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Natural Resources and the Washington Consensus

Shanta Devarajan's picture

In a recent interview on the Canadian Broadcasting Corporation, I reacted to statements by Patrick Bond on Africa’s export of raw materials and on structural adjustment policies. I said that the problem with natural resources was not that Africa exports them, but that many African governments have not used the revenues from these resources productively. On structural adjustment, I said that policies followed by the better-performing African countries over the last 15 years were quite similar to those of the Washington consensus, but the difference was that these policies emerged from a domestic political consensus rather than being imposed from abroad. 

Patrick has responded in a blog post, accusing me of “schizophrenia…mischievousness…[and] bizarre claims.” In order to hear what others have to say, I reproduce my response below.

 

Patrick: 

Thanks for bringing the discussion to the blogosphere, where we can communicate directly rather than through a CBC radio interviewer.

On your first point, we need to distinguish between accounting exercises, such as those in the World Bank’s book, Where is the Wealth of Nations, and measures of economic welfare. Measures of genuine savings deduct the amount of a resource that has been depleted from regular savings to account for the reduction in natural capital. This deduction does not by itself indicate whether human welfare, which is what we are all interested in, has gone up or down. The reason is that, with any natural resource, there is an optimal rate of depletion that maximizes economic welfare, and that rate is typically not zero. So the relevant question for signaling directions of welfare is whether the current rate of depletion is above or below the optimal rate. To see this starkly, consider two countries with the same endowment of a natural resource, and no other source of production. One country extracts all of its resources in one year, while the other depletes at an optimal rate so that the resource lasts for many years.  Clearly welfare is higher in the second than in the first. But the level of genuine savings in both countries is the same (at zero). Going from simple examples to the real world, countries like Norway and Botswana also have lower genuine savings than regular savings, but one doesn’t normally think of them as countries where people are suffering.

In short, while Where is the Wealth of Nations is a carefully done piece of analysis, it is incorrect to say that it provides evidence of “looting” or even of the resource curse. The latter has much more to do with how governments have used resource revenues. In too many African countries, these revenues have been spent on unproductive public investment projects, which is why growth has been anemic and poverty reduction even slower. This is the problem we are working on, including with initiatives like the Extractive Industries Transparency Initiative and the Natural Resource Charter.

On your second point, I would first note that not all the growth in Africa over the past fifteen years has been from resource extraction. Twenty-two non-oil-exporting countries (home to a third of the African population) experienced higher-than-four-percent average annual growth between 1998 and 2008. Furthermore, if you look at the economic policies these countries followed, they included fiscal and monetary stabilization—median inflation in 2005 was half what it was in 1995—more open trade regimes, and relaxation of some of the most prohibitive regulations in the economy. While other factors, including increased external resources (aid, debt relief, remittances, and private capital flows) and a buoyant global economy played a role, it is hard to escape the conclusion that the economic policies pursued by these African governments contributed significantly to their economic performance during the last fifteen years. To be sure, the policies were not the same across countries, and they varied in their timing and sequencing. But this corroborates my point that the policies, while consistent with the Washington consensus, were tailored to countries’ circumstances because they emerged from a domestic political consensus.

Shanta