The curse of natural resources

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By SERGIO GONZAGA DE OLIVEIRA*

The development of a country does not depend on the abundance or scarcity of natural resources

1.

The ancients say that Midas, king of Phrygia, now Anatolia in Turkey, was very concerned about the difficult situation of the poor in his kingdom. He dedicated much of his time and gold to lessening the suffering of these people. Midas' actions were so recurrent and appreciated by his subjects that his fame soon went beyond the borders of the kingdom, reaching the ears of the Olympian gods. One day, Midas asked Bacchus, god of wine, to help him in the fight against poverty.

In consideration of his good intentions, Bacchus granted him a single request. Midas, without thinking, told him that he would like to turn everything he touched into gold, certain that the gold produced would solve all the problems in his kingdom. Request accepted, Midas returned home. The first moments were very euphoric. Midas transformed various objects into golden artifacts. Vases, furniture, cutlery and even plants sparkled with the king's touch. A little later it was time for dinner. At the table he discovered to his horror that all the food he touched turned to gold. There was no way to feed.

In complete desperation, his daughter rushed to help him. When she touched her father, she turned into a golden statue. Midas understood that, instead of a blessing, he had obtained a curse. Desperate, he called again for Bacchus' help. The generous god told him that the magic would be undone when Midas bathed in the river near the castle. The waters of the river would carry away the curse of gold. It is not known for certain whether due to legend, or due to ancient geological formations, for a long time, the sands of the Pactolo River, in Anatolia, were rich in gold nuggets.

In 1993, Richard Auty, an English economist and professor at Lancaster University, coined the expression “natural resource curse” to indicate the difficulty that countries with large mineral and agricultural reserves have in transforming these riches into well-being for their population. Just like in the legend, the abundance of natural resources would not be a safe passport to a future without misery and poverty.

However, empirical proof of the existence of this curse is not unanimous in economic science. There are serious controversies. These controversies result from different approaches to defining the abundance of natural resources.

Authors who used the export level of commodities, as a parameter to measure abundance, found evidence of the curse. The most famous research in this regard was published in 1997 by Jeffrey Sachs and Andrew Warner who, through the analysis of a sample of 95 countries, between the 1970s and 1990s, found an inverse relationship between the “export intensity of natural resources” and “economic growth”. In other words, for these authors, commodity exporting countries have encountered many difficulties in transforming this wealth into economic and social development.[1]

More recently, this understanding has suffered a strong reversal and many questions. Other authors used natural resource stocks as a key variable to analyze the phenomenon. In this case they found no evidence of the curse. Christa Brunnschweiler and Erwin Bulte, in an article published in 2008, studied 60 countries in the period from 1970 to 2000 and discovered a direct correlation between the “abundance of natural resources” and “economic growth”, which means denying the occurrence of the curse.[2]

But after all, is the abundance or scarcity of natural resources really decisive for development? Why did some countries manage to transform the curse into a blessing and others did not? And nowadays, could the abundance of natural resources be an obstacle to a future without misery and poverty? To help clarify this controversy, it is worth remembering a little about the recent economic history that, since the Industrial Revolution, separated the world into central and peripheral countries.

2.

Western Europe and the USA, from the end of the 18th century, during the 19th and beginning of the 20th, made a considerable economic leap, distancing themselves from other countries. In a simplified way, it can be said that a kind of virtuous circle was formed between capital accumulation, increased productivity and income distribution in central countries and a stagnation of these same variables in peripheral countries.

Part of this process of separation between countries can be attributed to forces internal to the capital system, where the most competitive and innovative companies exclude the least capable from the market, in a process that Joseph Schumpeter called “creative destruction”. At the international level, this process is reproduced, when pioneering companies in a given country create competitive advantages that are difficult to overcome by latecomers in peripheral areas.

More than that, the environment where the most competitive and innovative companies are established promotes an increase in the efficiency of the entire economy in that region. More and more surpluses, in the form of profit, are generated and allocated to the search for innovations, both managerial and technological, in a self-feeding effect that promotes what is today called autonomous growth. It is true that autonomous growth is not generated only by innovations, but this is one of its main variables.

