United Nations DESA Working Paper No.93, June, Victor Polterovich, Vladimir Popov and Alexander Tonis (2010)

The paper finds that in resource rich countries, domestic fuel prices are lower and energy intensity of GDP is higher. It also finds that in resource rich countries, real exchange rate is higher, accumulation of human capital is slower and institutions are worse.

A country endowed with large quantities of natural resources has a competitive advantage and grows faster than countries with no or little resources. However, previous research has shown that between 1960 and 1990 the per capita incomes of resource poor countries grew two to three times faster than those of resource-rich countries. Therefore the relationship between resource abundance and economic growth is not obvious. This paper aims to examine the facets of a typical resource abundant country and establish the basic characteristics and stylized facts and relationships.

The authors used the relevant data from the World Development Indicators. They used the main indicators of resource abundance, namely, (i) share of fuel in exports (%) 1960-1999, (ii) production of oil and gas per capita in 1980-1999, tons of oil equivalent and (iii) proven reserves of oil and gas per capita in 1980-1999, tons of oil equivalent. As preliminary statistics, the authors found that the correlation between reserves and production is high, while the correlation between exports, production and reserves per capita is low. The reason could be that fuel capita consumption is different for rich and poor countries and richer countries would consume more energy per person.

The authors then test how resource abundance has an impact on macroeconomic indicators. Firstly for inflation, they find that higher per capita fuel production is associated with lower inflation after keeping the level of income constant for the year 1975. An increasing share of fuel / resource exports also had a favourable impact on inflation. However, when investment climate is included as another variable alongside per capita fuel production, the positive impact of higher per capita fuel production on inflation is moderated. This might mean that increased resource revenues do not automatically lead to low inflation; if the investment climate and institutional capacity is weak, then low inflation may not be achieved. A similar result was found for budget surplus – keeping the investment climate variable constant, the higher the share of fuel in exports, the greater is the budget surpluses of nations.

In case of foreign direct investment (FDI), the relationship between FDI and resource exports and production is found out to be positive – FDI is higher in fuel producing and exporting countries. However the relationship between reserves of oil and gas per capita and FDI is negative.

The authors then explain why many resource rich countries might perform poorly – low quality of institutions might be a factor. They point out that resource abundance might result in rent seeking behaviour, where influential parties under weak institutions might lobby to capture monopoly privileges of extraction and distribution. Another reason stated was that the outflow of resources from secondary manufacturing into the resource sector hampers the accumulation of human capital, which weakens the institutional quality further.

The authors then test for the factors determining the institutional quality and find that export of fuel has a negative impact on the quality of institutions. They explain this result by saying that if institutions are poor to begin with, allocation of resources would be unequal and this would undermine the institutional capacity and inhibit growth further. With respect to human capital, it was found out that under weak institutions, high production of fuel does not improve the quality of education further.

The researchers then set out to find whether resource-rich countries have low domestic fuel prices and higher real exchange rates, and in the process find out some stylized facts about these countries. They find that such countries with poor investment climates have lower domestic fuel prices alongside a high share of fuel in exports. Another related finding was that energy efficiency is positively associated with energy prices – the lower the energy prices are, the lower is the efficiency of energy use. The authors then discover that low domestic fuel prices impact growth positively, via increased competitiveness of domestic producers having access to low energy prices; and negatively via low energy efficiency, i.e. energy wastage. They conclude that the first effect predominates and hence countries with low energy prices should have higher growth rates. In terms of real exchange rates, the findings reveal that fuel exporting countries tend to accumulate more foreign exchange reserves, which overvalues their exchange rates. Thus the researchers find that the export of fuel leads to the appreciation of the real exchange rate (RER) and are faced with the “Dutch Disease”.

The authors conclude the paper with some policy recommendations. They posit that while it is difficult to improve the quality of institutions of resource rich countries in the short run, it is possible to switch to an industrial policy where the RER is kept low to promote the exports of high technology and then gradually raise the price of domestic fuel prices to increase the efficiency of energy use. They stress that a typical resource rich country can combat the resource curse by carefully managing appropriate industrial policies.