Curse of the natural resource

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Information about Curse of the natural resource

Published on February 28, 2014

Author: AgriGouravvani


Curse of the Natural Resource Major Advisor P.S. Srikantha Murthy Presented by Gourav Kumar Vani PALB 2103

Response and Action Taken E-Mail sent to Professor T.N. Prakash Kammardi Response Action Taken I can't download if title is curse of nre better to No action taken change it it should be academic and reflect AG economic Good luck Professor M.G. The slides are interesting. Focus on the regression Chandrakanth which gives more info. Some slides are provocative such as saddam Hussein's palace, which perhaps can be sent to the end, but left to you. If you feel it is absolutely essential keep those slides. Also add slides from Karnataka mining disaster, which has been responsible for silting up of Tunba bhadra dam to the tune fo 30 percent!A good seminar. No information was found regarding impact of Bellary ore mine on TungaBhadra Dam . No data found suggesting resource curse from mines in Bellary. Dr. K. B. Umesh, Dr. B V Chinnappa Reddy, Dr. G.S. Ananth, Dr Murtuza Khan Dr. G. M. Gaddi, Dr. Chandrashekar, P.S. Srikanthamurthy did not reply to my email and seminar teachers gave oral suggestion. 28-Feb-14 2

Introduction • One of the surprising features of economic life is that resource poor economies often vastly outperform resource rich economies in economic growth. • Here resources mean Agriculture, Minerals, Forest and Fuels. • History speaks to us for many such examples. 28-Feb-14 3

• In 17th century, resource-poor Netherland eclipsed Spain, despite the overflow of gold and silver from the Spanish colonies to the New World. • In the 19th and 20th centuries, resource-poor countries such as Switzerland and Japan surged ahead of resource-abundant economies of Russia. • In post 2nd world war scenario, star performers had been resource-poor Newly Industrializing Economies of East Asia-Korea, Taiwan, Hong Kong and Singapore while many resource-rich economies such as the oilrich countries of Mexico, Nigeria and Venezuela , had gone bankrupt. 28-Feb-14 4

Figure No 1. : Mining Vs Manufacturing as percentage of GDP for 2012 50 Puerto Rico 45 Swaziland Manufacturing as % of GDP 40 35 Thailand China Korea Rep. 30 25 Hungary Singapore 20 Czech Rep. Surinam Dominic Republic Germany Japan Italy 15 USA 10 Belarus Malaysia Indonesia Sri Lanka India Brazil Venezuela, RB Brunei Darussalam UK Kenya UAE Bhutan Saudi Arabia Angola Guinea 5 Congo DR Mauritania Nigeria Trinidad & Tobago Azerbaijan 0 0 10 20 Source: Presenter 28-Feb-14 30 40 50 60 70 80 Mining as % of GDP 5

Figure No. 2 Manufacturing Vs Agriculture as percentage of GDP ,2012 50 Puerto Rico 45 Swaziland 40 35 Thailand 30 Manufacturing sector as % of GDP China Korea 25 Singapore 20 15 Czech Rep. Belarus Malaysia Indonesia Hungary Surinam Dominic Germany Rep. Japan Sri Lanka Italy Venezuela Brazil USA Brunei D. UK Saudi Arabia UAE 10 Trinidad 5 India 6 Guinea Angola & Tobago Kenya Bhutan Congo DR Azerbaijan Mauritania Nigeria 0 0 5 Source: Presenter 10 15 20 25 30 Agriculture sector as % of GDP 28-Feb-14 35 40 45 50

FigureNo. 3: Manufacturing Vs (Agriculture +Mining ) as percentage of GDP,2012 50 Puerto Rico 45 Swaziland 40 35 Korea 30 Manufacturing , value added to GDP (%) Thailand China Belarus Malaysia Hungary Dominic Rep. Suriname Singapore Germany 20 Japan Sri Lanka Italy Czech Rep. 25 15 USA Brazil India Venezuela Brunei Darussalam Saudi Arabi Bhutan Guinea Angola Trinidad & Tobago Congo DR Azerbaijan Nigeria Mauritania Kenya UK 10 Indonesia 5 UAE 0 0 28-Feb-14 10 20 30 40 50 60 Agriculture + Mining , value added to GDP (%) Source: Presenter 70 80 7

