Tuesday, May 29, 2012

The on-going debate on natural resources and development

by Erwin Bulte


May 28, 2012

The so-called resource curse suggests that resource booms are bad for development. One reason put forward is that fighting over resource rents leads to armed conflict. This column argues the evidence identifying resources as a cause of conflicts is weak and that the policy focus should be on institutional reform, rather than on resources per se.

Prices of natural resource commodities have increased a lot in recent years. While the current commodity price index is not as high as it was during its peak in the spring of 2008, commodity prices have increased by 10% over the past 6 months, by 56% over the past 5 years, and by no less than 249% over the past 10 years. For certain specific commodities, price hikes are even larger. In 2002 a single DVD recorder cost as much as a hundred tons of iron ore. The current exchange rate is about one ton of iron ore per DVD recorder.

Several factors explain the reversal of fortune for miners –– conditions have been favourable both on the supply side (e.g., market power in the mining industry) and on the demand side (e.g., economic development in India and China). An important question concerns the degree to which these economic gains trickle down beyond the shareholders of international mining companies. Do high commodity prices translate into enhanced prospects for peaceful economic development for poor resource-exporting countries? This turns out to be a contested issue.


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