The Resource Curse by fdh56iuoui


									   The Resource Curse:
 Causes, Effects and Solutions

             J. Jay Park
Partner, and Chair, Global Resources
         Macleod Dixon LLP
          Calgary, Canada
     Presentation to CWC School for Energy
                  July 20, 2007

What is the "Resource Curse"?
Causes of the Resource Curse
Effects of the Resource Curse
Avoiding the Resource Curse
Can the Legal Regime Help?

What is the "Resource Curse"
The "resource curse" is the term used to
describe the apparent paradox that countries
with abundant natural resources tend to have
less economic growth than countries without
these natural resources
  Sometimes referred to as the "paradox of plenty"
There are many reasons why the resource curse
It has been observed in many different countries
around the globe
Causes of the Resource Curse
Reliance on Exports of Raw Resources
The "Dutch Disease"
Excessive Borrowing
Revenue Volatility
Resource Taxation and Democracy

Reliance on Exports of Raw Resources
  Production and export of natural resources tend to
  generate large streams of revenue
  In the effort to generate this revenue as quickly as
  possible, often there is reliance on resource revenues
  without related development
     states become merely “hewers of wood and drawers of water”
  Economic diversification often is neglected or deferred in
  light of the high profitability of producing and exporting
  the limited natural resources
     or if it is pursued, it is made difficult because resource extraction
     is more lucrative, and out-competes other industry for capital
     and skilled personnel
  This leads to increasing reliance on resource revenues
     however, while the resource sectors tend to provide large
     financial revenues, they often provide relatively few jobs, and
     tend to operate as "enclaves" with few connections to the rest of
     the economy
         The "Dutch Disease"
An economic phenomenon in which the revenues from
natural resource exports damage a nation's productive
economic sectors by causing an increase of the real
exchange rate and wage increase
The consequence is that sectors such as agriculture and
manufacturing become less competitive in world markets
   the term "Dutch disease" was coined in 1977 by The Economist
   to describe the decline of the manufacturing sector in the
   Netherlands after the discovery of natural gas in the 1960s
This creates a "vicious circle" of increased reliance on
resource revenues
   and manufacturing is hard to restore if the resource industry or
   revenues fail
Also, productivity generally increases faster in the
manufacturing sector, so resource economies tend to
lose out on some of those productivity gains
Diagnosing the Dutch Disease
It can be difficult to prove the Dutch disease exists in a
particular state
   the relationship between an increase in natural resource
   revenues, the real-exchange rate and a decline in the lagging
   sector can be caused by many factors
However, commonly mentioned examples are:
   16th Century- Spain - Large inflow of gold and other wealth into
   Spain from the Americas
   1850s- Australia- gold rush
   1970s-1980s- Norway - oil boom
      Russia - oil, natural gas
      Azerbaijan - oil
      Canada - oil, natural gas
      Various post-colonial African states - oil, mining

       Excessive Borrowing
Many states use the expectation of future
resource revenue to seize the opportunity
to borrow from international lenders
  this is actually sensible where currency is
  appreciating, because repayment is less
But resource prices are notoriously
volatile . . .

          Revenue Volatility
Natural resource prices tend to fluctuate wildly
  oil price has varied from $12 to $70 between 1986
  and 2007
  other commodities have seen similar swings
An economy that is heavily reliant on resource
revenues faces challenges during a price
  this kind of volatility makes government planning
  debts incurred during high prices and high exchange
  rates are difficult or impossible to pay with low
  revenues and a plunging exchange rate
  this can lead to breach of contracts, eroding the rule
  of law
Natural resources can, and often do, provoke
conflicts within societies as a result of "rent
  different groups and factions fight for their share
  these could be
     separatist conflicts in regions where the resources are
     battles between different federal and regional governments
     for control of revenues, or even among ministries or
     departments for access to budgetary allocations

In a resource state, governments sometimes
maintain authority through allocating resources
to favoured constituents
  this occurs without focus on a level, well-regulated
  playing field
Huge resource revenues fuel this political
There is less need to build up the institutional
infrastructure to regulate and tax a productive
economy outside the resource sector, so the
economy may remain undeveloped

Resource Taxation and Democracy
In economies that are not resource-dependent
   governments tax citizens
   citizens demand efficient and responsive government in return
   this bargain establishes a political relationship between rulers
   and subjects
In resource-dominant economies, the need to tax
citizens is less because governments have a
"guaranteed" source of income from natural resources
   the usual relationship between rulers and subjects may break
As a result, citizens are often poorly served by
governments in resource-dominant economies
   sometimes, if the citizens complain, money from the natural
   resources enables governments to pay for armed forces to keep
   the citizens in check

Effects of the Resource Curse
Economic Stunting: From 1965-1998, in the OPEC
countries, gross national product per capita growth
decreased on average by 1.3%, while in the rest of the
developing world, per capita growth was on average
Conflict: One study concluded that a country that has
primary commodity exports around 25% of GDP has a
33% risk of conflict, but when exports are only 5% of
GDP the chance of conflict drops to 6%
Corruption and Poor Governance: Countries whose
economies are dominated by resource extraction
industries tend to be more repressive, corrupt and badly-

Outcome: Resources as a Curse,
       Not a Blessing!

