Professional Documents
Culture Documents
Jeffrey Frankel
Harpel Professor, Harvard University
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Growth falls with oil & mineral exports
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Are natural resources necessarily bad?
No, of course not.
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7 Possible Natural Resource Curse Channels
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The 7 NRC Channels continued
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Institutions can be endogenous:
the result of economic growth rather than the cause.
The same problem is encountered with other proposed
fundamental determinants of growth,
e.g., openness to trade and freedom from tropical diseases.
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Addressing endogeneity of
institutions econometrically
Econometricians address the problem of endogeneity
by means of the technique of instrumental variables.
What is a good instrumental variable
for institutions, an exogenous determinant?
Acemoglu, Johnson & Robinson (2001) introduced
the mortality rates of colonial settlers.
The theory is that, out of all the lands that Europeans colonized,
only those where Europeans actually settled were given good
European institutions.
Acemoglu et al figured that initial settler mortality
determined whether Europeans settled in large numbers.[1]
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The “rent cycling theory”
as enunciated by Auty (1990, 2001, 07, 09) :
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A related view by economic historians
Engerman & Sokoloff (1997, 2000, 2002)
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Which comes first,
oil or institutions?
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Unenforceable property rights
over depletable resources
Some natural resources do not lend themselves
to property rights, whether the government
wants to apply them or not.
Very different from the theory that the physical possession of point-
source mineral wealth undermines the motivation for the government
to establish a regime of property rights for the rest of the economy.
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Unenforceable property rights, continued
[1] E.g., Dasgupta & Heal (1985). [2] Brander & Taylor (1997).
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(6) War
Where a valuable resource such as oil or diamonds
is there for the taking, factions will likely fight over it.
Oil & minerals are correlated with civil war.
Collier & Hoeffler (2004), Collier (2007),
Fearon & Laitin (2003) and Humphreys (2005).
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(7) The Dutch Disease
and Procyclicality
Developing countries have historically
been prone to procyclicality:
Procyclical capital inflows
Procyclical government spending.
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Procyclicality
Volatility in developing countries
Most developing countries in the 1990s brought
under control the chronic runaway budget deficits,
money creation, & inflation, that they experienced
in the preceding two decades,
but many still showed monetary & fiscal policy
that was procyclical rather than countercyclical:
They tend to be expansionary in booms
and contractionary in recessions,
thereby exacerbating the magnitudes of the swings.
The aim should be to moderate swings
-- the countercyclical pattern that economists, after the Great Depression,
originally hoped discretionary policy would take. 36
Procyclicality in developing countries
[1] Kaminsky, Reinhart, & Vegh (2005); Reinhart & Reinhart (2009); Gavin,
Hausmann, Perotti & Talvi (1996); and Mendoza & Terrones (2008).
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Procyclicality in developing countries
[1] Cuddington (1989), Tornell & Lane (1999), Kaminsky, Reinhart, & Vegh
(2004), Talvi & Végh (2005), Alesina, Campante & Tabellini (2008), Mendoza
& Oviedo (2006), Ilzetski & Vegh (2008), Medas & Zakharova (2009) and Gavin
& Perotti (1997).
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Procyclicality in developing countries
The procyclicality of fiscal policy, continued
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Figure 2: Iran’s Government Wage Bill Is Influenced
by Oil Prices Over Preceding 3 Years (1974, 1977-1997.)
16.52
Wage Expenditure as % of GDP
IRN
7.4
11.46 59.88
Real Oil Prices lagged by 3 year, in Today's Dollars
3.52
Wage Expenditure as % of GDP
IND
1.77
11.46 59.88
Real Oil Prices lagged by 3 year, in Today's Dollars
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Summary: Channels of the NRC
(1) Commodity price volatility is high, imposing risk & costs.
(2) Specialization in oil can crowd out the manufacturing sector.
(3) Depletion can be unsustainably rapid,
especially if property rights are not adequately protected.
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What characteristics have helped emerging
markets resist financial contagion?
High FX reserves and/or floating currency
Low foreign-denominated debt (currency mismatch)
Low short-term debt (maturity mis-match)
High Foreign Direct Investment
Strong initial budget, allowing room to ease.
High export/GDP ratio,
Sachs (1985); Eaton & Gersovitz (1981), Rose (2002); Calvo,
Izquierdo & Talvi (2003); Edwards (2004); Cavallo & Frankel ( 2008).
2.00
1.00 2003-07
1991-97 boom boom
0.00
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-1.00
Current
-2.00
Account
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Balance
-4.00
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Skeptics argue that commodity exports
are endogenous. [1]
On the one hand, basic trade theory says:
A country may show a high mineral share in exports,
not necessarily because it has a higher endowment of
minerals than others (absolute advantage)
but because it does not have the ability to export
manufactures (comparative advantage).
[1] Maloney (2002) and Wright & Czelusta (2003, 04, 06).
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Commodity exports are endogenous, continued.