Market logic continually increases the difference between developed and lagging areas. On the one hand, industrialized goods, with higher added value, generally with few manufacturers, often under a monopoly, oligopoly or monopolistic competition and higher profit rates. On the other, abundant raw materials, with many producers facing strong competition and a lower profit rate.

Additionally, the extraordinary profits generated in the precursor regions allow the formation of monetary reserves for loans. Many peripheral countries, to pay for their imports, borrow these resources and, through the interest mechanism, transfer part of the wealth produced from the periphery to the center. Once this duality is established, it is extremely difficult to reverse it, both from an economic and political point of view.

However, the development of central countries was not solely due to the internal logic associated with the market economy. In the overwhelming majority of cases, the governments of successful countries, from the beginning, protected their companies until they were able to compete in the international market.

In England, the birthplace of the Industrial Revolution, strict rules were adopted in this regard. Daron Acemoglu of MIT and James Robinson of Harvard in their book Why Nations Fail write: “After 1688, while more egalitarian conditions were being established internally, on the international level Parliament was committed to expanding English prerogatives – which is evidenced not only by the laws of Madras, but also by the laws of navigation, the first of which was promulgated in 1651, and which would remain in force, in one form or another, for the next 200 years. Such laws aimed to facilitate the British monopoly of international trade, although with the particularity that it was a monopoly not on the part of the State, but of the private sector. The basic principle was that English trade should be transported in English ships. The laws prohibited the transportation of goods from outside Europe to England or its colonies by foreign-flagged vessels; They also prohibited the transport of products originating from other European countries to England on ships of a third nationality. Such an advantage of English traders and producers naturally increased their profit margin and perhaps encouraged innovations in these new and highly profitable branches of activity”.[3]

In the same vein, Richard Nelson of Columbia University, in his book The sources of economic growth, studying the protectionism of the American economy in the interwar period, wrote: “Most industrialized countries that depended on foreign markets went through difficult times... North American industries remained largely isolated from these problems. The country had been highly protectionist since the Civil War. In the 1920s, despite the growing strength of North American industry, import barriers were increased, first by the Fordney-McCumber Tariff of 1922, and later by the famous Hawley-Smoot Tariff of 1930. But the domestic market was more than sufficient to sustain rapid productivity growth and the continued development and diffusion of new technologies and new products.”[4]

3.

But state interference was not just a matter of higher tariffs and customs barriers. Just as important as customs protections were government actions to increase the efficiency of the local economy. Productivity grew with public and private investments focused on education, technological development, physical infrastructure (energy, transport and communications), social infrastructure (health, housing, basic sanitation and urban mobility) and increasing the efficiency of the State bureaucracy.

These investments increased the competitiveness of all companies, making the comparison with their counterparts from lagging countries even more unequal. Furthermore, these actions, associated with income distribution, created, in most cases, a strong internal market, capable of supporting and boosting the production system, forming a solid platform to compete externally.

But it was not just that. Many forerunner countries strived to prevent laggards from achieving development. Through various paths, they sought to impose freedom of trade on an international level while protecting their companies and their domestic market. Often, with the use of force, these countries prevented any attempt to initiate more elaborate industrial production in the lagging countries.

Daron Acemoglu and James Robinson, already mentioned, wrote: “China was never formally colonized by a European power – although, after the defeat by the English in the Opium Wars, between 1839 and 1842, and again later, between 1856 and 1860, the Chinese had to sign a series of humiliating treaties, allowing the entry of European exports” and continue: “Japan… lived under an absolutist regime. The Tokugawa family rose to power in the 1600s and took control of a feudal system that also banned international trade. Japan also faced a critical circumstance created by Western intervention when four American warships, under the command of Matthew C. Perry, entered Edo Bay in July 1853 and imposed commercial concessions analogous to those wrested from the Chinese by England in the opium wars.”

In summary, the logic of the system, the specific actions to protect internal markets, the increase in economic efficiency and the blockade of latecomers substantially altered the world panorama after the Industrial Revolution, creating a kind of international division of labor, which favored, largely the precursor countries.

