & spending mostly positive-- correlation of income & spending mostly positive – – in contrast to industrialized countries.in contrast to 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.to increase spending proportionately.

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.

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Two budget items account for much Two budget items account for much

of the spending from oil booms:of the spending from oil booms:

(i) Investment projects.(i) Investment projects. Investment in practice may be Investment in practice may be

“white“white elephant” projects,elephant” projects, which are stranded without funds which are stranded without funds

for completion or maintenance for completion or maintenance when the oil price goes back down.when the oil price goes back down.

(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, which are hard to cut when prices go back down.which are hard to cut when prices go back down.

Rumbi Sithole took this photo in “Bayelsa Statein the Niger Delta,in Nigeria.

The state government received a windfall of money and didn't have the capacity to have it all absorbed in social services so they decided to build a Hilton Hotel. The construction company did a shoddy job, so the tower is leaning to its right and it’s unsalvageable..”

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)

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An important development -- An important development -- some developing countries, including some developing countries, including mineral-exporters, were able to break mineral-exporters, 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

mineral-rich countries are doomed mineral-rich countries are doomed to fail.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.

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 wellwork well

Producer subsidies Stockpiles Marketing boards Price controls Export controls

Blaming derivatives

Resource nationalism

Nationalization Banning foreign

participation

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 mining revenues Hedge mining revenues in options marketsin options markets

3.3. Denominate debt Denominate debt in terms ofin terms of commodity pricecommodity price

Summary: 10 recommendations for commodity-exporting countries

4. Allow some currency appreciation in response 4. Allow some currency appreciation in response to a rise in world prices of mining exports, to a rise in world prices of mining exports, but only after accumulating some foreign exchange reserves.but only after accumulating some foreign exchange reserves.

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 in times, allow deviations from a target surplus only in response to permanent commodity price risesresponse to permanent commodity price rises..

10 recommendations for commodity producers continued

Macroeconomic policyMacroeconomic policy

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 like Norway’s Pension Fund. subject to politics like Norway’s Pension Fund.

8. Invest in education, health, & roads.8. Invest in education, health, & roads.

9. Publish What You Pay. 9. Publish What You Pay.

10. Consider lump-sum distribution 10. Consider lump-sum distribution of oil wealth, equal per capita. of oil wealth, equal per capita.

Summary: 10 recommendations for commodity producers, concluded

Good governance Good governance institutionsinstitutions

Elaboration on two proposals to reduce the procyclicality of macroeconomic policy

for mining exporters

I) To make monetary/exchange rate policy less procyclical: Product Price Targeting

II) To make fiscal policy less procyclical: emulate Chile.

PPT

I) The challenge of designing a currency regime for countries where terms of trade shocks dominate the

cycle Fixing the exchange rate gives a nominal anchor,

but leads to procyclical monetary policy: money inflows during booms.

Floating accommodates terms of trade shocks, thus giving countercyclical monetary policy; but does not provide a nominal anchor.

Inflation targeting, in terms of the CPI, provides a nominal anchor; but reacts perversely to terms of trade.

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,

• not when world priced of import commodities rise.• Automatically countercyclical.

• The CPI does it backwards:• It calls for appreciation when import prices rise,• and 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, which is why Chile ran surpluses in the 2003-07 boom,which is why 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.

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References by the author Escaping the Oil Curse,” Project Syndicate,  Dec. 2011. 

"Barrels, Bushels and Bonds: How Commodity Exporters Can Hedge Volatility," Project Syndicate Oct. 2011.

“The Natural Resource Curse: A Survey of Diagnoses and Some Prescriptions,” 2012, Commodity Price Volatility & Inclusive Growth in Low-Income Countries, R.Arezki & Z.Min, eds. (IMF).  HKS RWP12-014.

"The Curse: Why Natural Resources Are Not Always a Good Thing,” Milken Institute Review, 13, no.4, 2011.

     

“How Can Commodity Exporters Make Fiscal and Monetary Policy Less Procyclical?” in Natural Resources, Finance and Development, R.Arezki, T.Gylfason & A.Sy, eds. (IMF), 2011. 

“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. HKS RWP11-012. 

“On Graduation from Procyclicality,” with C.Végh & G.Vuletin, 2012.

