Discuss Colliers view of the natural resource trap that countries that are rich in natural resources are less developed than those that are not so well endowed (20 marks)
Sam Larlham 13AMA F585: Development Economics
Discuss Collier’s view of the ‘natural resource trap’ that countries that are rich in natural resources are less developed than those that are not so well endowed (20 marks)
The natural resource trap is an idea proposed by Paul Collier, a development economist, in his book The Bottom Billion. The paradoxical suggestion that countries rich in natural resources are less developed than those that are not is one of great debate, where many variables must be considered.
One factor that supports Collier’s view is to do with government revenue. In many developing economies, there is a high level of government planning and as such, many natural resource exporting companies are nationalised. This means that much of the export revenue generated by the natural resources goes to the government. Equally, in economies where these companies are not necessarily state owned, the government can still generate large amounts of revenue on tariffs paid by importers for the resources. These two aspects mean that the government does not have to tax its citizens, or if so only at a small rate. Whilst this may benefit the disposable income of the domestic population, it can mean that policymakers have less financial accountability to their citizens. This can cause issues with corruption, or mean that fiscal spending is not used in a way that derives maximum benefit for the country, for example by choosing not to improve the education and healthcare systems. This in turn can harm human development, as average life expectancy and mean years of schooling will be low. This can have economic consequences due to a reduced labour force and lower quality of labour respectively, therefore a lack of taxation suggests Collier’s view is correct.
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The second issue of the Natural Resource Trap is that of ‘Dutch Disease’. High export revenues generated by natural resources lead to a current account and balance of payments surplus. The result of this is an appreciation in the country’s exchange rate, as there is a greater demand for the currency. This causes domestic exports to become more expensive to importers, meaning that they are less competitive when compared to other countries. This means that domestic companies outside the primary sector (natural resources) lose revenue as importers buy from elsewhere. The fall in revenue could cause unemployment, as firms must cut workers in order to stay in the market, which in turn would lead to a fall in domestic consumption. The net result of these factors would be a shift left in aggregate demand due to a decrease in total expenditure (falling exports as a whole, falling consumer spending, increased imports (as the currency valuation makes these cheaper)). This would cause a drop in real GDP, meaning that a country’s economic development suffers. This also supports Collier’s View.
The previous two factors link to the third issue with the Natural Resource Trap, which is that of primary sector dependency. The fact that the government can generate large revenue from natural resources means that they are more likely to invest in this industry. This would cause natural resources’ proportion of total export revenue to grow, as the market is expanding relative to others, meaning that the economy is more dependent on these commodities. This is then compounded by the lost international competitiveness in other sectors, which causes there share of total export revenue to fall. The problem with this is that natural resources a subject to a high level of price volatility