• It always look to us very obvious that natural resources increase wealth and purchasing power over imports, so that resource abundance might be expected to raise an economy’s investment and growth rates as well. • But very opposite is found true in reality and this puzzle is called as Resource Curse or Curse of Natural Resource. 28-Feb-14 8

What is curse of natural resources? According to Wikipedia* “Paradox that countries and regions with an abundance of natural resources, specifically point-source non renewable resources like minerals and fuels, tend to have less economic growth and worse development outcomes than countries with fewer natural resources”. Source:* 28-Feb-14 9

Resource Curse • First described by Richard M. Auty in 1990 in his book “Resource Based Industrialization: sowing the oil in Eight Developing countries”. • First observation of Resource Curse was made in 1960’s when Dutch Disease was observed in Netherland. 28-Feb-14 10

Dutch Disease • “THE ECONOMIST” magazine coined this term in 1977. • Massive Natural gas field in Groningen, Netherland in 1959. • The country wanted to profit from this gas by exporting it. • With the Govt. focus primarily on development of new gas field all the problem started to increase. 28-Feb-14 11

• Too much concentration on new gas field and neglect of manufacturing sector led to slowing down of manufacturing growth. • Natural Gas export started to increase but with trade surplus created by increased export ,Dutch Currency started to appreciate against the foreign currencies leading to loss in export competitiveness. 28-Feb-14 12

• Compared to manufacturing sector, Natural Gas exploration, development and extraction employ less no. of labourers . Therefore slowdown in growth rate of manufacturing sector lead to unemployment on mass scale. • Slowdown of manufacturing also lead to Deindustrialization. • This deindustrialization was supported by 1. increase in wages due to high wages paid by natural gas sector and 2. high inflation resulting from increased government spending due to high tax receipts from oil and gas firms. This made high wages unaffordable to manufacturers in the short run. • This led to influx of foreign goods dumped in Netherland and at a very cheap rate by foreign companies. 28-Feb-14 13

• With the growing natural gas market and the shrinking export economy, the Netherland began to experience a recession. • This situation of economy is called Dutch Disease and was witnessed in multiple countries around the world including Britain, Norway, Australia, Mexico and parts of USA. 28-Feb-14 14

Case study Natural Resource Abundance and Economic Growth By Jeffrey D. Sachs and Andrew M. Warner Centre for International Development & Harvard Institute for International Development An updated and Extended Version of National Bureau of Economic Research Working Paper No. 5398 (1995b) 28-Feb-14 15

Sachs and Warner argues that growth or decline in growth rate of real GDP is affected through factors such as 1. Initial GDP of economy, 2. Share of primary product exports, 3. Openness of Economy to the world, 4. Investment to GDP ratio, 5. Global Commodity Prices, 6. Adherence to rules and regulations by citizens of country. 7. Quality of Governance. 28-Feb-14 16

• Sachs and Warner took data on 87 countries for a period 1970-1990. they followed the model of Barrow (1991) with less no. of regressor than in original model. GEA7089=A0 + A1 *SXP+ A2 *SOPEN+ A3 *INV7089+ A4 *RL+ A5 * LGDP70 + A6 * DTT7089+ e GEA7089: Growth in GDP per unit of economically active population between 1970-1990. SXP: Share of primary product exports in GDP of 1970. SOPEN: Dummy for openness of economy during 1970-1990. INV7089: Investment to GDP ratio averaged over period 1970-1989. RL: Rule of Law is an index reflecting the degree to which the citizens of a country are willing to accept the established institutions to make and implement laws and adjudicate disputes. Scored from 0 (low) to 6 (high). LGDP70: Natural log of real GDP divided economically active population. DTT7089: Average annual growth of the ratio of export to import prices between 1971 and 1990. These regressor excluding SXP is meant to control for their effect or satisfy ceterus paribus condition. 28-Feb-14 17

