The pace of economic growth – “Dutch disease”

• “Dutch disease”
• fight for rent
• capital social
• Education, human capital and scientific and technical progress
• Savings, investment and capital accumulation
• conclusion

 

Empirical evidence suggests that economic growth in countries rich in oil, gas, and other natural resources tends to be lower than in countries where these resources are limited or non-existent. According to the World Bank, the average annual rate of decline in GDP per capita for the period from 1965 to 1998 in Iran and Venezuela was 1%, in Libya – 2%, in Iraq and Kuwait – 3%, and in Qatar for the period from 1970 to 1995 – 6%. In general, for OPEC members, GDP per capita has not grown in the last 30 years, but has decreased by around 1.3% per year. The OPEC countries are no exception in this case. Thus, in the last 20 years, of 65 countries that belong to the category rich in natural resources,only four states were able to bring the volume of investment in fixed assets to the level of 25% of GDP and guarantee an increase in GDP per capita to a level of at least 4% per year: these are Botswana, Indonesia, Malaysia and Thailand. It is worth noting that of these, only Indonesia has oil reserves. At the same time, other Southeast Asian states that do not have such large resource reserves (Hong Kong, Singapore, South Korea, and Taiwan) showed higher rates of economic growth. Economics offers several explanations or mechanisms for the negative relationship between natural resource stocks and economic growth.countries that do not have such important resource reserves (Hong Kong, Singapore, South Korea and Taiwan) showed higher rates of economic growth. Economics offers several explanations or mechanisms for the negative relationship between natural resource stocks and economic growth. countries that do not have such important resource reserves (Hong Kong, Singapore, South Korea and Taiwan) showed higher rates of economic growth. Economics offers several explanations or mechanisms for the negative relationship between natural resource stocks and economic growth.

“Dutch disease”

The most famous and obvious mechanism is called “Dutch disease”. The very appearance of this term is associated with the discovery in the late 50s and early 60s . natural gas deposits in that part of the North Sea, which belongs to Holland. The subsequent growth of natural gas exports led to a significant appreciation of the national currency, which had a negative impact on other export-oriented industries. Therefore, when it comes to “Dutch disease”, first of all, it means an increase in the real exchange rate due to an increase in the volume of exports of some industries, which has a negative impact on other industries and In the economy. like an everything.However, “Dutch disease” is not limited to this relationship. There are other mechanisms of negative influence. Since the prices of resources are subject to significant fluctuations determined by the conjuncture of world markets, the exchange rate fluctuates along with the prices of exported resources the greater the share of these resources in total exports. The high volatility of the exchange rate of the national currency has a negative impact on the industries associated with foreign trade (both exporters and importers) and the volume of foreign investment in the country’s economy.If a domestic industry is heavily dependent on imports (for example, the economy specializes in processing imported semi-finished products), exchange rate instability will have a negative effect on the entire economy. the exchange rate fluctuates along with the prices of exported resources, the more, the greater the share of these resources in total exports. The high volatility of the exchange rate of the national currency has a negative impact on the industries associated with foreign trade (both exporters and importers) and the volume of foreign investment in the country’s economy.If a domestic industry is heavily dependent on imports (for example, the economy specializes in processing imported semi-finished products), exchange rate instability will have a negative effect on the entire economy. the exchange rate fluctuates along with the prices of exported resources, the more, the greater the share of these resources in total exports. The high volatility of the exchange rate of the national currency has a negative impact on the industries associated with foreign trade (both exporters and importers) and the volume of foreign investment in the country’s economy.If a domestic industry is heavily dependent on imports (for example, the economy specializes in processing imported semi-finished products), exchange rate instability will have a negative effect on the entire economy. and on the volume of foreign investment in the country’s economy. If a domestic industry is heavily dependent on imports (for example, the economy specializes in processing imported semi-finished products), exchange rate instability will have a negative effect on the entire economy. and on the volume of foreign investment in the country’s economy.If a domestic industry is heavily dependent on imports (for example, the economy specializes in processing imported semi-finished products), exchange rate instability will have a negative effect on the entire economy.

