Avoiding the Resource Curse

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Chana Joffe-Walt has a worthwhile podcast about one solution for countries facing the resource curse: “Take all money that comes in from foreign companies — for lithium in Afghanistan, oil in Nigeria, natural gas in Bolivia — and give it to the citizens. Literally have a government official sit down with piles of cash, maybe with some international oversight, and divvy it up.”

There are a lot of merits to this, but one downside is that it still doesn’t do much of anything to alter the exchange rate impacts associated with so-called “Dutch Disease.” Imagine a poor country with low productivity and lots of poor people working in sweatshops making t-shirts. Now along comes the oil find, foreign cash starts pouring in, and the government distributes it via rebates. People have more money (which is good) but they haven’t become any more productive. So when the inflow of foreign funds causes the currency to appreciate and the price of sweatshop goods sold abroad to rise, now the factories have become uneconomical and need to be shut down.

Now being a poor, unemployed person living off welfare checks from your oil rich government might be considered preferable to being a poor person working long hours in brutal conditions in a t-shirt factory so this isn’t necessarily a terrible scenario. But it’s not an ideal one either. Countries can move up the value chain from lowest-end manufacturing and get richer and richer. Those oil checks won’t grow.

I think the better idea has been pioneered by Norway. Here you note that even if you took the money that foreign firms pay for the right to mine your lithium and threw it all in the garbage, the country would still gain economic benefits because there’d be increased employment associated with operating the mine and performing services for the foreign experts brought in to supervise the project. Of course throwing the money in the garbage would be dumb, but you can pool it into government-run investment fund that uses the revenue to purchase foreign financial assets. Those asset purchases will minimize currency appreciation and allow your non-extractive industries to remain competitive. Then once the fund has built up a bit, you can start using the income from the fund (rather than the principle derived from payments for your resources) to finance your public pension system. This allows for either lower taxes or else higher spending on productivity-enhancing non-pension purposes.

The problem of course is that it’s all well and good for Norway to create a giant slush fund managed by political appointees, but you can’t do that in high-corruption countries. So maybe this whole post is pointless. Or maybe this is a service the World Bank could provide—insured deposits at some modest rate of return for resource rich poor countries.