The resource curse is really a curse of government
The resource curse is really a curse of government
Why do resource-rich countries grow slower than others and why is it the government's fault (again)?
Cocoa futures have been on an absolute tear this year, as inordinately rainy weather has punished cocoa crops and decimated harvests. The Bloomberg [Archive.ph] story provides a window into the pressures farmers face living under the resource curse, compounded by government intervention. In the case of Ghana and Ivory Coast, for example, farmers are not going to be benefiting from the increase in prices as forward agreements have been locked 12 months in advance by the government on their behalf. This mismatch of price and supply leaves most of the riches in the hands of intermediaries and commodity traders, with no real recourse for increasing the farmer take beyond reneging on commercial agreements.
The story of government intervention obscures the other, underlying, story of the resource curse in Ghana and how it is spreading unabated throughout the country. Ghana has the (mis)fortune of being blessed with many valuable natural resources beyond Cocoa Beans, including Gold and Rubber. Farmers are then incentivized to shift their production factors to the nearest available resource that does not face the constraints of the Cocoa Bean market, further exacerbating the supply crunch in Cocoa Bean deliveries. In this case, know-how and expertise in Cocoa Bean farming is lost to first-time Rubber plantations - a resource curse hurting an already cursed resource.
In “Escaping the Resource Curse and the Dutch Disease?”, Erling Røed Larsen (2006) explains that resource-rich countries can face one or both of two macroeconomic evolutions following the discovery or exploitation of a new vein of natural resources.
The Resource Curse describes, more broadly, the phenomenon whereby resource-rich countries tend to grow more slowly. Dutch Disease is a more specific term to the phenomenon whereby non-resource sectors of the economy contract rapidly to shift into the resource sectors of the economy. These terms describe combinations of two drivers, the factor movement effect and the spending effect.
The factor movement effect occurs when resource extraction and related industries experience attractive returns to capital, and therefore bring capital and labor to it at the expense of other sectors of the economy. Why would you mill grain or weave carpets when you could chop Cocoa Beans off a tree and earn more instead? The danger with factor movement is that intangible value in the shrinking sectors atrophy and may be lost forever.
The spending effect relates more closely to the aggregate inflow of new revenues into the economy from the sale of commodities. This occurs when foreign currency inflows from selling resources are converted into domestic currency and spent in the economy, driving up domestic currencies, increasing prices and making exports uncompetitive. For a time, Luanda in Angola claimed the top spot of most expensive cities in the world in the 2010s for a similar reason, combined with decimated local production after a protracted Civil War, forcing most of the consumption to be through imports.
As an interesting counterexample of another African resource-rich economy, Botswana, has grown at an incredible clip, albeit in a completely different region and with slightly different export sectors (Diamonds in Botswana vs Gold and Cocoa Beans in Ghana). Botswana still seems to have some variety of Dutch Disease, in the sense that the overwhelming proportion of export revenues are generated through essentially diamond sales.
However, overall fiscal discipline and aggressive savings of resource revenues have prevented the typical increase in rent-seeking that many resource-rich countries fall prey to, and allowed broader economic expansion.
Another example of an economy that avoided this pitfall is Norway. In "Escaping the Resource Curse and the Dutch Disease?", Larsen explains the comparative success of Norway relative to its neighbors despite the siren temptation of oil revenues. It’s still clearly an oil-dominated country but its growth and prosperity outstripped its neighbors (without oil) despite starting from a less favorable position.
Perhaps one of the most important factors for why Norway’s economy has not fallen prey to the resource curse is centralized wage formation. Norway has a system of collective bargaining, similar to Switzerland, where industry unions and employer guilds or associations (essentially employer unions) bargain with each other on the desired level of wages for a given industry. These types of negotiations typically find ways to consider broader welfare objectives for all parties and are heavily consensus driven. Neither Norway nor Switzerland have any meaningful tradition of labor strikes or labor disruption. Crucially, the government is categorically not involved in wage formation processes and neither country has a government-regulated minimum wage1.
The other major factor is that the spending effect is mitigated by all of the oil revenues essentially being sucked up into a sponge. In Norway’s case, the oil industry is entirely nationalized, and all revenues accrue to the government. However, incredibly, these revenues are all directed to a sovereign wealth fund so there is no corresponding boom in aggregate demand from increased spending as a result. Whatever windfalls do accrue to the government are deployed in fiscally disciplined policies such as debt paydown and not into new increases in aggregate demand in domestic currency. Finally, the fund has a commitment device wherein the government is only allowed to spend the returns, not the principal, of the fund.
There are other reasons why positive spillovers from oil extraction are higher in Norway than with other resource extraction industries in other countries. The process is technically advanced and requires substantial know-how in engineering and research to function at optimal and profitable levels, so a lot of positive spillover is created in the rest of the economy to offset the decline in spillover from smaller manufacturing sectors.
Despite the preponderance of the government in the spending factor, what is surprising is how little it actually ends up featuring. Interestingly, Norway escapes the resource curse because the government either does not get involved (collective bargaining) or when it does, it limits its involvement as much as possible (sovereign wealth fund).
Botswana appears to be mimicking many of the same choices, with its own sovereign wealth fund (Pula Fund) for diamond revenues. However, it also shows the contra example to governance relative to Norway’s fund, as the Pula Fund does not have clear restrictions on how the government could use it. So, reliably, the government ended up using it.
To come back to Ghana, some solutions present themselves from looking at Norway’s example. The difficulty is that Cocoa Bean processing and grinding does not have the same level of spillover effects as high-tech oil extraction. There is not much benefit to Ghana’s economy of adding higher-order resource processing capabilities when these capabilities are commodified activities. It is very unlikely they would be able to successfully compete on price with existing capacity in other countries. Conceivably, they could try and cartelize exports and force buyers to purchase only processed cacao nibs or chocolate mass but would likely push Cocoa Bean cultivation into other geographies instead. What is clear is that the living income differential (LDI) and government collective bargaining has not only not helped farmers, but in these market conditions actively hurt them. Promoting collective bargaining by farmer collectives rather than by single government mouthpieces would be a start.
The role of the government so far has been highly deleterious to Cocoa Bean farmers, as they have been consistently unable to maintain their promise of guaranteeing a living wage by centralizing bargaining with international buyers. Compounding the effect of inefficiency is the impact of crass corruption and weak institutions, which allows the conversion of export revenues into very specific domestic spending. Visibly, very little of this domestic spending is happening out of the farmer’s pockets.
As with most situations, it turns out that not involving the government at all leads to positive outcomes (centralized wage bargaining). And where it does get involved, the most positive outcome occurs when the government is involved the least (keep resource revenues abroad and commit an inability to touch the fund).
Some cantons, such as Geneva, do have a government-regulated minimum wage. Exactly as you might expect, it also has a higher unemployment rate than the average for Switzerland (3.7% at time of writing, versus 2.0% average)