Avoiding the Resource Curse
The most interesting aspect of the resource
curse is not that natural resource wealth on
average reduces growth, but that the economic
and political outcome is so different in different
resource-abundant countries
The resource curse has both economic and
political causes and effects, so solutions involve
addressing both of these
  but it is unclear to what extent bad economic and
  political development causes countries to be resource
  dependent, or to what extent resource dependence
  causes bad economic and political development
Dealing with Resource Revenue Reliance
 Seek to expand industries related to the raw resource,
 and upgrade
   oil refining
   gas processing
   export steel, not iron ore, etc.
 Favour related industries
   if raw energy is available, focus on energy-intensive industry
   R&D related to the resource
 Use government revenues to focus on capacity-building
 in human resources
   higher education

Dealing with the Dutch Disease
try to slow the appreciation of the currency
use policy means to boost competitiveness of the manufacturing
   although some countries have relinquished control of certain policy tools
   by accession to WTO (ie. subsidies may not be permitted)
"sterilize" some revenues by:
   bringing them into the country slowly, or
   saving them for future use through sovereign wealth funds
       Government Pension Fund in Norway
       Stabilization Fund of the Russian Federation
       State Oil Fund of Azerbaijan
       Future Generations Fund of the State of Kuwait
   but this can be politically difficult as there is often pressure to spend the
   boom revenues immediately to alleviate poverty, but this ignores
   broader macroeconomic implications
encourage saving

          Good Governance
Resolving the other issues are mostly related to
good governance
  Excessive Borrowing: resist
  Revenue Volatility: be prepared
  Conflict: work out suitable rent-sharing policies with
  interested and affected persons
  Corruption: penalize it, and establish structures that
  minimize its risk
  Resource Taxation and Democracy: create the
  environment for proper democratic functions of
  accountability and transparency

  International Efforts to Deal with
   Transparency & Accountability

OECD Convention on Combating Bribery of
Foreign Public Officials
  extra-territorial reach
Extractive Industries Transparency Initiative
  Web site at:
World Bank
  increasingly, development programs need to take
  good governance and anti-corruption into account

 Can the Legal Regime Help?
Modern resource laws can help to deal with some aspects of the
resource curse:
   encourage upgrading of resources within the state
   create priority and benefits for local use of resources
   require the use of local goods, services and employees
   establish education & training requirements
   mandate rent-sharing among parties with vested interests
   require local benefits to be given directly to locally affected parties by
   the investor
   ensure transparency of award of rights, reporting on operations and
   publication of revenues and expenditures
       minimizes the risk of corruption
       enhances the environment for democratic function
   require a sovereign wealth fund to be set aside
Macleod Dixon's Global Resources Practice Group has experience in
designing resource laws with this focus

Background Information: J. Jay Park
  Jay Park is a lawyer practising domestic and international oil & gas law with
  Macleod Dixon LLP since 1980 (Partner, and Chair, Global Resources Group)
  He has worked on oil & gas transactions Canada as well as Albania, Algeria,
  Azerbaijan, Brazil, Brunei, Cambodia, China, Colombia, Egypt, Equatorial
  Guinea, France, Indonesia, Iran, Iraq, Kazakhstan, Kenya, Kuwait, Lebanon,
  Libya, Mexico, New Zealand, Niger, Nigeria, Oman, Pakistan, Peru, Russia,
  Saudi Arabia, Somalia, Sudan, Thailand, Trinidad, Ukraine, United Kingdom,
  United States of America, Vietnam, Venezuela and Yemen, principally for
  international oil companies, but also for governments, state oil companies
  and multilateral agencies such as the World Bank
  He has assisted governments and state oil companies in the design or
  amendment of petroleum regimes in eight countries, whose total resources
  comprise 49% of world oil reserves and 33% of world gas reserves
  Jay has been recognized by Who's Who Legal, the independent research
  partner of the International Bar Association, as the world's leading oil & gas
  lawyer in 2006 and 2007


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