Trabajo final Market, Society and State.docx

7/30/2019 Trabajo final Market, Society and State.docx

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Market, Society and State final paper 1stTrimester 2012 Elena Poc

Abstract

My work will focus on "the natural resource trap" as Collier raises, linking it w

obert Putnams culturalist pose. Collliers text shows from a systems perspective that poor countr

with significant income from their natural resources neither develop nor adhere to genui

emocracies. They rather stagnate, or go through periods of ups and downs. One of the main reaso

s that these countries do not encourage working culture because it is more attractive to participate

he bidding for, and living of, this easy wealth. In the best case, the policy evolves to democratic form

nd the tendency is to populism, alienating cultural factors essential for development. These countr

and Argentina is one of them - have two problems to solve: the first is to get the most value for the

esources, which does not happen due to corruption and failure of political bargaining. The seco

roblem is how to spend the proceeds well, without squandering them. The generous distribution

hese resources is what allows people to consume without producing. The intervention

istributionism is installed, leaving a trail of cultural deformation and spurious interests from which it

ifficult to recover. Can we ensure that natural resources rents are an opportunity to really genera

nclusive growth?

1. Popular explanations of the natural resource curseThe resource curse, a term coined by Auty,

1may be defined as the socio-econom

isadvantage, political disruption or environmental degradation that results from dependence

xtractive industries. The phenomena is generally identified as an affliction that crosses the North a

outh, though most intense debate has focused on experiences of resource-dependent low incom

ountries, and the extent to which dependence on resource exports locks these countries into lo

rowth underdevelopment. Dependency theory can be found in the roots of this debate, and turns

he question of whether resource dependency in accordance with this presumed comparati

dvantage imposes systemic disadvantages. Concrete demands in the early 1970s for a Ne

Auty, Richard M. "Industrial Policy Reform in Six Large Newly Industrializing Countries: The Resource Curse Thesis," World Developme

o. 1 (1994)


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nternational Economic Order to enable countries to escape from dependence on resource expor

were an expression of the concern at the role allotted to the South under the classical internation

ivision of labor. The resource curse thesis, though, did not emerge until the aftermath of the 197

lobal resource boom, as many of the countries that had gained substantial resource ren

multaneously experienced surprisingly low economic growth rates. The depression in commodrices in the 1980s watched the discussion of the issue wane, but the resources boom of the late 199

nd 2000s driven by rapid economic growth in Asia has renewed the debate.

There is broad agreement across the literature that, on the basis of country-level da

esource wealth can be a curse rather than a blessing. Three sets of factors are cited. First, soc

conomic impacts arising from changing terms of trade, weakened non-resource sectors, incom

olatility, dominance of foreign-owned resource companies, lack of local linkages and enclav

ormation in what become sharply dualised societies, divided between locally-affected populations a

esource elites. Second, political aspects stemming from the ready availability of resource ren

specially in terms of patronage, clientelism and corruption, along with cross-national inter-state a

orporate dynamics that inter-mesh local structures with geo-economic pressures for resource acce

hird, ecological impacts, which are visited upon immediate living environments in the first instanc

ut extend far beyond immediate sites of extraction, through the commoditys life cycle.

The experiences of resource rich countries have been very heterogeneous. Some ha

arnessed their resource wealth to boost their economic performance and one example often cited

otswana. Acemoglu et al3

have evaluated the institutional strength of Botswana in detail. The lesson

hat four important aspects of governance are crucial for managing the natural resource re

penness to participation and civil societys opportunity to be heard; governments responsibility a

ccountability; the Pula Fund, constitutionally protected from prospective predators, investing mu

f the income of the minerals in a long term perspective, managed transparently and with the aid

nti-corruption policies; government and private sector working together in the elimination of adver

Ross, M.L., The political economy of the resource curse, World Politics, 51, 297-322, (1999).

Acemoglu, Johnson & Robinson, An African success story: Botswana, http://www.colby.edu/economics/faculty/jmlong/ec479/AJR.

2001)
http://www.colby.edu/economics/faculty/jmlong/ec479/AJR.pdfhttp://www.colby.edu/economics/faculty/jmlong/ec479/AJR.pdf


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market policies, price controls and excessive regulation costs. The state owns 50 percent of Debswan

he largest diamond producer company in the country.

Botswana's experience suggests that there is a central component referred to governme

olicies and the way the flow of income is managed, leading to economic prosperity. The rent

atural resources can be an advantage factor in an economy where there exist plans of developmeor the medium and long term and appropriate mechanisms to implement the spending have bee

dentified and applied, thus expanding the stock of physical and human capital to drive growth. But t

most important factor in the experience of this country is in its governance and institutional quali

esides the degree of social cohesion and the ability to build shared visions of the future in th

ociety. This Social Capital enables the country to turn the curse into a blessing.

Robert Putnam4

examines the concept from the elements that comprise Social Capit

he level of association within the society, the degree of trust between the social, civic standards

ehavior practiced. Each of these elements reveals the characteristics of the social fabric of a societ

onditioning its political and economic performance. Putnam, as we have seen, compares the relati

evelopment gap between North and South of Italy: the same country, same language, same laws, b

very marked degree of development. He identifies the lack of social capital as the main cause

nderdevelopment of Southern Italy: the lack of trust between people and institutions prevents tra

redit, partnership and teamwork. People are very committed to the care of their particular issue

mitting the attention of public affairs. According to Putnam's view, raw human and natu

esources are doubtlessly necessary, but they also require a social mortar, a consensus to carry on t

usiness of living together in society.

