Monday, June 14, 2010

Natural Resource Curse: How Finding $1 Trillion in minerals could be bad?

In my economic development class I have my students read Paul Collier's book the Bottom Billion. In the book he lays out four traps that lead to country's falling behind. Afghanistan is clearly one of those countries. Of the four traps Afghanistan has a conflict,it's landlocked, and it's small with bad neighbors.

The fourth trap surprisingly to some of my students is having natural resources. Over 1 trillion dollars in minerals deposits were recently discovered in Afghanistan (NY Times Story), how could this be bad. In Collier's book he points to previous research that shows when large natural resource finds happen that governments tend to become even more corrupt. In short with more revenues there is more to steal. The second problem is that natural resource exports make it hard to develop other industries. Once a developing country starts exporting minerals their currency increases in value making their other exports less desirable since their prices will increase internationally with an appreciation in their currency. Once the minerals run out or the price of minerals falls briefly the country doesn't have other industries to take up the slack.

In theory what a country should do is use natural resource money to invest in schools and other industries, but this type of strategy has not been too successful in countries with weak governance.

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1 comment:

rjgitter said...

Glad to see you are blogging again. In terms of the first problem with natural resources, could the Afgan gov't become more corrupt than it already is? Transparancy International has them ranked 179 or 180 in terms of perceived corruption. So, maybe they will now pass Somalia.

Bob Gitter aka Dad