“A Comparison of Product Price Targeting and Other Monetary Anchor Options, for Commodity-Exporters in Latin America," Economia, vol.11 (Brookings), 2011.  NBER WP 16362,. 

“The Natural Resource Curse: A Survey,” 2012, in Beyond the Resource Curse, edited by B.Shaffer & T.Ziyadov (University of Pennsylvania Press); CID WP195, 2011.

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Appendix (I): Anarchic Appendix (I): Anarchic InstitutionsInstitutions

4.1 Unsustainably 4.1 Unsustainably rapid depletion rapid depletion

When exhaustible resources When exhaustible resources are in fact exhausted, are in fact exhausted, 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..

The need to save for the day of depletion (see Nauru): The need to save for the day of depletion (see Nauru): Invest rents from exhaustible resources in other assets. Invest rents from exhaustible resources in other assets.

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4.2 Unenforceable property 4.2 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 incentive thereby giving the owners 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, ranchers, loggers, or miners, Individual fisherman, ranchers, loggers, or miners, have no incentive to restrain themselves, while the have no incentive to restrain themselves, while the fisheries, pastureland or forests are collectively fisheries, pastureland or forests are collectively depleted.depleted.

Madre de Dios region of the Amazon rainforest in Peru,

the left-hand side stripped by illegal gold mining.

http://indiancountrytodaymedianetwork.com/2011/02/27/amazon-gold-rush-laying-waste-to-peruvian-rainforest%E2%80%99s-madre-de-dios-20021

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4.3 War4.3 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.

Chronic conflict in places Chronic conflict in places such as Sudan comes to mind.such 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.

Appendix (II): Unsuccessful policies Appendix (II): Unsuccessful policies to reduce commodity price volatilityto reduce commodity price 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.

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 Shortages & long lines can stir political rage as well stir political rage as well as higher prices can.as higher prices can.

Not to mention when Not to mention when huge gaps force the huge gaps force the government to raise prices.government to raise prices.

“Iran Fuel Rationing Sparks Anger, Protests,” 6/27/07

http://www.payvand.com/news/07/jun/1263.html

Price controls can also require imports, to satisfy excess demand. 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.

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.

An example of commodity speculation

In the 1955 movie version In the 1955 movie version of of East of EdenEast of Eden, the legendary , the legendary James Dean plays Cal.James Dean plays Cal.   

Like Cain in Genesis, he competes Like Cain in Genesis, he competes with his brother for the love of his with his brother for the love of his father, Adam. father, Adam.    

Cal “goes long” in the market Cal “goes long” in the market for beans, in anticipation of a rise in for beans, in anticipation of a rise in demand if the US enters WWI.demand if the US enters WWI.   

Sure enough, the price of beans Sure enough, the price of beans goes sky high, Cal makes a bundle, goes sky high, Cal makes a bundle, and offers it to his father, and offers it to his father, a moralizing patriarch.  a moralizing patriarch. 

An example of commodity speculation

But the father is morally But the father is morally offended by Cal’s speculation, offended by Cal’s speculation, not wanting to profit from not wanting to profit from others’ misfortunes, and others’ misfortunes, and angrily tells him that he will angrily tells him that he will have to “give the money back.”have to “give the money back.”  

Cal has been the agent of Cal has been the agent of AdamAdam Smith’s famous invisible hand:Smith’s famous invisible hand:By betting on his hunch about the future, he has contributed By betting on his hunch about the future, he has contributed to upward pressure on the price of beans in the present, to upward pressure on the price of beans in the present,

thereby increasing the supply thereby increasing the supply so that more is available precisely when needed (by the Army).  so that more is available precisely when needed (by the Army). 

The movie even treats us to a scene where Cal watches The movie even treats us to a scene where Cal watches the beans grow in a farmer’s field, something real-life speculators seldom the beans grow in a farmer’s field, something real-life speculators seldom get to see.get to see.

The overall lesson for microeconomic policyThe overall lesson for microeconomic policy

Attempts to prevent Attempts to prevent commodity prices from commodity prices from fluctuating generally fail.fluctuating generally fail.

Even though enacted in the name of reducing volatility Even though enacted in the name of reducing volatility & income inequality, their effect is often different.& income 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.