This description of Southern Italy seems to be a carbon copy of our circumstances. I do n

now if Putnam was ever in Argentina, but a regular visitor to our country, the Italian econom

tefano Zamagni, Vicedirector of the Bologna Center Senior adjunct professor of Internation

conomics, Professor of economics, University of Bologna, can add something to our analysis. F

amagni, Social Capital is not just a medium that allows the creation of wealth (in the words

utnam), but an end in itself, because it leads to the integral development of individuals and the

uality of life. Thus, the welfare of the community is much more than the sum of the well- being

Putnam, Robert et al, Making democracy work, (1993).


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ach member of the community (citizen welfare of the citizen A plus B and so on). Zamagni propos

ere an "arithmetic metaphor" that would multiply the welfare of the citizen A by the welfare of B a

o on. Thus, if there were a citizen in a community X whose welfare is zero, the welfare of the socie

would be illusory. In other words, it is doubtful the real development of a society in which some (

many) of its members "are well", while others (few or many) remain outside the system. The idea osociety" implies that somehow we are all "partners" (socios). ...In conclusion, what Putnam a

amagni seem to tell us is that not only conventional macroeconomic variables account for t

roblem. We cannot hope to solve economic issues first and address social issues later: to be able

evelop we do not only need Human Capital and Natural Capital (we have a surplus of them

Ultimately, we also need to create our own Social Capital.5

Others resource rich countries have done worse. Among them, it is difficult to avo

he parallels between Australia and Argentina, both countries where colonizers drove out small nati

opulations and established an export economy based on extensive agricultural land use. What w

ifferent about Australia and Argentina that saw them ultimately take divergent paths? Harriso

rovides a foil for dependency theory, blaming Latin American underdevelopment on the historical la

f social cohesion and economic dynamism due to fatalistic world views and authoritarian soc

tructures inherited from Spain. Yet while his is an explicitly cultural thesis, Harrisons actual analy

f Argentina's and Australia's differences looks not unlike the story of lost political opportunities to

y Cardoso and Faletto.7

In Argentina, which is modestly rich in abundant natural resources, but has been ve

ependent on them, especially for fiscal revenues and productive structure, the post-independen

eriod of the 19th

century was divided by internal conflict, while the large land-owners, who h

Zicari, Adrin, Professor of Finance, Graduate School of Business, Universidad de Palermo, Posted in El Cronista Comercial, Bue

ires, (April 21, 2008)

Harrison, Lawrence E. Underdevelopment Is A State of Mind. Lanham, MA: Madison Books, 2000 (1985).

Cardoso, Fernando Henrique and Faletto, Enzo. Dependency and Development in Latin America. Berkeley: University of California Pre

1979)


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btained their properties as a result of the participation in the campaign to drive out the nati

opulation Cardoso and Harrison agree maintained a hegemonic grip on power. Desp

onsiderable economic growth driven by agricultural export, it wasn't until 1912 that anything li

emocratic government was achieved, and then it was chaotic and faction-ridden. Peronist populism

he 1940s produced economic and political gains for some previously-excluded groups, but couldeconcile the conflicts between classes and between rural and urban sectors, and in fact exacerbat

hem by setting the unfortunate precedent of having the military act as arbiter. The basic idea was

xtract income from landed families (directly through IAPI and indirectly through taxes on imports) a

istribute it with perks and public employment. The state patronage extended to the majorities t

romise that Argentina was a country so rich that, settling well (acomodndose adecuadamente

nyone could live without straining. Inflation and the freezing of rents destroyed the incentive to sav

he culture of the immigrant who worked hard and saved was gradually replaced by the culture

ocial rights: now that the country's wealth was sufficient to ensure that the government could provi

work, health, education, housing and pensions, it was no longer necessary to take care of ones heal

ducate , work and save to progress. The transfer of cultural values necessary for the development n

nlyreached the lower classes, but also the middle class and entrepreneurs. Everybody bid for sinecu

nd received it. The new born industrialists subsisted on state protection and subsidies, which were t

rigin of the prebendary corporatism which has since characterized our business. Policy makers we

ever able to engineer a move to the next phase of competitive export-oriented industrialization.

It is now a society that in all its layers is not willing to progress by itself but requires t

tate to solve its problems. The conclusion is that in our case the "curse" did not end when our ea

ncomes were over; time perpetuated it through cultural damage caused and the spurious corpora

nterests installed. The extraordinary income of the pampas and other natural resources are a minim

ortion of national income, the land has been fragmented into 200,000 pieces: yet distribution

mentality is as lively and widespread as in 1945. Everything becomes a redistribution bid and t

overnment intervenes in all markets to defend the most (consumers and employees) as opposed

he few (producers) because it is electorally convenient. So we miss opportunities to increase nation

ncome producing what we are efficient at. To make matters worse, improving income distributi


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emains a promise because interventionist discretion maximizes the risk of investors, who remain

he country only if wages are low and profitability is extraordinary.

By contrast, Australia saw political reforms more than 60 years before Argentina. Fro

judicial point of view, the former British colonies were prone to have more honest public officia

nder the influence of the British bureaucracy. In those systems, there is greater emphasis on aspecf procedure law, which promotes the ability of subordinates and judges to challenge hierarchie

rotestant religion, relatively less hierarchical in comparison with other churches and religions, wou

e less likely to tolerate abuse of power. Tradition, individualism and a much lower degree

arrowness of family ties in the society were fundamental factors as well. There were forms

arliamentary government in place from 1850; land reform in Victoria from 1860; and some of t

world's first social welfare programs by 1910. Importantly, the large landholding interests had nev

maintained a grip on political power. On the contrary, land reform in Latin American countries w

ate, partial, and ineffective. In many cases, landlords were able to block any attempts at reform in t

ountryside8. Attempts to use agricultural profit to finance industry mainly hurt peasants and the ru

roletariat. When the original elites were eventually displaced, it was often by new sectional intere

roups. Some authors argue that the clientelistic relations of these new groups eroded t

ffectiveness of governments, corroded institutions and severely affected long-term economic growt

ow trust rates reported for the region reflect the absence of legitimacy of the regimes that supplant

he precedent plantocracies9. Compared with East Asia, governments lacked authority and statecraf

artly due to the polarized and entrenched class structure10

.

