A2 Macro: The Natural Resource Trap

“Although large deposits of key resources such as oil would usually be considered a blessing for the development prospects of a country, it often turns out to be a ‘resource curse’”

Professor Paul Collier

Causes of the Natural Resource Trap

1: Risk of political conflict and corruption / conflict / land grabs

2: Vulnerability to changes in world prices which causes high levels of macro volatility

3: Danger of over-rapid extraction of finite andrenewable resources

4: Rising prices can lead to a currency appreciation –damaging domestic industries

2:32:17 PM

Civil WarsCountry Dates Resources

Afghanistan 1992-2001 gems, opium

Angola 1975-2002 oil, diamonds

Burma 1983-1995 timber, tin, gems, opium

Cambodia 1978-1997 timber, gems

Congo Rep. 1997 oil

DR Congo 1996 oil, diamonds, gold, cobalt

DR Congo 1997-1999 oil, diamonds, gold, cobalt

Liberia 1989-1996 timber, diamonds, iron, oil palm

Peru 1982-1996 coca

Sierra Leone 1991-2000 diamonds

Sudan 1983 oil

Violent ConflictsRegion Participants Date Resources

Cabinda Angola, Congo 1975 oil

Congo War DRC, Chad, Namibia, Rwanda, Angola, Zimbabwe, Uganda, Burundi, Sudan

1990s minerals, diamonds,timber

Kashmir India, Pakistan 1947 water

Palestine Israel, Palestine 2007 water

Baluchistan Pakistan, Iran 2004 natural gas

Somali civil war Somalia, US, UK 1991 oil

Afghanistan Afghanistan, US + allies 1980 gems, gold, copper, coal, opium, natural gas

Iraq Iraq, US + allies 2001 oil, natural gas, phosphates, sulphur

Land Grabs

Causes of the Natural Resource Trap

1: Risk of political conflict and corruption / conflict / land grabs

2: Vulnerability to changes in world prices which causes high levels of macro volatility

3: Danger of over-rapid extraction of finite andrenewable resources

4: Rising prices can lead to a currency appreciation –damaging domestic industries

Causes of the Natural Resource Trap

1: Risk of political conflict and corruption / conflict / land grabs

2: Vulnerability to changes in world prices which causes high levels of macro volatility

3: Danger of over-rapid extraction of finite andrenewable resources

4: Rising prices can lead to a currency appreciation –damaging domestic industries

Causes of the Natural Resource Trap

1: Risk of political conflict and corruption / conflict / land grabs

2: Vulnerability to changes in world prices which causes high levels of macro volatility

3: Danger of over-rapid extraction of finite andrenewable resources

4: Rising prices can lead to a currency appreciation –damaging domestic industries

What policies might help a country avoid a natural resource trap?

Better government – including more transparency & accountability to tax payers

Stabilisation Fund / Sovereign Wealth Fund – e.g. to fund human capital and critical infrastructure

Higher taxes of natural resource profits (extracting resource rents)

Diversification to reduce dependency and build new competitive advantages

“Resource-rich countries often do not pursue sustainable growth strategies. They fail to recognise that if they do not reinvest their

resource wealth into productive investments above ground, they are becoming poorer.

Conflict over access to resource rents gives rise to corrupt and undemocratic governments”

Professor Joe Stiglitz

What policies might help a country avoid a natural resource trap?

Better government – including more transparency & accountability to tax payers

Stabilisation Fund / Sovereign Wealth Fund – e.g. to fund human capital and critical infrastructure

Higher taxes of natural resource profits (extracting resource rents)

Diversification to reduce dependency and build new competitive advantages

“Resource-rich countries often do not pursue sustainable growth strategies. They fail to recognise that if they do not reinvest their

resource wealth into productive investments above ground, they are becoming poorer.

Conflict over access to resource rents gives rise to corrupt and undemocratic governments”

Professor Joe Stiglitz

What policies might help a country avoid a natural resource trap?

Better government – including more transparency & accountability to tax payers

Stabilisation Fund / Sovereign Wealth Fund – e.g. to fund human capital and critical infrastructure

Higher taxes of natural resource profits (extracting resource rents)

Diversification to reduce dependency and build new competitive advantages

“Resource-rich countries often do not pursue sustainable growth strategies. They fail to recognise that if they do not reinvest their

resource wealth into productive investments above ground, they are becoming poorer.

Conflict over access to resource rents gives rise to corrupt and undemocratic governments”

Professor Joe Stiglitz

What policies might help a country avoid a natural resource trap?

Better government – including more transparency & accountability to tax payers

Stabilisation Fund / Sovereign Wealth Fund – e.g. to fund human capital and critical infrastructure

Higher taxes of natural resource profits (extracting resource rents)

Diversification – investment in processing and manufacturing –giving higher value added

“Resource-rich countries often do not pursue sustainable growth strategies. They fail to recognise that if they do not reinvest their

resource wealth into productive investments above ground, they are becoming poorer.

Conflict over access to resource rents gives rise to corrupt and undemocratic governments”

Professor Joe Stiglitz

Process – don’t just extract!

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