Furthermore, in many peripheral countries local elites reacted strongly to the arrival of factories and the most modern production techniques. This was because they feared that the concentration of workers, traders and students could bring new ideas and political movements that would alter the current system of power, where the feudal or semi-feudal order was established.

Daron Acemoglu and James Robinson, in relation to Tsarist Russia, wrote: “…in 1849 a new law was enacted, setting severe limits on the number of factories that could be opened in any area of ​​Moscow and specifically prohibiting the opening of any new spinning mills. cotton or wool and iron castings. In other sectors, such as weaving and dyeing, it would be necessary to request authorization from the military governor to open new manufacturing units. Shortly thereafter, cotton spinning would be explicitly banned by a law that intended to prevent any and all concentrations of potentially rebellious workers in the city.” … “Opposition to railways accompanied opposition to industry, just as in the Austro-Hungarian Empire. Until 1842, there was only one railway in Russia: the Tsarskoe Selo, which ran the 27 kilometers that separated Saint Petersburg from the imperial residences of Tsarskoe Selo and Pavlovsk”.

In Brazil it was no different. Local elites throughout the 1888th century reacted strongly to the end of slavery, so much so that its formal abolition only took place in XNUMX, more than a century after the start of the Industrial Revolution in the precursor countries.

Finally, the analysis of the mechanisms and processes of separation between developed and underdeveloped allows us to answer the questions formulated at the beginning of this article. Everything indicates that this separation suffered little or no influence from the abundance or scarcity of natural resources, confirming the most recent empirical research. In fact, what can be observed is that successful trajectories were a combination of autonomous market forces, associated with the induction of development by a State determined to achieve this objective.

In fact, this symbiosis between autonomous and induced growth can be observed today in the People's Republic of China, where a large part of production is private (around 60%) while the State establishes strategic guidelines, plans and controls important sectors of the economy. . The result of this experience is that China has grown at rates close to 10% per year over the last four decades, lifting around 800 million people out of poverty.

In any case, regardless of empirical analyzes and historical records, it is easy to see that there are developed countries that have an abundance of natural resources, such as the USA, Australia, Canada, Norway, Finland and New Zealand. Meanwhile, others such as Nigeria, Angola, Venezuela, Iraq, Libya, Congo, Bolivia and Sudan, despite the abundance of these resources, remain underdeveloped.

With this, it is possible to affirm that development, even late as in the case of China or other countries, does not depend on the abundance or scarcity of natural resources. The process is fundamentally political and institutional. It is established from institutions capable of planning, executing and controlling long-term programs and projects in pursuit of this objective. For a curse to turn into a blessing, much more is necessary than begging for help from the gods. It requires in-depth knowledge of development theory, international experiences and, above all, political will and action.

Looking at Brazil, it can be said that the current level of underdevelopment was not caused by the abundance or scarcity of natural resources. It is because of the incompetence of the elites to structure a political alliance around a clear long-term development program that would remove us from the near stagnation in which we have found ourselves for more than 40 years. Meanwhile, poverty, public insecurity, the poor quality of education and health, the low level of sanitation, the daily tragedy of public transport in large cities and many other problems continue to make life hell for the majority of the Brazilian population.

*Sergio Gonzaga de Oliveira He is an engineer (UFRJ) and an economist (UNISUL).

Notes


[1] Sachs, Jeffrey and Warner, Andrew. Natural Resource Abundance and Economic Growth. Center for International Development and Harvard Institute for International Development, 1997

[2] Brunnschweiler, Christa and Bulte, Erwin. The Resource Curse Revisited and Revised: a tale of paradoxes and red herrings. Journal of Environmental Economics and Management, 2008.

[3] Acemoglu, Daron and Robinson, James. Why Nations Fail. Elsevier Editora, Rio de Janeiro, RJ, 2012.

[4] Nelson, Richard. The Sources of Economic Growth. UNICAMP Publisher, Campinas, SP, 2006.


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