Table No. 1: Results of Stepwise Regression Variables 1.1 1.2 1.3 1.4 1.5 LGDPEA70 -0.11 -0.96*** -1.34*** -1.76*** -1.79*** -9.43*** -6.96*** -7.29*** -10.57*** -10.26*** SXP SOPEN - 3.06*** 2.42*** 1.33** 1.34*** INV7089 - - 1.25*** 1.02*** 0.81 RL - - - 0.36*** 0.40*** DTT7090 - - - - 0.09_ Adjusted R2 0.20 0.55 0.67 0.72 0.73 Sample size 87 87 87 71 71 Standard Error 1.62 1.22 1.04 0.93 0.92 . Significance codes: 0 ‘***’ ,0.001 ‘**’ ,0.01 ‘*’ ,0.05 ‘.’ ,0.1 ‘_ ’ ,1 Since data is run on normalized/standardized variables hence we do not get intercept in this case. 28-Feb-14 18

Interpretation • Mean for SXP variable is 0.16 and standard deviation of 0.16. Regression 1.1 implies that a unit standard deviation increase in the share of primary exports in 1970 would be associated with a reduction in annual growth of 1.51% points (-1.51=-9.43*0.16). • It is possible that this negative association between natural resource intensity and growth is spurious, reflecting an association between resource wealth and something else that affects growth. 28-Feb-14 19

• Some common arguments are that 1. resource-rich countries are more likely to adopt import-substitution, state-led development strategies, 2. are less likely to accumulate capital at home because they can live off natural resource rents , 3. are more prone to rent-seeking and to develop large inefficient bureaucracies, or 4. are less likely to develop market supporting legal institutions. 5. In addition, a long standing view in the development literature is that countries that specialization in natural resource exports are more likely to suffer from unpredictable and disruptive shocks in global commodity prices. 28-Feb-14 20

But Sachs and Warner had over come this arguments by including • SOPEN dummy variable for first arguments. • INV7089 variable for second argument. • RL variable takes care of third and fourth argument. • DTT7090 variable for fifth argument. Hence it can be argued that adverse effect was due to resource abundance and not due to other prevailing factors. 28-Feb-14 21

• Table No. 2: Association between Quality of Institutions and Natural Resource Intensity • These are results of regression on different dependent variables in columns with two independent variables log of real GDP and primary resource intensity. Variables Government Repudiation of Contracts Risk of Corruption Expropriati on Rule of Law Bureaucratic Quality Log of Real GDP 1980 0.49 (2.35) 0.44 (1.66) 1.35 (8.49) 1.31 (7.80) 1.35 (8.58) SXP -3.90 (-3.41) -4.60 (-3.17) -3.29 (-3.17) -5.47 (-5.00) -5.86 (-5.70) Adjusted R2 0.16 0.12 0.48 0.49 0.55 sample size 65 65 85 85 85 Standard Error 1.40 1.78 1.40 1.47 1.38 • Figures in parentheses are t statistics. 28-Feb-14 22

• Robert Barro’s research paper titled “Economic Growth in a cross section of countries .“ was published in Quarterly Journal of Economics in 1991. • This paper highlighted the variables influencing growth rate of income across countries. Sachs and Warner replicated the work of Barro by re-estimating the same model with latest data at that time( 1970-89) compared to 1960-1990 sample data. 28-Feb-14 23