Hikino & Amsden11

point out that a more equitable distribution of wealth preven

onflict that ultimately frames generated uncertainty and chaos, jeopardizing the results, destroyi

he incentives necessary to embark on long-term projects that require efforts by the society as a who

nd thus eroding competitiveness, for in countries that overlooked this edge there has been spasmod

Kay, Cristbal Why East Asia Overtook Latin America: Agrarian Reform, Industrialization and Development, Third World Quarterly,

o. 6 (2002), 1073-1102

Knack, Stephen and Keefer, Philip, Does Social Capital Have an Economic Payoff? A Cross-Country Investigation, The

uarterly Journal of Economics, Vol. 112, No. 4 (Nov., 1997), pp. 1251-1288, The MIT PressKay, p. 1087

Hikino, T. and Amsden, A., La industrializacin tarda en perspectiva histrica. In: Desarrollo Econmico, Abril/Junio de

995, Vol.35 N 135.


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rowth, but not a concerning sustainable development. At the same time, the fact that income

istributed more equitably, favors a more austere consumption pattern promoting the ability of savi

nd indirectly encouraging investment. This marks a difference, as noted by Fernando Fajnzylber

with what has happened in Latin America, whose very unequal distribution has led to a reproduction

atterns of consumption by more advantaged strata (which match more advanced societies but nhat of the socioeconomic realities of the countries of the region). This inequality in the distributi

rocess, says ECLAC economist, has laid the foundation of the basic features of the pattern

ndustrialization in Latin America: a) international integration based almost exclusively on the tra

urplus generated in the sectors of natural resources and systematic trade deficit in the manufacturi

ector (with the exception of Brazil), b) designed and driven industrial structure with a view mainly

heir respective domestic markets, c) strive to reproduce the lifestyle of the advanced countries at bo

he consumption and degrees of domestic production variables, d) limited social value

ntrepreneurship and poor leadership of the national business public and private sectors who

ynamism and content define the industrial profile in each country.

The role of inequality as an obstacle to development has been analyzed in the last decade

ocial capital theorists. Kliksberg13

(1999, 2000 and 2001) summarizes the most important analysis on t

ubject. This author demonstrates how poverty and inequality significantly destroy social capital, undermi

rust, act against the interest of association and participation, destroy the basis of civic consciousness and crea

nomic and nihilistic climates. Another structural perspective emphasizes the importance of econom

evelopment level. This view says that the growth of human capital is what develops the institutions.14

It seems interesting at this point to discuss the theoretical support and eviden

vailable for a wide range of hypotheses about the effects of natural resources on the economy a

ociety. Section 1.1 puts forward the hypothesis that a resource bonanza induces appreciation of t

eal exchange rate, contraction of the traded sector and expansion of the non-traded sectors. Secti

.2 suggests that the resource curse can be turned into a blessing for countries with good institutio

nd provides some evidence in support thereof. Section 1.3 discusses the hypothesis that president

Fajnzylber, F., La industrializacin trunca de Amrica Latina, Editorial Nueva Imagen, Mxico, (1983).

Kliksberg, Bernardo, El rol del capital social y de la cultura en el proceso de Desarrollo, BID, (1999)Lipset, Seymour Martin, Political Man: The Social Bases of Politics, (1960)


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emocracies are more likely to suffer a negative effect of resources on growth. Section 1.4 review

olitical explanations of the natural resources trap. Section 1.5 proposes that volatility plays a cruc

ole. Section 1.6 refers to two poorly studied options: state-owned enterprises and poor enforceme

f property rights.

.1. When natural resources booms produce deindustrialization

The most common macroeconomic effect associated with natural resource booms

nown in the literature as Dutch Disease15

. The idea behind this Dutch disease is that the ext

wealth generated by the sale of natural resources induces appreciation of the real exchange rate a

n ensuing contraction of the traded sector. And why should this be a problem? One popular answer

hat the traded sector is the engine of growth and benefits most from learning by doing and oth

ositive externalities, hence non-resource export sectors temporarily hit by worsening competitivene

re unable to fully recover when resources run out. Although the hypothesis of learning by doing in t

raded sector may be relevant for advanced industrialized economies, developing economies are mo

kely to suffer from absorption constraints in the non-traded sector especially as it is unlikely th

apital in the traded sector can easily be unbolted and shunted to the non-traded sector. T

mportant point is that following a boom-bust cycle associated with natural resource revenues,

ountry might find itself devoid of these rents, yet not industrialized and unable to catch up with oth

eveloping countries that are already industrialized. Also, their wages may be too high to compete w

ther resource poor developing nations. Not all, however, is doom and gloom when an economy

lessed with a boom in its natural resource based exports. Several countries, Norway, the Netherland

ndonesia, Malaysia and Botswana among them, have coped well with these bounties in recent time

esource booms should not automatically cause the traded sector to contract and the non-trad

ector to expand.

.2. The argument of good institutions and no corruption

An expression coined by the Economist magazine in 1977. This is because the discovery of gas in the North Sea was said to ha

ontributed to deindustrialization in the Netherlands.


