December 12, 2011

BY TAXING OUR OIL CONSUMPTION WE CAN BREAK THEIR CURSE:

Escaping the Oil Curse (Jeffrey Frankel, 12/09/11, Project Syndicate)

Why do oil riches turn out to be a curse as often as they are a blessing?

Economists have identified six pitfalls that can afflict natural-resource exporters: commodity-price volatility, crowding out of manufacturing, "Dutch disease" (a booming export industry causes rapid currency appreciation, which undermines other exporters' competitiveness), inhibited institutional development, civil war, and excessively rapid resource depletion (with insufficient saving).

Oil prices are especially volatile, as the large swings over the last five years remind us. The recent oil boom could easily turn to bust, especially if global economic activity slows.

Volatility itself is costly, leaving economies unable to respond effectively to price signals. Temporary commodity booms typically pull workers, capital, and land away from fledgling manufacturing sectors and production of other internationally traded goods. This reallocation can damage long-term economic development if those sectors nurture learning by doing and fuel broader productivity gains.

The problem is not just that workers, capital, and land are sucked into the booming commodity sector. They also are frequently lured away from manufacturing by booms in construction and other non-tradable goods and services. The pattern also includes an exuberant expansion of government spending, which can result in bloated public payrolls and large infrastructure projects, both of which are found to be unsustainable when oil prices fall. If the manufacturing sector has been "hollowed out" in the meantime, so much the worse.

Even if an increase in oil prices turns out to be permanent, pitfalls abound. Governments that can finance themselves simply by retaining physical control over oil or mineral deposits often fail in the long run to develop institutions that are conducive to economic development.

Such countries evolve a hierarchical authoritarian society in which the only incentive is to compete for privileged access to commodity rents. In the extreme case, this competition can take the form of civil war. In a country without resource wealth, by contrast, elites have little alternative but to nurture a decentralized economy in which individuals have incentives to work and save. These are the economies that industrialize.

Posted by at December 12, 2011 6:15 AM
  

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