Why might some economists argue that plentifulcommodities (natural resources & minerals) might be an economicdrag overall? What is your view, as for example regarding Russianoil and other such examples? discus through thearticle....
Raw materials need not undermine the countries that exportthem
THE LAMP POSTS in Kliptown, South Africa, do not all stand upstraight. One lists awkwardly, laden with cables carrying stolenelectricity to a squatters' settlement nearby. Many families inthis suburb of Soweto, a formerly black township in greaterJohannesburg, are still crammed into makeshift housing. When it ishot outside, the temperature inside is "times two", says oneresident, who shares six rooms with 20 others. And when it turnscold, the chill inside is also "times two".
On the other side of the railway tracks the government isinvesting heavily in Walter Sisulu Square, where in 1955 theAfrican National Congress (ANC) and its allies adopted the FreedomCharter, a statement of principles for a post-apartheid nation. Thecharter's commitments, written in stone on a monument in thesquare, include demolishing slums and building well-lit suburbs.They also include transferring ownership of the mineral wealthbeneath the soil to the people. The contrast between what thecharter says and what the slum itself reveals tells you how brokenthe system is, says one squatter.
The resources beneath South Africa's soil, including iron ore,precious metals and coal, ought to be an unmitigated blessing.Johannesburg, the city of gold, owes its existence to these riches.Its landscape is still dotted with piles of sandy residue, or"tailings", from mining and quarrying. The industry accounts forover 20% of South Africa's exports and employs over 450,000 people.But it also adds to the volatility of South Africa's economy andthe pugnacity of its politics.
Mining and quarrying shrank by 4.7% in 2016, then rebounded,growing by 4.3% year-on-year in the first half of 2017. Thisimprovement partly reflects stronger growth in China, whichconsumes almost half of the world's coal, 30% of its gold jewelleryand over 40% of its steel. But the industry's economic prospectsremain hostage to its political fortunes.
Like any industry, mining must offer sufficiently rewarding payand profits to attract the capital and labour it requires. Unlikeother industries, however, mining tends to generate excess returnsor "rents" on top of that. Bosses, workers and politicians are thentempted to squabble over the division of those rents, sometimes tothe detriment of the sector as a whole. This kind of economicvolatility and political bitterness are two of the more troublesome"tailings" from resource wealth, not only in South Africa but inmany emerging markets. In 11 of the 24 countries in MSCI'sbenchmark equity index, resource rents exceeded 5% of GDP between2011 and 2015. That qualified them as "resource-rich", according tothe World Bank. The rents of all 24 members taken together alsoamounted to about 5% of their combined GDP.
Many of these resource-rich economies have gone through atwin-peaked or "M-shaped" cycle since the mid-2000s. Theircommodities sector (as a proportion of GDP) peaked on the eve ofthe financial crisis in 2007, plunged, then rebounded between 2008and 2011 and faltered again after 2014. The first drop reflected acollapse in demand following the global financial crisis. Thesecond one was more complicated. A slowdown in Chinese commoditypurchases played a part, especially in the case of coal andconstruction-related resources such as iron ore. But in the case ofoil, a rise in supply (and projected supply) was more important.The boom in tight oil and shale production in America promptedOPEC, the oil exporters' cartel, to pump more crude to defend itsmarket share. Cheap energy, in turn, cut the cost of agriculturalproduction and dampened demand for biofuels, leading to lowerprices for grains and soyabeans.
It is not easy to cope with a commodity cycle of this magnitude,driven by a boom in demand in the world's second-biggest economy,then a supply boom in the biggest. In the face of these globalforces, emerging economies can resemble the squatter's house inKliptown: their economies run twice as hot when commodity marketswarm up, and twice as cold when the temperature drops. But althoughresource-rich economies cannot entirely escape the ups and downs ofglobal commodity cycles, they can do a lot to moderate them. Bycontaining the upturns, they can cushion the downturns. The key tothis lies not in the mining industry itself, but in a country'scentral bank and finance ministry. Resource-rich economies needequally resourceful macroeconomic policies.
One of the best examples is Chile. Its fiscal rule curbsgovernment spending when the copper price exceeds its long-termtrend, as judged by an independent committee of experts. Duringgood times, fiscal restraint makes room for mining to boom withoutunduly squeezing the rest of the economy. During bad times, itleaves scope for fiscal easing to offset the damage.
