Natural Resources and Development Strategy after the crisis: useful (but flawed) new World Bank paper

February 18, 2010

     By Duncan Green     

The World Bank’s influential PREM (Poverty Reduction and Economic Management Network) team has a new series of topical notes, pulling together its research on breaking issues (they’ve obviously been reading the literature on using research for influence – rehashing existing research at the right moment for policy makers is one of the most effective forms of influencing). It’s called ‘Economic Premise’ (geddit?). Very welcome idea, but the premises behind the first issue are a bit patchy.

Issue number 1 is entitled ‘Natural Resources and Development Strategy After the Crisis’ and starts with the data.  ‘It is notable that, while commodity prices fell sharply from their peak in 2008 with the onset of the global recession, they generally remained much higher than previous recession lows, often as high as in 2005–07, a period of robust world growth. Furthermore, prices have also rebounded commodity pricessmartly over the course of 2009.’  [see graph]

The paper then addresses four main issues:

1.  How dependent are developing countries on primary commodity exports?  ‘Although declining, commodity or natural resource dependence remains a fact of life for a majority of developing countries. Commodities still comprised a little over 60 percent of the merchandise exports of the average developing country in the middle part of this decade [presumably they mean the last one], although this was down from over 90 percent in the late 1960s.’

2. What is the outlook for primary commodity prices? ‘In the 1950s the famous Prebisch-Singer thesis argued that real primary commodity prices (for example, relative to manufactures prices) displayed a long-run declining trend. [But] based on econometric study of long time series, the present consensus appears to be that real commodity prices do not display any permanent trend or drift over time.’

3. Is there a natural resource “curse” (or blessing)? ‘The short answer is “no” or rather “it depends.” Natural resources are “neither curse nor destiny”… negative long-run growth effects are mostly related to oil and minerals —concentrated “point source” resources that can easily become the object of rent-seeking and redistributive struggles (including armed conflict). On the other hand, there is little evidence of negative growth effects related to high prices for agricultural commodities, which are generally more open to competitive entry. Second, high oil and mineral prices mostly have a negative impact on long-run growth in exporting countries with bad governance. They have a significant positive impact on growth in exporters with good governance. This finding suggests that continued high commodity prices in the next few years could provide valuable resources to accelerate economic and social development in commodity exporting countries with good policies and governance.’

At this point alarm bells started to ring for me. Natural resources and governance are not independent variables – the interesting question is the impact of natural resources on governance itself. Countries are not born with either good or bad governance, they evolve, not least because of the influence of ‘money coming out of the ground’. How will Ugandan governance fare when its new oil finds come on stream this year? The Bank (or at least PREM) seems stronger on the economics and data than on the politics.

But that is nothing compared to this paper’s blind spot on environmental constraints. An entire paper on commodities, including agriculture, in which the only reference to climate is ‘investment climate’ is really quite an achievement. Might climate change not just have a bit of an impact on the future supply of commodities? And nothing on natural resource exhaustion either. Long term investors have largely accepted that oil production will peak, probably this decade, and then fall away. But in this paper the happy world of unlimited natural resource usage lives on. Extraordinary. Other bits of the Bank are doing good work on climate change, but it doesn’t seem to have reached the authors. Deep breath and back to point 4.

4. What policies can help poor countries best manage commodity resources for development? A fairly standard set of policy prescriptions:

a) Deal with governance through transparency, as in the Extractive Industries Transparency Initiative, backed up by citizen watchdogs. Not a bad thing (after all, we NGOs developed the ideas behind the EITI as Publish What You Pay, before Tony Blair nicked and rebranded the idea), but hardly a game changer.

b) Set up Natural Resource Funds to put money aside during booms and smooth out the impact of price swings on government revenues.

c) Don’t spend all the money on consumption and wages. Better in low income countries ‘to devote a larger portion of resource revenues to high-return public domestic investments, leading to higher growth and, ultimately, a higher value of consumption than under the permanent income strategy.’

For natural resource wonks, this last point is more significant than it seems. The authors think the standard advice, known as the ‘permanent income approach’ to natural resource fiscal management, doesn’t go far enough, and want governments to spend more.