Climate Change

The natural resource curse

On average, economies of resource-rich countries do not outperform countries lacking those natural materials. According to Jeffrey Frankel, Professor of Capital Formation and Growth at Harvard’s Kennedy School, this results from undesirable side effects of resource extraction.

A paper by Dr. Frankel was first presented to the International Monetary Fund in 2011. It described The Natural Resource Curse:

Oil, minerals, and agricultural resources can bring great riches to those who possess them. Yet countries that are abundantly endowed with such natural resources often encounter pitfalls that interfere with the expected superior economic performance.

Possibly undesirable side effects include reallocation of production away from the manufacturing sector. The crowding out of manufacturing comes not just via expansion of the natural resource sector itself, but also via expansion of the government and non-traded goods sectors. The artificial inflation of these sectors in turn comes via relative prices (real appreciation of the currency) or government spending, or both.

One interpretation is that this phenomenon is cyclical, with the effects reversed when commodity boom turns to commodity bust.

Another interpretation is that it can be permanent: countries endowed with natural resources more often develop social structures in which autocratic or corrupt political elites finance themselves through physical control of the natural resources.

Meanwhile those governments that lack these endowments have no choice but to develop decentralized, democratic and diversified economies with market incentives that are more conducive to the development of manufacturing.

Examples of the Natural Resource Curse are plain to see. Japan, Korea, Taiwan, Singapore and Hong Kong are rocky islands (or peninsulas) that were endowed with very little in the way of exportable natural resources.

Nevertheless, they achieved western-level standards of living. Many countries in Africa, the Middle East and Latin America are endowed with oil, minerals, or other natural resources, and yet have experienced much less satisfactory economic performance.

…What happens when a depletable natural resources is indeed depleted?

This question is not only of concern to environmentalists. It is also one motivation for the strategy of diversifying the economy beyond natural resources into other sectors. The question is also a reason to save a good share of the rents from exhaustible natural resources, so that future generations do not suffer an exhaustion of total wealth or a diminution in the flow of consumption.

Not included in the Harvard University examination are environmental costs of resource extraction. These have become more important as deadly impacts of climate change accelerate.

Harvard Professor Frankel discusses what is known as Dutch Disease, a phenomenon caused by material upswings in natural resource exports. Possible results:

  • Large appreciation in the national currency.
  • Increase in spending and related debt, especially by governments and utilities funded by consumers.
  • Increases in prices for goods and services not internationally traded, such as housing.
  • A shift of labour, land, and government attention from production of non-resource goods to extraction industries that may appear more attractive in the short-term.
  • Deficits (despite revenue from resource commodity exports), thereby incurring debt that may be difficult to service when the commodity boom ends.

We ought to consider if any of these effects can be seen in this country.

Currency appreciation? While the Canadian dollar has weakened in comparison to the USA, it has strengthened in the past year against currencies of other important trading partners. This makes exports of Canadian services and manufactured goods more difficult to countries other than USA.

Increases in public debt and spending by the BC Government have been dramatic since 2015. The BC NDP would like us to think all this is about COVID-19, but a driving force is the dedication of politicians to facilitate fossil fuel exports. Even the astoundingly expensive Site C project is being constructed primarily to provide energy to gas producers and LNG processors at rates substantially below cost.

Climate change is generational robbery; so are rapid increases in public debt. In British Columbia the two are connected.

Through their dedication to extractivism and deforestation, autocrats and corrupt political elites controlling Canada’s western provinces show little concern about humanity’s long-term survival.

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7 replies »

  1. Great post Norm – quick note though, the ‘legend colour’ for your first bar graph (BC total spending) should be reversed…


  2. It would interesting to see comparison graphs between 2 jurisdictions in this world who have extracted the same resource. It is Alberta and Norway. Population: Roughly the same. Land mass: not that much of a difference. Use of wealth created by resource extraction: No comparison, Norway wins it, hands down. Why would one jurisdiction do so well with their resources and another squander it? Also Norway is light years ahead with climate change action.


  3. I agree with Mike but the spin does not end with resource extraction.

    By letter dated Oct. 28 , 2021, I asked the BC Auditor General a few questions that came from reading an announcement by the AG that a report on accounting for our provincial accounts, including Crown Corporations, was prepared. This report featured notice that included an item of $6 billion of “deferred revenues”. I think that after a year and not being received, these “revenues” become reported “liabilities”.
    Seeking greater detail I tried opening the “report” but encountered an access block; “This site can’t be reached”.
    No reply by AG.


  4. i DO REMEMBER the “Dutch Disease”. Norway avoided it and they have a huge wealth fund.

    Thanks for the laugh regarding showers and fracking. Fracking ought not to be part of resource extraction. I’d prefer our country outlawed it.
    We can live without just about everything except water and air. As they say, you can die without air in 3 minutes, 3 days without water, 3 weeks without food,.

    Most of us have always thought B.C. had enough water to get us through what ever would come along. We have now seen that isn’t true. We have dried up streams and thus salmon are unable to spawn. Farmers are having to rethink watering their crops. This is not a good thing.

    Back in the early 2000s I purchased a book about the politics of water. It had a chapter on the lack of water 10,000 years ago in Southern Vancouver Island. The drought was so severe trees stopped growing.


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