Chile's fiscal benchmarks were better calibrated than the ruleRussia introduced in 2008 (and overhauled in 2013). Rather thanallow an independent committee to estimate the long-term oil price,Russia used a backward-looking average. According to the IMF, thatresulted in a benchmark oil price of $85 a barrel in 2016 whenprices had already fallen to $42.
Russia was forced to abandon its fiscal rule in 2015. By thenthe country's central bank had also given up trying to defend therouble, allowing it to fall in line with the price of crude. At thetime Russia's devaluation was humiliating. But a cheaper exchangerate can be a godsend for an oil exporter when the price of crudedrops. Russia's diminished currency kept the rouble value of oilrevenues steady. And by boosting Russia's competitiveness, ithelped to offset the damage that lower oil prices inflicted on thecountry's trade balance. Unemployment is now lower than it was in2013, when oil prices were around $100 a barrel.
Having survived the M-shaped commodity cycle, resource-richemerging markets can hope for an easier script in the years ahead.China's growth has stopped slowing and OPEC production has stoppedrising. The cartel decided in November 2016 to cut production byover 3% to 32.5m barrels per day (a decision matched by restraintfrom 11 other oil producers, including Russia). America, meanwhile,has become an "unwitting swing producer" of oil, in the words ofthe Economist Intelligence Unit, a sister company of The Economist.When crude prices drop below $45 a barrel, shale producerswithdraw, pushing the price back up. When prices rise above $56,America's nimble operators invest in new rigs, pushing the priceback down. So another bout of commodity-price volatility should notscupper the emerging-market recovery.
The economic instability and political division sometimesassociated with natural resources have caused some economists tothink of them as a curse, not a blessing. In a seminal paperpublished in 1995, Jeffrey Sachs and Andrew Warner, two economiststhen both at Harvard, found that economies dependent on resourceexports grew more slowly than others not so blessed.
But economic thinking on this issue is also prone to divisionand swings in sentiment. Several researchers have questionedwhether the resource curse is real or just a statistical illusion.The seminal Sachs-Warner study, they say, may be marred by reversecausality: rather than resource dependence leading to slow growth,it could be the other way around. This is because the two authorscalculate resource exports as a proportion of GDP, so anything thatlowers GDP will mechanically increase resource dependence by theirmeasure, creating the illusion of a causal link from resources togrowth.
Economists may have missed the blessings of natural resourcesbecause they were looking in the wrong place. Oil, gold, copper andother endowments may add to the level of GDP but not its growthrate. Imagine, for example, a $100bn economy growing at 1% a year.Suppose it suddenly discovers a big platinum deposit, which yieldsa steady additional income of $100bn, year in, year out. That woulddouble the country's GDP to about $200bn, much to the benefit ofits people. But it would also halve the country's growth rate,because now half of this $200bn economy is growing at 1% and theother half not at all.
Graham Davis of the Colorado School of Mines calls thisphenomenon "resource drag". In South Africa the mining andquarrying industry has been growing more slowly than the economy asa whole since 1980, dragging down South Africa's overall GDP growthby about 0.4 percentage points. But having both the resources andthe drag is still better than having neither.
Patricio Meller of CIEPLAN, a Chilean think-tank, reckons thateconomists have been biased against natural resources ever sinceAdam Smith, who witnessed impressive advances in pin-making butcomparative stasis in agriculture. Even in Smith's day that was amistake, says Mr Meller. After all, Britain's industrial revolutionowed a lot to coal-mining.
Mr Meller sees the natural resources in his country as aplatform for technological innovation. Many of the lorries thatserve Chile's mining industry, for example, are remotely controlledby people sitting in an office in Santiago, over 1,000km away.Indeed, the combination of technologies--big data, end-to-endsensors, analytics--now being applied to advanced manufacturingcould also be applied to mining and agriculture.
The application of new technologies to commodities may alleviatewhatever curses natural resources can bring. But their applicationto manufacturing industry is raising a different fear inlabour-rich emerging markets. As industrial machines become moresophisticated, will they increasingly replace industrial workers?And if fewer jobs are on offer in metal-bashing and clothes-making,who will employ them?
Block quote: Economists have questioned whether the "resourcecurse" is real. Rather than resource dependence leading to slowgrowth, it could be the other way around
