The Resource Curse

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Taking a break from social justice issues that have populated this blog in recent months, I want to draw attention to economics, specifically something called the “resource curse”.  It’s a bit of a counter-intuitive phenomena where discovery or development of a valued resource or commodity adversely affects the national economy.  Typically, development of new resources is fantastic for the economy but there are exceptions.  The rise of the United States is in some ways the development and exploitation of new resources such as minerals, crops, timber, and various other industries including and especially the US’s own vast carbon based energy deposits.    What has made the American story, and many such stories, a success is the ability of the American economy to reinvest the profits from the sale of resources back into the economy.  More importantly, it allows America to import goods from abroad.

There are two reasons that the development of a resource might detrimental to an economy. In the eponymous Dutch disease case, the exploitation of a large field of Natural Gas increased the value of the Dutch currency.  The Dutch Guilder became expensive enough that it hampered their domestic manufacturing base.   Dutch Disease might have possibly been avoided if the profits from the Natural Gas had been able to circulate more efficiently through the Netherlands increasing the domestic consumer base enough to support their manufacturing base.

In other places of the world, like Nigeria and many of the Middle Eastern countries, too much of the national resources are put into developing a single commodity. Because the wealth is so highly concentrated, the benefits do not get distributed to the rest of the country. Even if they are, commodity fluctuations can still be highly toxic to an economy so reliant on a single resource. Since the infrastructure, social spending, and other sectors of the economy are sacrificed or ignored to develop a single lucrative resource, the economy declines over time as market fluctuations take their toll. For example, in Louisiana in the 80s went through something very similar.

Other countries such as Norway, UAE, or the state of Alaska, have taken great pains to translate the wealth gained from oil and turn it into real wealth for its citizens. The United Arab Eremites for example, uses their oil wealth to diversify their economy. Dubai has been tuned into a world class tourist destination, and the city is a hub for business, trade, and commerce. Should the oil run out or prices drop precipitously, the economy should still be broad enough to thrive. In Norway, the profits from oil and gas are managed by the government and are used to fund an generous social programs, giving Norwegians one of the highest standards of living in the world. The fund for these programs is large enough to withstand market volatility without compromising the standard of living. Alaska is genius in its simplicity. The state just cuts a check to each of it’s citizens for a portion of the proceeds as well as funding basic infrastructure.

There are healthy and unhealthy ways of managing resources. Perhaps one of the most toxic methods is evident in our own backyards. Rural Appalachia. As the coal mines fail and energy production moves to cleaner and less costly fuel, the mining towns are slowly dying. They’ve turned their frustration and despair into anger at the government which they see as a meddlesome outsider. Instead of developing a new economic bases, they want to double down on a failing strategy. In many ways, Texas resembles a petrol dictatorship with the wealth generated by the oil revenues concentrated in the hands of a few while funding for education, healthcare, infrastructure, and economic expansion are highly curtailed. Texas is already supported by the Federal government despite its oil wealth and with the precipitous decline in oil and gas, people are worried how Texas will weather the current economic climate.

The United States can be thought of like a complex corporation with a highly diversified portfolio and managed board of directors picked by shareholders. The company grows by reinvesting profits from its various divisions back into the company to develop a deeper or better product base. However, if the company becomes over-leveraged or the portfolio in one of its divisions becomes too concentrated the shareholders will suffer. It might be understandable for shareholders to demand high dividends for their investment but not at the cost of failing to invest in a diversified portfolio.

A country is not like a business. It’s a metaphor, but a good one. The US has never faced a competitive environment like today’s global economy. During our rise to power, the industrialized world had been devastated by 30 years of brutal warfare. Now there are dozens of sophisticated economies and dozens of developing economies able to provide free labor. It’s a time for innovation and investment. The US faces a serious risk of running into it’s own version of the resource curse. There are solutions but we won’t find them resting on our laurels and listening to our iPhones.

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