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Resource riches raise the value of being in power and induce politicians to expa

ublic sectors, bribing voters by offering them well paid, but unproductive jobs and inefficient subsid

nd tax handouts, especially if accountability and state competence are lacking.16

Depending on ho

esource rents affect the leaders probability of survival, they can induce a self-interested leader

nvest more or less in assets that favor growth such as rule of law or infrastructure, so the effects esources on economic performance can be positive. On the one hand, the busy leader faces budg

nd time constraints. Hence, if a resource boom raises the value of staying in office, he or she shif

rom productive towards unproductive activities and patronage, contributing to a resource curse. O

he other hand, the strategic leader uses the windfall to keep citizens happy and stay longer in pow

o the windfall becomes a blessing. A fatalistic leader realizes that a windfall boosts chances

ebellion and thus is more short-sighted and puts less effort into developing the non-resource econom

nd more into inefficient self-preservation. However, if the leader responds by offering better a

more outside opportunities to rebel groups, the windfall may become a blessing.

The point is that in any of these scenarios income ends up being distributed arbitrar

nd without economic coherence. Thus, governments allocate purchase payments for the purposes

ursuing political gain allies. In it are inscribed not only payments to individuals or groups of peop

ut the realization of public projects with political interest because of their impact on specific regio

n each country and power groups, including white elephants as our proposed tren bala.

It helps to make a difference between countries with production friendly institutio

nd others with rent grabbing-friendly institutions.17

Nevertheless, rent-seeking models have proved

e too blunt; in such systems, the effect of resource abundance becomes context-specific a

ssentially determined by initial conditions. Authors point out that the growth effects of resour

bundance might depend on countries governance institutions, regarding them as predetermined

xed.18

Particularly interesting is the idea that the institutional composition of the European colonize

specially those constituting their political economies, needs to be a center of attention. By glanci

Robinson, J.A., R. Torvik and T. Verdier Political foundations of the resource curse, Journal of Development Economics, 79, 2, 447-

2006).Mehlum, H., K. Moene and R. Torvik, Cursed by resources or institutions? The World Economy29, 8, 1117-113, (2006a).

Mehlum, H., K. Moene and R. Torvik, Institutions and the resource curse, Economic Journal, 116, 1-20, (2006b).Mahoney, James. Colonialism and post colonial development: Spanish America in Comparative Perspective, Cambridge University Pre

2010)


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rst at precolonial societies and their institutions relationship with geography, they contend th

differences in the organization of indigenous societies shaped the extent and form of Europe

nstitutions building during colonialism independently of geographical conditions and the kind

eography that provides superior access to commercial opportunities is likely to change in conjuncti

with new technology and the evolution of economic organization. Spain is portrayed as bearinglassical mercantilist political economy during the first period as a colonizing European power, centra

oncerned with maximizing wealth generation in the short run to meet their hefty immedia

onsumption. The key institutions wielded were restrictions on trade, on property ownership and

conomic and political participation which produced elites of wealthy merchants and landed classe

hese elites upheld a rigidly hierarchical society in which the vast majority could not advance. T

onflicts which undermined reforms similar to those undergone in Australia, in Latin America had th

rigin in those rigid hierarchies and exploitative social structures dating from colonial times. But t

nternal factors had a life of their own, and were not just the products of economic dependenc

ailures to reach new political compromises were not inevitable.

In the case of Argentina, less complex indigenous societies produced a lower lev

f colonialism at the beginning, resisted incorporation more actively and were rather ignored by Spa

On the contrary, the second periods political economy was mostly liberal, being its legacy politica

rivileged rent-seeking economic elites quite incapable of orchestrating postcolonial development.

we can see, the overall colonial experience is best captured through the mercantilist-liberal model.

Finally, natural resources also make it attractive for political elites to blo

echnological and institutional improvements, since this can weaken their power.19

Acemoglu a

obinson demonstrate that, fearing replacement, political elites are unwilling to initiate change, a

may even block economic development. They show that elites are unlikely to block development wh

here is a high degree of political competition, or when they are highly entrenched. It is only wh

olitical competition is limited and also their power is threatened that elites will block developme

locking is more likely to arise when elites have a relatively high degree of security with existi

echnologies and arrangements that will be eroded as a result of economics change, and when politic

takes are higher. External threats, on the other hand, may reduce the incentives to block.

Acemoglu, D. and J.A. Robinson, Economic backwardness in political perspective,American Political Science Review, 100-131 (2006).


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.3. The role of constitutions and forms of government

Using within-country variation and instruments for constitutional features, Persson

hows that reforms from non-democracy or presidential democracy into parliamentary democra

eads to more growth promoting trade and regulation policies. The empirical results of a paper Andersen and Alaksen

21 suggest that economies long-run abilities to deal with natural resour

bundance depend largely on country specific constitutional arrangements. In some cases, as

otswana, it is because the destiny of natural resources rent is clearly defined in it. The authors fi

hat the form of government seems to matter more than being non-democratic in relation to wheth

country is afflicted by the so-called resource curse. Revisiting the important econometric analysis

achs and Warner22

, we acknowledge that they found the resource trap is explained by the po

erformance of resource abundant presidential and non-democratic regimes, while there is

esource curse in democracies with a parliamentary form of government. This empirical finding

onsistent with recent contributions to the political economy literature, which suggest that president

egimes pursue inferior growth-promoting structural policies compared with parliamentary regime

nterestingly, constitutions do not significantly affect growth directly: they simply have a negati

nteraction with resource abundance. The authors tentatively interpret this result as a budg

onstraint effect. The negative growth dynamics of presidential regimes, through inappropria

tructural policies, seem to play a quantitatively significant role only when governments face less rig

udget constraints. They also found patterns in the data that suggest that the electoral system m

matter for the resource curse. Proportional electoral systems seem more likely to be afflicted by t

esource curse. However, these effects are empirically less robust than the effects of the form

overnment. Collier and Hoeffler23

suggest that the combination of high natural resource rents a

Persson, T.,Forms of Democracy, Policy and Economic Development., NBER Working Paper No. 11171 (2005)

Andersen Jrgen Juel, Aslaksen, Silje, Constitutions and the resource curse, Norwegian University of Science and Technolo

epartment of Economics N-7491, Trondheim, Norway, Working paper series, September 4, 2006.