Variables used are …. • • • • • • • • • • • GEA7089: Average Annual Growth in real GDP per economically active population of duration 1970-90. SXP: Share of exports of primary products in GNP in 1970. DTT7090: Average annual growth in the log of the external terms of trade between 1970-1990. SOPEN: fractions of years during1970-90 in which economy was open. SEC70: Secondary school enrollment rate. PRI70:primary school enrollment rate. GVXDXE: ratio of real government consumption spending (excluding on military and education). REVCOUP: average no. of revolutions and coups over the period 1970-1985. ASSASSP: average no. of assassinations per million persons over the period 1970-1985. PPI70DEV: It measures the deviation of the (log) price level of investment goods from the cross country mean in 1970. INV7090: mean ratio of real domestic investment (public plus private ) to real GDP over the period 1970-1990. 28-Feb-14 24

Table No. 3: Estimation of Barrow’s Model with Variables from Sachs and Warner’s paper Independent Variables GEA7089 GEA7089 SXP - -9.17S SOPEN - 1.96S DTT7090 - 0.10NS LGDPEA70 -1.31S -1.92S SEC70 3.51NS 2.89NS PRI70 -0.38NS 0.20NS GVXDXE -4.67NS -4.24NS REVCOUP -0.04NS -1.04NS ASSASSP -1.62NS 0.89NS PPI70DEV -0.41NS 0.03NS INV7089 0.17S 0.09S Adjusted R2 0.34 0.71 Sample Size 70 69 1.57 1.04 Standard Error 28-Feb-14 S: Significant at 5% level of significance and NS: Not significant 25

• Sachs and Warner opined that there exists disparity among the countries which are developed and resource cursed countries. Hence to prove exactly the resource curse of these countries we need to prove that even after controlling for the effect of these differences resource curse exist. 28-Feb-14 26

• These critical differences are 1. Access to sea (whether country is land locked or has sea access). 2. Most of the resource rich countries are having high proportion of area under tropical region i.e. more coverage of forest. This leads to more obstacles for setting up of manufacturing industry and also for agriculture. 3. High proportion of forest is also positively associated with Falciparam malaria and greater chance of other diseases compared to temperate countries of Europe. 28-Feb-14 27

• A country having greater distance to the port will obviously have to incur more expense on transporting its goods to the port which will reduce its competitiveness in international market. This can be a case even after having access to sea through when country has very much width. • This also leads to lower incentive to invest in the manufacturing in this countries by foreign firm. Even if manufacturing is for domestic purpose, high cost of imported critical input will obviate a greater incentive to import in short run than to manufacture that good domestically. 28-Feb-14 28

Variables selected here are… • • • • • • • • LGDP70 :log of GDP per capita in 1970 GDP70*SOPEN :Interaction term SOPEN : share of years open SXP : Natural Resource Abundance % of land within 100 Km coast DPORT: distance (km) to closest major port TROPICS:% of land in geographical tropics FMALARIA 66:Falciparam Malaria index, 1966 28-Feb-14 29

Table No. 4: Growth regressions with the natural resource variable and the geography and climate variables Here dependent variable is Growth per-capita 1970-1989 Variables 1 2 3 4 5 LGDPPP70 -0.31NS -0.20NS -0.37NS -0.69S -0.86S GDP70*SOPEN -1.52S -1.68S -1.82S -1.13S -1.11S SOPEN 16.21S 17.63S 18.77S 12.75S 12.45S SXP -0.05S -0.05S -0.04S -0.04S -0.03S % land within 100 Km coast 0.63NS - - - 0.60 DPORT - 0.00NS - - 0.00NS TROPICS - - -0.87NS - -0.64NS FMALARIA 66 - - - -1.41S -1.22S Intercept 3.40NS 2.79NS 4.52NS 7.17S 8.48S Observations 97 97 97 94 93 R2 28-Feb-14 0.57 0.57 0.58 0.58 S: Significant at 5% level of significance and NS: Not significant 0.59 30

