"The Myth of the Resource Curse" by Wright and Czelusta. A review.

The following is a discussion of Gavin Wright’s and Jesse Czelusta’s 2004 paper “Why Economies Slow : The Myth of the Resource Curse”.   The purpose these posts are to comment on key innovation themes from academic papers, thereby introducing these concepts to a broader audience. 

The key takeaway from this papers is that the authors suggest the ‘non-renewable resources’ can be extended through exploration, technological progress and investments in appropriate knowledge.   These dynamics operate at the global and regional level. 

While the cases examined are not exhaustive, they soundly refute the allegation that resource-based economic development is ‘cursed’.   The economic outcome is largely determined by the manner in which policy makers and business view natural resources

The authors of this paper scrutinize the resource-curse literature and present some interesting finding that reveal important nuances.  The first nuance is that there is a questionable relationship inferred in the resource curse literature that export of natural resources is a reflection of a (externally determined) geological endowment.   The authors explain that a regions comparative advantage is natural resources is not equivalent to “resource abundance” (e.g. a region may have a comparative advantage in natural resource development simply due to other regions under developing their resource base).  When studies use approaches that describe mineral abundance relative to a regions development level (e.g. Reserves per capita or natural resource exports per worker), there is no negative relation between the variables and growth rates.  Historical case studies do not indicate that resource-based development is primarily a matter of geological endowment, but support the idea that resource-driven economic growth is institutionally driven (i.e. Making appropriate policy decisions).   

The case of the United States in the late 19th Century

In the case of the United States who rose to the top of global economies in manufacturing in the late 19th century it was found that their success was due to the development of their natural resources sooner than other competing nations.  This development resulted from large investments in exploration, transportation and development of technologies for extraction, refining and utilization.   The development and leadership of the United States was not simply due to bountiful geological endowments, which were not particularly favourable.  Essentially the mineral sector was the leading driver of knowledge-based economic development of the period, and was a catalyst for development of highly technological solutions for exploration, extraction and substitution (and remains so today).   

By 1913 the United States was the world’s dominant producer of practically every major industrial mineral.  This resource abundance was a major reason behind the American position as the world leader in manufacturing.  Why should the idea of the resource curse not apply to the case of America?   One reason is the idea that abundant natural resources were not simply endowed, but rather a result of collective return on investments in exploration, transportation and technologies for extraction, refining and utilization.   While some of the growth of the period certainly came from the size and the ‘unexplored’ condition prior to westward migration, many examples of dramatic production occurred in the east of the country.  The dramatic rise in the American natural resource economy of this period is attributed to three elements.  The first was a legal environment that was very accommodating to mineral interests, often readily transferring prime mineral land to private hands through official (and unofficial) processes 2) investment in public knowledge infrastructure (e.g. The United States Geological Survey) and 3) education in mining, minerals and metallurgy.

Latin America

The authors consider some examples of the underdevelopment of natural resource development in Latin American countries of this era and have suggested the main impediment was the lack of accurate knowledge regarding the size and location of valuable mineral deposits.  

Early Australia

Australia is another example a region who was an underachiever in many minerals (gold excluded) relative to its actual share of natural resources.  Why did this occur in Australia?  Difficulties in settling such an unforgiving region with a small population was not unique to Australia.  And Australia also invested in knowledge infrastructure such as mining schools and surveys.  The authors also suggest that the ‘ethos’ of the Australian technological system was informally organized and  resistant to adoption of outside knowledge.  By the start of the Second World War the Australian self image was described as being relatively unsophisticated and technologically dependant on the British Empire.  These factors and low natural resource prices led to Australians being pessimistic about the possibilities of expanding their natural resource base and with the belief that natural resources were limited enacted policies to conserve natural resources for domestic industries.  This pessimism led to poor policies and lack of survey effort.  Up until the 1960s Australia embargoed exports of certain resources.  With a new policy regime in the 1960s a regime of new exploration began leading to new discoveries of iron, copper, nickel, bauxite, uranium, phosphate rock and petroleum.  The problem was not lack of resources in Australia, but the failure to develop their potential.  

Oil in the United States

The authors examine the historical American specialization in petroleum to understand how it contributed to economic growth in general and to analyze the claim that endowments of petroleum can lead to economic deterioration in regions (e.g. Venezuela).   Between 1900 and 1930, California became the leading oil state and the regional economy was energized by both the influx of jobs and the reduction in the cost of energy.   The regions manufacturing sector quadrupled (contrary to the ‘Dutch Disease’ model) and was launched onto its trajectory as a leading region for technology and innovation.    The regional economy was one of the first to transition from coal to oil and thus had to ‘learn’ how to utilize the new fuel and upgrade the infrastructure for use and supply.   The requirements for petroleum geological knowledge also helped to establish Berkely and Stanford as world-class research universities.  The shift in industrial energy feedstock from coal to oil required increased contact between oil companies and the chemical industry and helped to raise the United States to a leading position in the chemicals sector. 