Sachs, J.D. and Warner, A.M., Natural Resource Abundance and Economic Growth, NBER Working PaperNo. 5398 (1995)

achs, J.D. and Warner, A.M., Natural Resource Abundance and Economic Growth, Revised version, Mimeo, Harvard University (1997a

Collier, Paul and Hoeffler, Anke, Democracy and Resource Rents (2005)


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pen democratic systems retards growth, unless there are sufficient checks and balances which is n

he case in many new resource rich democracies, Argentina being one of them.

.4 Political explanations of the natural resources trap: cognitive, societal and state theories

Three groups of theories account for policy failure: cognitive, societal and staheories. The first blame policy failure on short-sightedness of state actors who fail to take account

he effects of their actions on generations that come after the resource is exhausted, thus leading

myopic sloth and exuberance. Substantial resource wealth in many countries may thus have prolong

ad policies. Political scientists have advanced several reasons why states have a proclivity to ado

nd maintain sub-optimal policies.

Societal theories, in turn, point their finger at resource wealth abuse by privileg

lasses, sectors, client networks and interest groups. They also stress a get-quick-rich mental

mongst businessmen, and a boom-and-bust psychology among policy makers and economic agents

eneral. (It is important to note that the expression economic agents refers to all business and n

usiness, corporate and political actors, production associations, unions, traders and other inform

workers, unemployed, underemployed and even retirees. More particularly, it also includes groups

tate workers with the ability to pressure the government). It is usual in our country to listen to you

rofessionals explaining that now that they have understood how their country works, (every ten yea

crisis) they will send their savings abroad before the term is due.

Societal approaches suggest that resource booms enhance the political leverage of n

tate actors who favor growth-impeding policies. These arguments are used most frequently to expla

why the resource-rich states of Latin America fell behind resource-poor East Asia in the 1970s a

980s. Scholars have often compared the timely decisions of the South Korean and Taiwane

overnments to move away from import-substituting industrialization (ISI) and adopt vigorous expo

romotion strategies with the self-defeating efforts of the Latin American governments to maintain

olicies long after they became counterproductive. A diverse set of scholars - including Auty, Maho

anis, and Wade24

- all trace Latin America's reluctance to discard ISI to its greater resource wealt

4Versions of this argument have been offered by Gustav Ranis, "Toward a Model of Development," in Lawrence B. Krause and K

hwan, eds., Liberalization in the Process of Economic Development (Berkeley: University of California Press, 1991); Gustav Ranis a


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hough each author tells a slightly different story, they all suggest that Latin American manufacture

nd workers who enjoyed subsidies from the resource sector stopped their governments fro

ropping ISI policies. South Korea and Taiwan, however, had little resource wealth and hence few

roups that profited from ISI; as a consequence, they found it easier to move toward expo

romotion.Last but not least, state theories also emphasize the rentier state and fault the state

weakness for not being able to extract and deploy resources, enforce property rights and res

emands of rent seekers. As Auty25

sustains, these states are usually factional, more constrained and

eed of political compromises got at the cost of policy coherence. They make mistakes initially as th

re incapable of foreseeing economic outcomes and want to secure rents to bolster support. As

esult, the primary sector is squeezed for additional revenues even if its share of GDP shrinks in relati

o the growing nontradeable sector, leading to great collapses accompanied by decreasing institution

apital, diminishing revenues, declining quality in education and less investment.

A paper by Acemoglu26

focuses on how the reward structure of a society becom

ndogenous as responding to the outcome of past economic decisions. Economic decisions a

etermined by the reward structure; thus, the two-way causality between the economic decisions a

he social consensus of a society acts as an additional force that exacerbates the effects of histo

ependence. In a country or a region that is trapped in the high rent seeking equilibrium, growth w

e slower, policies against rent-seeking harder to implement and there will exist a much less damagi

tigma (successful rent-seekers are in fact secretly admired, although criticized in public) attached

ent-seeking than in a country or region enjoying a low rent-seeking equilibrium. This link between pa

llocations and non-pecuniary rewards implies that after a misallocation of talent, not only w

yed Akhtar Mahmood, The Political Economy of Development Policy Change (Cambridge, Mass.: Blackwell, 1992); Robert Wade, "E

sia's Economic Success: Conflicting Perspectives, Partial Insights, Shaky Evidence," World Politics 44 (January 1992); James E. Mahon

Was Latin America Too Rich to Prosper?"Journal of Development Studies 28 (January 1992); Richard M. Auty, "Industrial Policy Reform

x Large Newly Industrializing Countries: The Resource Curse Thesis," World Development, no. 1 (1994); Sachs and Warner offe

eterodox version of this argument, suggesting that when states are affected by the Dutch Disease, lagging manufacturing sectors

emand compensation in the form of trade barriers and thus produce economic stagnation.