Symptoms or Consequences of Resource Curse • Natural resource abundance leads to greater corruption and inefficient bureaucracies. • High rents distract governments from investing in the ability to produce growth supporting public goods, such as infrastructure or legal codes. • Natural resource production generates high economic rents. Government of resource rich countries tend to become dependent on rents received from natural resources. 28-Feb-14 31

• Economies rich in natural resources adopt import substitution policies and protect domestic industries from foreign competition leading to underdeveloped manufacturing base. This also leads to high inflation in economy. • Government that controlled natural resource rents tended to waste the rents through profligate or inappropriate consumption. • Too much optimistic government about resource prices acted in hurry to announce and implement large public investments in projects that were hugely inefficient when the government’s optimism turns out to be wrong. As a result these economies end up with more inappropriate capital on their hands than other economies. • Fight for resources also leads to civil war in country which deteriorates nation’s peace status . 28-Feb-14 32

Table No. 5: Recent Civil Wars in Oil and Mineral Dependent States Country Algeria Angola Chad Colombia Congo Rep. Indonesia (Aceh) Iraq Liberia Nigeria Papua New Guinea Sierra Leone Sudan Yemen Terry Karl (2009) Source: 28-Feb-14 Duration 1991-2002 1975-2002 1975-1982 1984-present 1997-1999 1986-2004 1974-1975, 1985-1992,2003 1989-1995 1967-1970, 1980-1984 1988-2003 1991-2002 1983-present 1986-1987, 1990-1994 33

• Resources hinder the democracy. Resources break the link between taxation and state building. Spending on patronage weakens pressure for representation and accountability. Usually resource rich countries have autocratic regime and to maintain that autocratic rule, autocrats spend only on those who groups who favour them and spend a negligible amount on those who doesn’t. • Usually Government of resource rich states get majority of their revenue from taxing the resource sector. Often it happens that government doesn’t tax its citizen. It is obvious that those who pay tax, demand the basic necessities from the government like health care, infrastructure etc. But when they don’t pay taxes to the government they cannot put pressure their government. This also weakens the democracy in these countries. 28-Feb-14 34

• Most of the time, extraction of minerals and oil is done by foreign firms because domestic firms are not capable enough, usually in countries like Nigeria, Congo, due to lacking technological knowledge. When these firms pay the governments royalties and taxes, the data on how much is paid by the foreign firms to the government is not published. This leads to distrust among public regarding the finances of the government and result of these public resentment is Publish What You Pay Campaign. So this campaign asks the companies to publish the data on how they have paid the government of their respective nations. 28-Feb-14 35

• Arezki and Bruckner (2010 a) find that commodity price booms lead to increased government spending, external debt and default risk in autocracies and but do not have those effect in democracies. It is also a fact that, of the 20 major oil exporting countries in 2000, only Mexico and Venezuela are democracies and both have experienced prolonged period of authoritarian rule. Thus we can establish the fact that results of Arezki an Bruckner are true for oil dependent countries leading to resource curse. 28-Feb-14 36

Saddam Hussein’s Palace 28-Feb-14 37 Source:,29307,1973064_2089038,00.html

Saddam Hussein’s Palace 38 Source:,29307,1973064_2089044,00.html 28-Feb-14

With marbled walkways, raised escalators and gold-plated walls, this proposed , new metro station on Riyadh Saudi Arabia. Source: 28-Feb-14 39

• Resources also leads to conflict in the country. • Lets take example of Congo. • Congo’s second II war began in 19983. just one year after its first war was over. In this war rebel groups attacked the government to gain control of Congo's natural resources. • Today1. these armed rebels are in control of Eastern Congo’s mineral wealth, trading routes and other strategic areas. UN2. has put sanction on all countries/ companies in the world from importing minerals from these armed groups because wealth generated from these minerals sold by rebels is used for financing arms and armed groups. M23 rebel fighters walk as they withdraw near the town of Sake, some 42 km (26 miles) west of Goma4. Source: 1. /initiatives/conflict-minerals 2. 3. 4. 40