Norway

Norway is a relative newcomer to the world of science-based petroleum sector, with the first commercial oil discoveries occurring in 1969.   Norway was able to reorientate its engineering skills (e.g. Shipbuilding) towards developing oil exploration and drilling technologies in harsh nordic conditions.   Policies with international oil companies emphasized transfer of skills and control to Norway.  The creation of Statoil (a state owned company) and institutes of higher learning increased the local competencies to leverage the development of the Norwegian oil industry.    The expertise developed in the production of deepwater drilling platforms led to the platforms becoming an export good.  Also, the “Norwegian school of thought” (a new approach to exploration) have led to revision of reserve estimates.   These advances in technology and knowledge infrastructure has qualitatively transformed the way that Norwegians participate in the resource economy.  They have engaged as professionals not simply as passive recipients of resource windfalls.

Venezuela

Presented as an antithesis of Norway, Venezuela is an example of a development failure the authors argue.   Venezuela was able to enjoy considerable success in developing technologies to develop regionally idiosyncratic petroleum resources, which has led to significant increases in the estimated reserves.  What appears to have harmed Veneuzua was making major spending commitments during periods of rapid revenue growth when resource rents were high.   This situation led to considerable economic shocks when market volatility inherent in the commodity occurred.  Unfortunately, when strapped for cash the Venezuelan government raided the development budgets of the state owned enterprises weakening their research and development infrastructure.

Chile

In the first half of the 20th century Chile’s copper production occurred in the absence of strong domestic technological capacity.  It took decades for the Chilean government to recognize the issue and train Chilean specialists.  However, this technological expertise did not prevent policy missteps which cumulated with the nationalizations of 1971.   Policy began to change in the 1980’s leading to strengthening of private rights in mining concessions, although the state still controlled over half of Chile’s copper production.   Since 1990 Chile’s economy has grown at a healthy rate largely driven by the mining industry (e.g. 47% of exports and 8.5% of GDP)

Peru

Peru is a recent player in the global mining sector, with a privatization program beginning in 1992.  There are policies that are aimed to create an enabling investment for foreign investment and encourage Peru to play a larger role in the global mining sector.   It seems that these institutions have been successful with Peru ranking second in the world in the production of silver and tin, fourth in zinc and lead, seventh in copper and eighth in gold (as of the end of 2001).

Modern Australia

The modern story (post 1960’s) of natural resource driven growth is a striking story of successful minerals search and economic growth.  There were dramatic surges in the production of minerals of almost all types along with the expansion of reserves.  This expansion of the mineral base also supported growth in local manufacturing industries (e.g. Metal and steel products, autos, industrial equipment, petroleum products, ships and chemicals).   However, the most interesting is the effect of the natural resource sector as a knowledge intensive sector.   

From 1994 to 2004 income from intellectual property in mining grew from $40 million per year to $1.9 billion per year.   In 1995-96 the research and development expenditures from the mining sector accounted for a disproportionately high 20% of all R&D expenditures.   Around this period the mining sector spent $896 per employee on training (all industry average $185) and the proportion of payroll spent on training was 5.8% for mining (all industry average 2.5%).  Australia has emerged as a world leader in mineral exploitation and development technology, as an example Australia provides between 60-70% of mining software worldwide.  These technologies are borne from Australia’s difficult conditions but find applications across the world.

The Development Potential of Minerals

The authors discuss how the theory of Harold Hotelling that the scarcity of relative prices of nonrenewable resources would inexorably rise over time has not been supported by the facts of history.   The pressure on prices to rise is mitigated by the discovery of new deposits, technological progress in extraction technology and the the development of resource substitutes.  

The authors also note that virtually all of the writing on the topic of market supplies of commodities are conducted at the global level, this may overlook the regional processes of natural resource renewal.  And within the context of regional development policy a crucial aspect is regionally specific knowledge.   While much of the scientific knowledge base for natural resource development is global location-specific knowledge will always continue to play an important role.  In virtually all of the cases the authors have examined, the public goods aspect of the infrastructure of geologic knowledge have often led to significant payoffs to the host economies.

Conclusion

The authors suggest the ‘non-renewable resources’ can be extended through exploration, technological progress and investments in appropriate knowledge.   These dynamics operate at the global and regional level.  While the cases examines are not exhaustive, they soundly refute the allegation that resource-based economic development is ‘cursed’.   The economic outcome is largely determined by the manner in which policy makers and business view natural resources.    

Reference

Wright, G. and Czelusta (2004) The Myth of the Resource Curse, Challenge, 47, 2, 6-38