Auty, Richard M., Resource Abundance and Economic Development. Improving the performance of resource-r

ountries, UNU/WIDER, (1998)

Acemoglu, Daron, Reward structures and the allocation of talent, European Economic Review 39, 17-33 (1995)


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ecuniary rewards favor unproductive activities but the society may also lack the social/political w

o change the status quo. The above analysis also suggests an insight about underdeveloped countrie

Many underdeveloped countries can be thought to be trapped in a low wage, low entrepreneursh

ow growth equilibrium from which escape is not easy. The fact that rent-seeking and fraud become

ndemic part of the cultures of these societies coheres well with the above view. Another possibeason why the trap may be easier to fall into for the developing countries is the difference betwe

he education systems of developed and underdeveloped countries. In particular, a well-functioni

ducation system will increase the relative returns to the talented people in productive compared

nproductive jobs. Therefore, getting trapped in the inferior equilibrium is less likely when talent

eople have access to an education system that prepares them to be productive. The brain dra

urther makes the inefficient equilibrium a distinct possibility in the less developed countries;

articular, agents with high productivity levels will try to migrate to countries where they can obta

igher returns for their talent. (This phenomenon has been happening in Argentina every time there

crisis and even more since 2001).

The reward structure that determines the allocation of talent is also endogenou

urther, more rent-seeking reduces the marginal productivity of investment and the relative return

ntrepreneurship; thus a multiplicity of equilibria is possible, where increased rent-seeking makes re

eeking relatively more attractive. In a dynamic context, initial differences in rewards and/

llocations will have long-run effects because allocations of the past generations determine curre

ewards. The author also argues that there exist mechanisms that make non-pecuniary rewar

ndogenous and thus induce further history-dependence. A natural resource bonanza also encourag

roductive entrepreneurs to shift to rent seeking. With an aggregate demand externality (and

onstant tax rate and no external trade), this lowers income by more than the extra income from tesource revenues and thus lowers welfare.

27

.5 Volatility

Not only do primary products risk declining terms of trade, but they are also prone

udden collapses in value. Latin American history is littered with examples of boom and bust periods based on

Torvik, R., Natural resources, rent seeking and welfare,Journal of Development Economics, 67, 455-470 (2002).


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ngle product, leaving little more than scars on the local environment, territorial disputes and resentment. T

mpirical results suggest that the effect of resource dependence is mainly driven by these boom-bust cyc

nduced by volatile commodity prices, excess in public spending, debt overhang and credit constraints, and mu

ess by quality of bureaucracy: when commodities prices fall, public spending acts in a completely pro-cycli

way, abruptly contracting and thus exacerbating macroeconomic volatility.

.6 Poorly studied but promising options

There are two other explanations for the trap that might be fruitfully explored, but whi

ave so far received little attention. The first explanation attributes the curse to state-own

nterprises, which typically govern resource extraction in developing states. This is an ongoi

iscussion in Argentina nowadays thanks to the recent expropriation of YPF (Yacimientos Petrolfer

iscales). From the 1950s to the mid-1970s, many foreign-owned resource firms were nationalized

move that had at least three harmful consequences for many developing states. Foreign multinationa

ad previously served as buffers against export instability; without them the governments a

conomies of developing states have become more exposed to international market shocks. Sta

wnership may have also "softened" the budget constraints of resource-exporting governmen

roducing fiscal laxity and a tendency to over borrow. And this type of companies are exceptiona

nefficient and often deprived of funds they need to improve productivity. If part of the resource trap

ue to state ownership, privatization should offer a simple solution.

But as we have seen with Repsol, if a government does not have the capacity a

eadership to foster the needed energetic policies, establishing adequate tariffs so that priva

oncerns invest in exploration, the will to control private companies taking advantage of prerogativ

stablished by contract and the honesty to serve their country well no matter the distributive biddi

nstalled instead of doing private business in their benefit with public goods, the outcomes are more

ess the same. In fact, in Argentina elections are not won by promising the privatization of the

ector. The social consensus on Argentinas oil problem, built along the sectors 100 -year history,

uite close to nationalist, statist oil ideas, reluctant to the participation of foreign private companies

esources exploitation. Di Tella and MacCulloch28

demonstrate that people who perceive corruption

Di Tella, Rafael, MacCulloch, Robert, Why Doesn't Capitalism Flow To Poor Countries? National Bureau Of Economic Research, N

Working Paper Series, Working Paper13164, http://www.nber.org/papers/w13164


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e high in their country are also more likely to lean left ideologically (and to declare support for a mo

ntrusive government in economic matters). The importance of the above mentioned distributive conf

nd the lack of an effective tax system that allows the government to effectively collect rents should not

verlooked. The country has witnessed cycles of investment and expropriation caused by the lack of

ppropriate institutional framework that is able to manage the changing environment allowing the state

apture the rents without impeding the development of the full potential of the oil industry29

.

A second promising approach might link the resource trap to the failure of states

nforce property rights.30

Rosss opinion does not take into account the widespread lack of recogniti

f property rights in the population. In Argentinas case, the state cannot enforce what the state itse

nd the majority of the people it represents - do not believe in.

. Managing abundance and price volatility

The key debate, in fact, is not whether these curses exist, but whether and how th

an be avoided. A volatile flow is better than no flow at all.31

It is a more powerful approach not

reat it as a curse or trap but as a design problem in order to achieve a more stable rent income

mechanisms able to smooth high and low peaks. The negative interpretation on output growth wou

equire evidence that these flows contaminate other productive sectors making them also erratic an

olatile, and discouraging investment in them.

Volatility seems the quintessence of the resource curse, but is offset somewhat

ountries with high degree of financial development. To get round these curses, then, one could reso

o stabilization and saving policies and improve the efficiency of financial markets. It also helps to ha

fully diversified economy, since then shocks to nontradeable demand can be accommodated throu

hanges in structure of production rather than expenditure switching. The failure of states to ta

Gadano, Nicols, Urgency and Betrayal: Three attempts to Foster Private Investment in Argentinas Oil Industry, in T

atural Resources Trap, Private Investment without Public Commitment, Edited by William Hogan and Feder

turzenegger, June 2010. The subject matter of contracts is worth a separate library, so it will not be treated in this work.