• Compared to mining sector, manufacturing sector requires more skilled worker. So when the mining sector boom increase the wages for beyond marginal value product of worker. • This leads to two problems…. 1. Increased wages without productivity increase leads to inflation. 2. Youngsters get attracted to the mining sector at early stage of their education. This leads next generations to be low skilled, low incentive to invest in education and less skilled teachers in the next generation. 28-Feb-14 41

• Due to boom in the natural resource sector people feel sufficiency and hence necessary environment for innovations is not provided by these cursed economies leading to suppression of innovations. • Innovations also get suppressed because of low quality of education. • Innovations also get suppressed because of high cost of performing research in these countries and new innovations can be sourced easily from advanced foreign economies. 28-Feb-14 42

Table No. 6: List of Selected Resource Rich and Poor Countries and Their Natural Resources Country Angola Congo (DR) Nigeria Botswana Natural Resource Diamond, Petroleum, Uranium, Gold, Bauxite, Iron ore, Phosphates, Feldspar. Gold, tungsten, tantalum, tin. Petroleum, Coal, Natural Gas, Iron Ore, Tin, Lead, Zinc , Limestone, Arable Land. Diamonds, Copper, Nickel, Salt, Soda Ash, Potash, Coal, Iron Ore, Silver India Coal (Fourth-largest Reserves In The World), Iron Ore, Manganese, Mica, Bauxite, Rare Earth Elements, Titanium Ore, Chromites, Natural Gas, Diamonds, Petroleum, Limestone, Arable Land Australia Bauxite, Coal, Iron Ore, Copper, Tin, Gold, Silver, Uranium, Nickel, Tungsten, Rare Earth Elements, Mineral Sands, Lead, Zinc, Diamonds, Natural Gas, Petroleum. Note: Australia is the world's largest net exporter of coal accounting for 29% of global coal exports Japan Negligible mineral resources, fish Note: with virtually no energy natural resources, Japan is the world's largest importer of coal and liquefied natural gas, as well as the second largest importer of oil Source: CIA World Fact Book 2013. 28-Feb-14 43

Table No. 7: Comparison of Selected Resource Rich and Poor Countries Across World on different Economic Indicator Country # HDI rank (2013) @ Per capita income status CAGR of GDP per capita ~ (1985-2010) Resource Rent % of GDP @ (rank) ! Peace status Governance index rank ^ Unemployment rate (%) *,(D) _ Corruption ranking @ Poverty (<$2 a day,2010) @ Inflation rate (CPI, 2000-11) @ Adjusted Net Saving % of GNI Global Innovation Index rank 2013^^ Congo Nigeria Angola Botswana India Australia Japan 186 153 148 119 136 2 10 L LM UM UM LM H H -3.13 1.61 2.38 3.98 4.46 1.81 1.51 35.2 35.8 46.67 4.7 (19) (18) (7) (100) VL L M H 176 163 166 80 53 23.9 26 17.8 22 29 23 146 95.2 84.5 70.2 49.4 47.9 12.2 33.2 8.8 -8.63 -58.58 -23.2 10.1 120 135 91 7.4 10.7 (66) (58) L VH 163 10 8.5 5.20 77 167 68.7 0.00 6.4 2.0 22.5 6.8 66 19 0.0 VH 20 4.40 158 0.00 -0.2 10.1 22 UM: Upper middle, UP: Upper, LM: Lower middle, VL: Very Low, L: Low, M: Medium, H: High, VH: Very High , CAGR: Compound Annual Growth Rate, (D): Decadal 44 Source: *CIA World Fact Book 2013 , @World Bank Development Indicator 2013, #UNDP, !Global Peace Index, ~Author ^,_TransparencyInternational2013, ^^

CRITICISM AGAINST THE RESOURCE CURSE 1. High wages are not necessarily unproductive because they are kept high to attract labourers to risky jobs like mining and exploration. 2. Much of the variation in resource curse is accounted by quality of institutions, which was weak at the time resources were discovered in these countries. Hence peace and socio-economic conditions remained poor. 28-Feb-14 45