Even in the extreme case that a country does not have a national currency, “Dutch disease” will manifest itself in rising factor prices in export-oriented industries. In the simplest case, these are wages and interest. Rising prices of factors of production in one sector of the economy, especially if unions are strong in the country and the share of the export-oriented sector is large enough, will spread to other sectors. As a result, we will get the same decrease in the competitiveness of the national economy.

fight for rent

In addition to the factors described above of the negative impact of the growth of natural resource exports associated with the appreciation of the national currency, there are a series of mechanisms whose effect is less evident. Here and below, we will focus primarily on developing economies, as these effects are more pronounced for them.

The second and no less destructive factor associated with the relative abundance of natural resources is the struggle for rent. The point is that emerging economies tend to be characterized by relatively imperfect markets, poorly defined property rights and protection systems, and a host of other institutional problems. In this case, in the most exotic scenario, the presence of important reserves of natural resources can lead to a worsening of the struggle for these resources between various economic, political and criminal groups, until reaching a civil war (an example is wars civilians in African states, where the belligerents tried to gain control of diamond deposits).In the peaceful resolution of conflicts, the presence of rich deposits requires the maintenance of a large army, whose main task is to protect these deposits from the invasion of neighboring states. However, these are quite exotic examples. The most civilized variants of the rent struggle involve the concentration of political and economic power in the hands of small groups. To maintain their position, these groups are forced to spend significant resources, most of which are spent far from being productive. The most civilized variants of the rent struggle involve the concentration of political and economic power in the hands of small groups.To maintain their position, these groups are forced to spend significant resources, most of which are spent far from being productive. The most civilized variants of the rent struggle involve the concentration of political and economic power in the hands of small groups. To maintain their position, these groups are forced to spend significant resources, most of which are spent far from being productive.

In an even more civilized version, control over natural resources is in the hands of the state, and it independently distributes access rights to these resources. Economic efficiency requires that access rights be assigned through some competitive mechanism, such as contests and auctions. In practice, however, in many countries these rights are assigned on the basis of less formal criteria. Together with the developed corruption, this situation creates excellent conditions for the emergence of a struggle for rent. The situation described above very well characterizes the state of affairs with the distribution of access rights to natural resources in Russia.We are talking about oil fields, and the distribution of fishing quotas, and the distribution of rights for deforestation.

Another side of the struggle for income is protectionism in relation to the sectors of the national economy focused on satisfying internal demand. Very often, such measures serve as a response to the relative growth of the real exchange rate of the national currency, but the initiators and lobbyists of such measures are large companies or entire industries that are forced to compete with imports from other countries. Empirical studies indicate that there is a statistically significant positive relationship between the share of extractive industries in total national production and the value of import duties. In other words, commodity-oriented countries tend to charge higher import duties.

capital social

In the absence of clear property rights over natural resources and/or clear criteria for delegating these rights from the state to private companies, the economy creates incentives to fight for rent. In such a situation, the influential groups that have managed to gain access to natural resources are interested in maintaining the deficiencies of the institutional system as necessary conditions for the emergence of rent itself. In short, if through corruption, bureaucracy, and a weak legal and judicial system, some groups are able to gain privileged access to natural resources, these groups will seek to maintain and increase previous disadvantages.If we consider favorable institutional conditions as another factor of production, say, social capital, then the presence of significant reserves of natural resources to some extent leads to its displacement.

However, even if the state receives all the rent from the use of natural resources, the presence of such a source of income can create a false sense of security and prosperity. As a result, a significant portion of this revenue can be spent completely inefficiently.

The problem described above has more to do with human psychology. In fact, empirical research suggests that people tend to be more unconcerned about funds received, for example, as a result of winning the lottery, than about money earned through their own efforts. Surprisingly, this effect is also manifested at the state level. Thus, according to statistics, countries with a large supply of natural resources resort more often to financial assistance from other states and have a relatively larger amount of foreign debt.

