Naked Economics: Undressing the Dismal Science pdfdrive com

Natural resources matter less than you would think. Israel, which has no oil to
speak of, is a far richer country than nearly all of its Middle Eastern neighbors
that have large petroleum reserves. Israeli GDP per capita is $28,300 compared
to $20,500 for Saudi Arabia and $12,800 for Iran. Meanwhile, resource-poor
countries like Japan and Switzerland have fared much better than resource-rich
Russia.
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Or consider oil-rich Angola. The country takes in some $3.5 billion a
year from its oil industry.
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What has happened to the people who might benefit
from this treasure in the ground? Much of the oil money goes to fund a never-
ending civil war that has ravaged the country. Angola has the world’s highest
rate of citizens maimed by land mines (1 out of 133). One-third of Angola’s
children die before age five; life expectancy is forty-two. Large swathes of the
capital have no electricity, no running water, no sewers, and no garbage
pickup.
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These are not anecdotal examples carefully picked to make a point.

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Economists believe that a rich endowment of natural resources may actually be a
detriment to development. All else equal, it is great to discover the world’s
largest zinc deposit. But all else is not equal. Commodity-rich countries are
changed by the experience in ways that can do more harm than good. One study
of economic performance in ninety-seven countries over two decades found that
growth was higher in countries that were less endowed with natural resources.
Of the top eighteen fastest-growing nations, only two were rich in things that can
be taken out of the ground. Why?
Mineral riches change an economy. First, they divert resources away from
other industries, such as manufacturing and trade, that can be more beneficial to
long-term growth. For example, the Asian tigers were resource-poor; their path
to prosperity began with labor-intensive exports and progressed into more
technology-intensive exports. The countries grew steadily richer in the process.
Second, resource rich economies become far more vulnerable to wild swings in
the price of commodities. A country built on oil will have a rough stretch when
the barrel price drops from $90 to $15. Meanwhile, demand for a nation’s
currency rises as the rest of the world begins to buy its diamonds or bauxite or
oil or natural gas. That will cause the currency to appreciate, which, we now
know, makes the country’s other exports, such as manufactured goods, more
expensive.
Economists started referring to the perverse effects of abundant natural
resources as “Dutch disease” after observing the economic effects of an
enormous North Sea natural gas discovery by the Netherlands in the 1950s. The
spike in natural gas exports drove up the value of the Dutch guilder (as the rest
of the world demanded more guilders in order to buy Dutch natural gas), making
life more difficult for other exporters. The government also used the gas
revenues to expand social spending, which raised employers’ social security
contributions and therefore their production costs. The Dutch had long been a
nation of traders, with exports making up more than 50 percent of GDP. By the
1970s, other export industries, the traditional lifeblood of the economy, had
grown far less competitive. One business publication noted, “Gas so distended
and distorted the workings of the economy that it became a mixed blessing for a
trading nation.”
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Last, and perhaps most important, countries could use the revenues from
natural resources to make themselves better off—but they don’t. Money that
might be spent on public investments with huge returns—education, public
health, sanitation, immunizations, infrastructure—is more often squandered.
After the World Bank helped to build an oil pipeline that originates in Chad and
runs through Cameroon to the ocean, Chad’s president, Idriss Déby, used the

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first $4.5 million installment of oil money to buy weapons for fighting rebels.
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