Can great wealth do more harm than good? Everybody enjoys moral tales about Richie Riches made miserable by the worship of Mammon at the expense of family, friendship, and self-respect. But can wealth (in particular, natural wealth) be a liability for a whole country?
Actually, the question is relevant for a startlingly large number of economies in transition ranging from Saudi Arabia and Iraq to Venezuela and Russia. And while the consequences of being the resource king of the neighborhood are mixed -- Angola barely survived the consequences of generous deposits of oil and diamonds, while Chile has thrived on mountains of copper -- the dilemma known to economists as the "natural resource curse" does offer insights into the delicate, complex process of development.
Let's get one thing settled. Yes, a whole host of countries (in no particular order, Canada, Australia, the United States, Malaysia, Norway) have managed very nicely indeed with big natural resource endowments. But happy endings (or, for that matter, happy middles) seem more the exception than the rule. Why?
Resource-rich countries typically depend heavily on just a few commodities to pay for imports, to service foreign debts and to fund government services. Nothing inherently wrong with that, save one thing: Natural resource prices are far more volatile than the prices of most industrial goods and services.
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Oil, of course, is a great example: The price of a barrel (adjusted for inflation) has topped $100 twice since 1998 -- and slipped to less than $20 in between. But what goes for oil also goes for most hard-rock minerals. Copper tripled between 1998 and the peak of the 2008; tin hit $38,000 a ton in the early 1980s, then sunk below $5,000 early in the new millennium. Nor have crops -- especially the tropical food crops that spell the difference between a strong economy and a week one for a number of small countries -- been immune to the roller coaster ride. Coffee prices increased five-fold between 2002 and the spring of 2011; cocoa tripled between early 2007 and early 2010.
Now, countries could offset the impact of this volatility in all manner of ways, most of which come down to saving in boom times and spending in lean. And some (like Norway, Chile, and even Russia) do just that. But most developing countries lack the political will or the institutional constraints to take the long view. Typically, they become trapped by commodity price cycles, over-committing on the up side and suffering the consequences in terms of budget deficits, currency volatility, and inflation when the balloon deflates. Among other problems, the resulting macroeconomic instability makes it difficult to attract investment in manufacturing and services: arguably just what these countries need to diversify away the impact of commodity price volatility.
There's a related problem for commodity exporters called "Dutch disease." It was named (by The Economist magazine) after the problems encountered by the Netherlands when vast natural gas fields were discovered offshore in the late 1950s. Gas exports brought a bonanza of foreign exchange earnings, tending to drive up the exchange value of the Dutch currency. And that, in turn, made other Dutch exports (notably, manufactured goods) uncompetitive in foreign markets - which made manufacturers and their employees very unhappy.