Another negative consequence of the presence of important reserves of natural resources in conditions of unequal rights of access to them is the growth of social inequality. The causal relationship here is quite obvious: groups that have access to deposits, for example through connections in government structures or by giving bribes, have a source of enrichment at their disposal. From the point of view of democratic values, the economies of countries where such sources of income are absent and individuals can only rely on their own abilities are more socially just. Growing inequality within a country naturally reduces the quality of social capital, which has a negative impact on economic growth rates.

Education, human capital and scientific and technical progress

The fourth mechanism that explains the negative relationship between the relative abundance of natural resources and economic growth rates is the negative impact of the size of the extractive sector on the educational level of the population and the accumulation of human capital. First, most of the income from the use of natural resources is not related to wages. In the case of the legal use of natural resources, income is presented mainly in the form of dividends, social and fiscal benefits, etc. In the case of semi-legal use, the sources of income may remain the same, but arise as a result of corruption, bribery, etc.In general, there is no strict relationship between the level of education and the level of remuneration, which reduces the incentives to invest in human capital.

Second, extractive industries are generally not knowledge intensive and do not require a highly skilled workforce. Mining technologies have been established for a long time and revolutionary changes in technology are extremely rare. Good examples are fishing or logging. The fishermen, like 100 years ago, use nets and the lumberjacks use saws, although somewhat improved. In such a situation, extractive industries, by their specific nature, are not interested in scientific research, which at the same time limits positive externalities in relation to other industries (it is no secret that R&D in some industries is often finds application in other industries).

In addition to the factors listed above, the labor and capital employed in extractive industries are highly specialized and, in fact, cannot be used in other industries. Even highly skilled workers employed, for example, in oil extraction, cannot move into light industry without proper training. On an economic scale, this specificity of labor and capital imposes restrictions on the free flow of resources from one sector to another and reduces the efficiency of their distribution.

It should be noted that the main role in ensuring a normal level of education in the country (at least primary) should be played by the state. Therefore, it would not be entirely correct to point to the high participation of extractive industries as the main reason for the low educational level of the population. These are rather shortcomings of public policies. However, the negative nature of the relationship between the abundance of natural resources and scientific and technical progress is quite predictable.

Savings, investment and capital accumulation

Another mechanism is associated with the processes of investment and capital accumulation. The extraction and subsequent sale of minerals, as a rule, has a fairly high level of profitability. In fact, the main task of the State in the process of distributing access rights to natural resource deposits is to choose such payment schemes for the use of these resources (here we are talking about tax payments, customs fees and the price of licences, etc.), which provide extractive companies with a zero level of economic benefit.If, for some reason, the state cannot correctly set the fees for the use of these resources, the profitability of the extractive industries turns out to be higher than the average for the economy (of course, the situation in which the profitability of the extractive industries industries is below average in the economy is hypothetically also possible, however this has not been the case in practice). Since extractive industries can provide a higher return on investment, they can borrow at higher rates. This leads to an increase in the interest rate in the economy and crowds out investments in other industries.Furthermore, capital accumulation, although accelerating, is concentrated in the extractive industries, which only exacerbates the structural imbalances in the economy.

In emerging economies, capital inflows into extractive industries can also hamper the development of financial infrastructure. The fact is that in the conditions of underdeveloped industry, mining industries are the main consumers of capital. In the event that the inflow of foreign exchange from the sale of extracted resources satisfies the capital needs of the industry, the incentives for the development of the financial system are reduced. This makes it difficult to transform the population’s savings into investments, reduces the volume of investments in the economy and slows down economic growth.

conclusion

All the factors listed above do not at all mean that a large amount of natural resources is an absolute evil for the economy. All things being equal, it is certainly better to have a couple of oil fields in reserve than not to have them at all. Natural resources carry more risks and require more careful political decisions. In fact, all the mechanisms of the negative impact of the relative abundance of natural resources on economic growth are related to the State or, at least, can be controlled by it. Unfortunately, the solution of this problem, apparently, is impossible even with the participation of the state.Given that empirical studies show that there is a negative effect of the presence of stocks of natural resources even in those variables that are the result of public policy (for example, education, the level of bureaucracy and corruption, the development of social institutions and legal), in most cases, states with significant reserves of raw materials were unable to carry out an effective social and economic policy. Russia is no exception here.