• Most of the countries in the list of resource curse were colonized. This also impaired their ability to prosper by eliminating institutions originally present in those countries. Table No. 8: List of Selected Resource Rich Countries and Their Respective Foreign Rulers Country Foreign Ruler(s) Nigeria British (1861-1960) Angola Portuguese ( 1480s -1975) Congo Democratic Republic Belgium ( 1908-1960) Sudan British ( 1898-1956) Kenya Portuguese ( 16th century till 1920) British ( 1920-1963) Ghana Portuguese (15th century) British (1874-1957) Syria French ( 1918 – 1946) Libya Italy ( 1911-1951) Iran Russia and Britain economically controlled in 19th century. Iraq None 28-Feb-14 Source: Encyclopædia Britannica 2013 Ready Reference CD. 46

• Previous research works on Curse of Natural Resource took into account data for 30 to 40 years i.e. short run. In long run all the resource cursed economies start performing well as is the case of Angola which is now recovering from the resource curse. • Appreciation of currency in FOREX market, as depicted in Dutch Disease can also be due to excessive or large amount of foreign fund flowing into country, may be in the form of foreign investment or foreign aid. Hence Dutch Disease can’t always be attributed to resource led appreciation. • But this criticism is not correct, because though these foreign funds can lead to appreciation but also shift focus away from (non-booming) tradable to non tradable. Again in this case, the real appreciation takes the form of a nominal appreciation if the exchange rate is flexible and inflation if the exchange rate is fixed. 28-Feb-14 47

How to manage curse of Natural resource? Following points were suggested by Jeffrey Frankel19 of Harvard Kennedy School, Harvard University, USA. 1. Include in contracts with foreign purchasers clauses for automatic adjustment of the price if world market conditions change. 2. Hedge export proceeds in commodity futures markets. 3. Denominate debt in terms of commodity prices. 4. Allow some nominal currency appreciation in response to an increase in world prices of the commodity, but also add to foreign exchange reserves, especially at the early stages of the boom when it may prove to be transitory. 5. If the monetary regime is to be Inflation Targeting, consider using as the target, in place of the standard CPI, a price measure that puts greater weight on the export commodity, such as an index of export prices or producer prices. 28-Feb-14 48

6. Emulate Chile: to avoid excessive spending in boom times, allow deviations from a target surplus only in response to output gaps and long-lasting commodity price increases, as judged by independent panels of experts rather than politicians. 7. Commodity Funds should be transparently and professionally run, with rules to govern the payout rate and with insulation of the managers from political pressure in their pursuit of the financial wellbeing of the country. 8. When spending oil wealth, consider lump-sum distribution on an equal per capita basis. 9. An external agent, for example a financial institution that houses the Commodity Fund, could be mandated to provide transparency and to freeze accounts in the event of a coup. Needless to say, policies and institutions have to be tailored to local circumstances, country by country. But with good intentions and innovative thinking, there is no reason why resource-rich countries need fall prey to the curse. 28-Feb-14 49

“Ten Years from now, twenty years from now, you will see: oil bring us ruin….. Oil is devil’s excrement”. - Venezuelan Politician Juan Pablo Perez Alfonzo’s view on oil discovered in his country during early 1970’s, He was one of the founding member of OPEC and minister of minerals and Hydrocarbons in second democratic government of Venezuela. 28-Feb-14 50


Figure3: Crude Oil Prices in World Market *and GDP index for Saudi Arabia# 200 World Crude oil prices index (base 1991) 180 160 140 120 100 80 GDP index (base 1991) 60 40 20 Source: * 1991 1989 1987 1985 1983 1981 1979 1977 1975 1973 1971 1969 0 Year # World Bank Chart prepared by Author 28-Feb-14 52

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