an interesting article on "the curse" (and I don't mean the one that haunts the Red Sox) --
February 19, 2004/New York TIMES ECONOMIC SCENE Resources Form the Basis for Economic Growth By JEFF MADRICK POPULAR notion in economics today is that an abundance of natural resources is a "curse" for developing nations. Such an endowment, it is argued, encourages corruption, undermines institutional development, pushes the value of a currency uncompetitively high and cannot support long-term growth because the reserves eventually run out. Small wonder, then, that oil-rich nations like Iraq and Venezuela are poor or in decline. Gavin Wright will have none of this. Mr. Wright, an economic historian at Stanford and long a specialist in the role that natural resources play in economic growth, agrees that overdependence on a single resource can lead to poor policies, but it is by no means inevitable. To the contrary, many developed and developing nations have used their mineral resources as springboards to wealth and broader-based development - not least the United States itself. Mr. Wright and a colleague, Jesse Czelusta, have written a fascinating study (at www-econ.stanford.edu) on the subject that should be required reading. The lessons to be drawn are especially pertinent for countries like Iraq. The economists start their analysis by looking at the evidence compiled by advocates of the resource curse. The seminal study was done by Jeffrey D. Sachs and Andrew M. Warner in 1995 and showed a strong statistical relationship between resource abundance and slow growth. Many follow-up studies using the same method draw remarkably sweeping conclusions about the inevitable disadvantages of resource abundance. One recent study explicitly concludes that poor institutional development, including weak governance and property laws, is "intrinsic" to nations with oil and other minerals. Mr. Sachs and Mr. Warner have recently concluded that the curse is a "reasonably solid fact." But Mr. Wright and Mr. Czelusta point out that almost every one of these studies uses the proportion of exports of the particular natural resource as a proxy for a nation's mineral abundance. Among other obvious problems with this measure, a high proportion of resource exports may simply reflect a lack of other kinds of exports, which is almost a definition of underdevelopment in the first place. A better measure of abundance would be resources per capita or per worker. New studies using such measures, including one by the World Bank economist William F. Maloney, published in Economia, can find no telling relationship between abundance of reserves and slow growth. Some nations do well with their endowments, others do not. Why is that? Historical and contemporary case studies provide some guidance. America's own rise to economic supremacy in the late 1800's occurred just as it was becoming the leading producer of almost every major natural resource of the industrial age, including iron ore, lead, coal, copper, zinc, timber, zinc and nickel. Such leadership did not hold America back, nor did it hold back other nations like Australia and Canada. Britain, where the industrial revolution started, was notably rich in coal reserves, not to mention wool for its critical textile industry. But what is most relevant to policy, America did not become a leader simply because it had been endowed by nature with this bounty of resources, as we are typically taught in our high school textbooks. Nor was it because it enjoyed enlightened governance in the 1800's, like open and free markets and clear-cut rules about property ownership. In fact, millions of acres of coal mines in the 1800's were secretly bought as farmland. Enormous tracts of iron-rich land were bought cheaply through fraudulent claims under the Homestead Act. Rather, as Mr. Wright and another Stanford economic historian, Paul A. David, convincingly summarize in a 1997 paper, the nation invested heavily in mineral exploration, new techniques and mining education. Other industries received spillover benefits from new technologies, the low costs of natural resources and a technically trained labor force. Public investment was especially important. For example, the 1879 United States Geological Survey, a detailed mapping of reserves and potential reserves, was critical to development. Many state colleges offered mining degrees by the 1890's, including the University of California at Berkeley. But does such analysis apply to today's developing nations? Mr. Wright and Mr. Czelusta point out that some Latin American nations, like Chile, Peru and Brazil, developed mineral resources through concerted efforts at investment and development. As for cases like Venezuela, often cited as a leading example of the resource curse, advocates of the curse thesis argue that oil contributed to a debt-driven boom that was bound to deter growth eventually. But over-borrowing was hardly unique to resource-dependent nations in the 1970's and 1980's. Nations like the United States and Japan, for example, also over-borrowed in this period. Natural resource reserves also do not necessarily provide only short-term advantages. Mr. Wright and Mr. Czelusta contend that natural resource reserves are rarely depleted as rapidly as expected. New mining methods are discovered, as are processes that make more economical use of lesser grades. Australia's reserve base has expanded, for example, even as its production has increased sharply in a variety of minerals. Clearly, there are limits to exploration and development, but they are not as severe as has often been thought. Environmental degradation also limits such growth, but Mr. Wright argues that, again, new processes have minimized and even reversed harmful effects. He contends that reserves can consistently be expanded even while being attentive to environmental concerns. An important lesson for Iraq is that American-led policies should honestly follow American historical example. They should assure that there is large and broad Iraqi ownership in oil development that will encourage continuing and aggressive local investment in technology, research and expanding education. Good governance, which these days too often means only open markets, low taxes and direct foreign investment, is not a guarantor of success. One interesting proposal along these lines, by the economist Thomas Palley, formerly of the Open Society Institute, is to siphon off Iraq's oil revenues and distribute them to individual citizens as well as to local governments. [Tom switched jobs again!!?!] If exploited wisely, resource abundance can be turned into a growth industry that provides a solid and even long-term foundation for economic growth. This is hardly a curse. Jeff Madrick is the editor of Challenge Magazine, and he teaches at Cooper Union and New School University. His new book is "Why Economies Grow,'' from Basic Books and the Century Foundation. E-mail: [EMAIL PROTECTED] ------------------------ Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