In fact, when a state poorly enforces property rights to its natural resources, it may gain a comparative advantage

nternational trade; see Graciela Chichilnisky, "North-South Trade and the Global Environment,"American Economic Revi

4, no. 4, 1994.Ferrufino Goyta, Rubn, La Maldicin de los recursos naturales. Enfoques, teoras y opciones. Coloquios econmicos N

007, Fundacin Milenio, Bolivia.


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measures that could change resource abundance from a liability to an asset has become the mo

uzzling part of the resource curse32

. If this time Latin American states are successful, abundance mig

ot result in dependence.

Saving in an environment of natural wealth is essential for several reasons, especia

he following three: a) an issue of intergenerational justice; b) to maintain competitiveness; c) tabilize the price volatility of commodities.

ets develop these concepts:

a) The problem of intergenerational distribution of wealth is of vital importance

ountries specializing in the production of non-renewable mineral commodities. The extraction

minerals involves a change in the way it expresses the portfolio of national wealth. The national wea

s in the basement and can be removed or saved and invested in other assets to maintain and increa

, or can be consumed by today's generation, leaving a country less rich in tomorrows generatio

aving this revenue stream generated by the extraction and sale of commodities is the only way

revent erosion of national wealth. Investments can be in financial instruments, physical assets

uman capital.

b) Maintaining competitiveness: The generation of savings, especially those placed

oreign currency, is vital to maintain the competitiveness of the economy. Savings mitigate curren

ppreciation keeping domestic competition. Note that the lasting currencys competitiveness is bas

n actual savings, not foreign purchases made by the central bank. Moreover, saving and investi

fficiently helps improve the productivity of the economy.

c) Stabilization of the economy from the volatility of prices commodities: Saving is al

undamental to deal with the volatility of commodity prices because it allows a counter-cyclical fisc

olicy. The result is a more stable macroeconomic framework which impacts positively on t

conomy. However, in Latin America it is very difficult to save, given the enormous unmet social need

which explains why many times saving is not popular in society. Moreover, the key is not only to sa

money but to invest in the national economy at a pace that does not create problems of real exchan

ate.

Ross, M.L., The political economy of the resource curse, World Politics, 51, 297-322 (1999)


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As previously mentioned, it is extremely important to maintain a diversifi

roductive sector to cushion the impacts of volatility of commodity prices. In this sense, the sta

hould consider public policies that help stimulate diversification maintaining an outward view. This

he difference between export promotion and substitution imports. Diversification is achieved mo

urably when our firms compete abroad.

3. So which is the appropriate public policy?Obviously excessive appreciation of the real exchange rate is part of the problem a

o efforts must be made in order to avoid it, especially through savings. But if the equilibrium exchan

ate needs to be strengthened for fundamental reasons (e.g., lasting increase in the terms of trad

ery strongly organized public policy is needed to compensate the costs of doing business, by reduci

osts. Besides, the state must not only provide generic goods - like improving education, infrastructu

nd so on - but also complementary and more specific public ones as well. It takes an inten

onversation between the state and the private sector for the state to find ways to discover the type

ublic goods to be produced in order to facilitate and promote economic diversification.

Fluctuations are amplified by borrowing in good years, so countries should negotia

dvantageous conditions with foreign lenders (in this case Chinese banks) who try to persuade them

he virtues of such capital flows. Laws that allow the country to spend the resources income only f

he payment of government debts and some specific components in priority sectors is a possibili

Other mechanisms are countercyclical or growth stabilization funds or hedging for resource rents

edging implies securing prices for commodities in the future so as to leave sales of resources le

usceptible to short-term market fluctuations.

The key advantage of the stabilization fund is that it is easier to administe

evertheless, it may be politically difficult not to spend the fund early34

as occurred in Ecuador

enezuela in recent years. Populist pressures are significant, even in a developed country like Norwa

which has a large stabilization fund from oil revenues. Also, stabilization funds only smooth incom

The Natural Resources Trap, Private Investment without Public Commitment, Edited by William Hogan and Federico Sturzenegger,

2010)Everhart, Stephen and Duval-Hernandez, Robert, Management of Oil Windfalls in Mexico, World Bank Policy Research Working Pa

o. 2592 (2001)


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ver time if a commodity price is ultimately mean-reverting, which may or may not be the case

edging instruments appear not to carry the political or financial risk of stabilization funds. Howev

hey do require more financial knowledge, and the markets need to exist. In the above mention

aper, Devlin & Titman observe that it would be challenging to find buyers for the large magnitude

ommodity futures that would be produced if many countries began to engage in this financechnique. They suggest that international agencies and institutional investors could combine to for

hese markets. Such markets do not seem to be forming yet.

If the macroeconomic volatility is a cause of expropriation, then either stabilization

edging funds might reduce the temptation to expropriate. One of the current questions surroun

which type of financial instrument is more appropriate. These alternatives, however, still seem ve

ifficult to operate in countries like ours, with low levels of institutionalization, unable to conta

ressures from large unmet needs.

