The Bottom Billion: Trap #2

Recently, I began recounting the four traps in The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It, by Paul Collier which is about the very poor on our globe. Mr Collier notes four traps keeping the very poor where they are. In this essay, below the fold, I will continue with trap #2 and the notions (less counter-intuitive notions here … just one) about that particular trap, #2 being the natural resource trap.

I had never before heard, not being “in the trade” and trade in this case being economics, of the “Dutch disease.” At least heard of anything like this outside the context of Elm trees. The Dutch disease refers to the effects of the opening of the North Sea oil fields on the Dutch economy. As oil money poured in, the effect was to strengthen the Dutch currency. This in turn weakened all other industry in the country which had to compete on world markets but was hampered by their strong currency. Case in point:

Take Nigeria in the 1970s. As oil revenue built up, the country’s other exports — such as peanuts and cocoa — became unprofitable, and production rapidly collapsed.

Another sensible problem with the natural resource trap is that a boom of funds when a market goes “hot” of a natural resource encourages wasteful spending (and borrowing) by the government. In a country with a small economy to begin with this is catastrophic when the market collapses or returns to a normal state. This can be devastating. Mr Collier notes that in the 1980s in Nigeria again, the oil boom (spending and borrowing) led to approximately halving the Nigerian economy in the aftermath.

The money natural resources Mr Collier terms “rents.”  Resource rents make democracy malfunction.

Statistically this is born out. Autocracies outperform democracy in terms of economic growth in the presence of rents surplus, “and the effects are large.”

In the absence of natural resource surpluses a fully democratic polity outperforms a despotic autocracy by around 2 percent per year. By the time natural resource rents are around 8% of national income, the growth advantage has been eliminated. Beyond this, the net effect of democracy is adverse. Taking a country with resource rents worth 20 percent of national income, the switch from autocracy to intense electoral competition would lower the growth rate by nearly 3 percent. [emphasis mine]

Democracy has two sets of features, one in which democracy limits how power is acheived the other set on how it is used. Both are undermined by rents.

In electoral politics rents distort democracy in that the aim of election is to get, in the most cost effective manner, votes. This is normally done by promising and delivering public services and infrastructure for example. In the presence of large resource rents, this is done by directly buying voters from the public till (in extreme but very real cases).  The “tragedy is” that patronage works. Short term advantage gaming wins.

The use of power is distorted by resource rents because they radically need to tax, which then reduces the drive for oversight. The rest of that story is an elaboration of the consequence of that sentence.

The unforunate consequence of this is one wonders … is autocracy the answer? Because growth is the key factor desperately needed by this crowd. In the conflict trap, ethnic diversity was not statistically relevant. However, in an autocracy it is. Autocracy, such as China, only works well (or at all) when the country, like China, is not ethnically diverse.

It is also well to note that the bottom billion are not the only countries likely cought in the resource trap, Russia, Venezuela, and many states in the Middle East are very likely mired in it.

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