The role of institutions on the possible effects of income distribution has becom

bundantly clear. Our country meets most of the characteristics pointed out by several authors as

xplanation for the curse. Regrettably we are unable of creating solid institutions or the social capi

we need overnight and in our case a clear weakening of the institutional and governance has be

bserved from the complex political processes experienced. Neither can we abruptly modify o

onstitution, form of government, presidential system or anti-market beliefs in a minute. Inequal

nd poverty are being addressed by government policies, even though in my opinion these polic

hould be implemented in a more systemic way. However, the scenarios for discussion and politic

efinition of core issues of national life are still the roads, streets and many other places, in ways th

o not correspond to the formal institutions of power management. Therefore, it can be argued wi

onsiderable evidence that the adverse effects of income on corruption, patronage behavior and la

f transparency can be played forward, in the three levels of government, central, provincial a

municipal levels. Then, thinking about public policy it is natural to consider whether you can distribu

art of the income more directly to the people, which is conceptually very different from letting t

tate assume commitments for fixed and indefinite transfers without explicit linkage with changes

Devlin, Julia and Titman, Sheridan, Managing Oil Price Risk in Developing Countries. WorldBank Research Observer19.1 (Spr. 200

19-139.


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he flow of income from natural resources. This route has already been implemented in Alaska whe

he royalties are partially shared with the population. This changes the political dynamics by having t

opulation feel participant in rents, thus reducing the risk of expropriation. Besides, this should aim

reating a sense of ownership of income and accepting the challenge of taking the best decisions

pend or invest as individuals.

What would be left to the state could have two destinations through different levels

overnment. In the first case we can strengthen investment public infrastructure: the country has

gnificant lag in public works conditions affecting production, transportation and access to energy. T

econd target that is complementary and important is the strengthening of national productio

rovincial governments should be effective in supporting the development of the productive potent

f each region through concurrent projects to be addressed with the private sector, identifying sma

medium and large players who have the ability to generate employment and capital play. The lesso

omes from Asia: a bottom-up process of integration, starting in business, building supply chains a

egional infrastructure works best to increase the competitiveness that the top-down approach th

as been used in Latin America36

.The golden rule is then treating rental income as exceptional a

herefore spending it only in commitments that are not permanent in time. Investment projects have

eginning and an end, so that most of these resources could be used to finance public works, to t

xtent that resources remain in the realm of central and provincial governments.

Western governments can help with common sense reforms. Secret bank accoun

ot only support terrorism, but also facilitate the corruption that undermines development. Similar

ransparency would be encouraged if only fully documented payments were tax deductible.

Finally, the resource curse forms part of the broader global 'curse' of climate chang

which threatens now to erode the viability of not simply other sectors of the economy but of the ent

ociety. If we are to address these systemic dynamics then we must seriously question the curre

esource boom.

6Foxley, Alejandro, La trampa del ingreso medio, (Cieplan) 06/07/2011


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onclusion

The underlying issue is whether Latin America is becoming the barn and mine of Chi

without impacting positively on the long-term growth of the region. In this sense, some ECLAC autho

warn that the region is being integrated to the pole of XXI century development (China) with

roduction structure of the nineteenth century (concentrated in raw materials). A paper by Ast

onini,37

based on a comparison with Britain and the United States, suggests that Chinas increasin

entral role in the world-economy may be comparatively complementary to economic development

aw material producing countries. It provides evidence that the production of cash crops and resour

xtraction has not always equaled peripheralization in the world-economy, as the upward econom

mobility of the United States, Canada, Australia and New Zealand during the nineteenth centu

emonstrated. It puts forth a new hypothesis that the existence of opportunities for raw mater

roducing countries depends on whether the hegemonic regime of accumulation at a given tim

tructures the economy in a way that is either complementary or competitive to the econom

evelopment of raw material producing countries. By examining the British centered regime

ccumulation during the nineteenth century, the author finds that it was comparative

omplementary to economic development in raw material producing countries whereas the twentie

entury United States centered regime was comparatively competitive with raw material producers..

However, not everything is rosy. These investments will deepen the historic Lat

American dependence on commodities and the environmental ramifications of these massive projec

an get a piece of the economic benefits. The region should reinvest some of those resources

nnovation, industrial diversification and environmental care. Otherwise, this new source of fundi

ould bring great risks. Among the unorthodox instruments necessary to achieve and stabilize th

conomies without compromising their economic growth rates in the future, Latin America will requihose that control the inflow of capital in periods of boom. The constant monitoring, supervision a

nforcement of precautionary measures in the financial markets is also an essential tool to preve

Bonini, Astra Complementary And Competitive Regimes Of Accumulation: Natural Resources And Development In The World-Syst

5 Journal Of World-Systems Research (2012)


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nancial turmoil experienced by advanced economies; in Latin America today a number of countri

re already showing early signs of a credit boom38

.

As we have seen, Latin America still has a comparative advantage in natural resour

xploitation. This advantage involves risks, which must be properly spent, but need not be a curse. Tsk management requires:

Economic diversification of production and tax revenues Strengthening institutions to avoid capture and solve collective action problems, even int

generationally

Savings of much of the income and investment policies, in order to:

a) Invest in and build other forms of capital

b) Avoid excessive appreciation of the currency

c) Soften the adverse impact of volatile commodity prices

With good management, natural resource abundance may be a blessing!

8Gallagher, Kevin P. , Professor of International Relations , Boston University, Los Bancos Chinos en Amrica Latina

ttp://www.pagina12.com.ar/diario/economia/subnotas/193965-59014-2012-05-14.html


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2

0,8

0,6Argentina Brazil ChileColombia Mexico PanamaPeru

0,4

0,2

0,0

-0,2

-0,4

1980 1984 1988 1990 1992 1996 2000 2004 2008

Output co-movement between LAC and China

20 years rolling correlation of the Real GDP growthSource: World Bank calculations based on data from national authorities.

Note: solid colors reflect significant correlation values in a confidence interval of 10%.


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