An abundance of natural resources is both an opportunity and a challenge for developing countries. A number of resource-rich, low-income countries receive amounts of foreign aid that are similar to or larger than their actual or potential revenues from natural resources. A new policy research working paper by Octave Keutiben and me develops a growth model to look at some ways in which the donors may help governments of such countries to use their resource revenues productively and minimize the magnitude of risks created by resource rents. The paper’s key conclusion is that making aid countercyclical helps to achieve higher economic growth, and so does conditioning disbursements on enhancement of public capital.
The extent to which local communities benefit from commodity booms has been subject to wide but inconclusive investigations. This paper draws from a new district-level database to investigate the local impact on socioeconomic outcomes of mining activity in Peru, which grew almost twentyfold in the last two decades. The authors find evidence that producing districts have better average living standards than otherwise similar districts: larger household consumption, lower poverty rate, and higher literacy. However, the positive impacts from mining decrease significantly with administrative and geographic distance from the mine, while district-level consumption inequality increases in all districts belonging to a producing province. The inequalizing impact of mining activity, both across and within districts, may explain part of the current social discontent with mining activities in the country, even despite its enormous revenues.
Read the working paper to know more.
Tackling poverty and inequality through appropriate growth strategies is at the core of the World Bank’s mission. In my view, achieving sustainable and inclusive growth depends on a well-functioning market and to a significant extent also the degree to which government policies facilitate private firms’ upgrading and diversification into industries that are aligned with an economy’s comparative advantages.
To smooth the way and allow this dynamic process to function optimally, we need to answer many questions that are unique to different types of economies. For example, how is it possible to successfully tap a developing country’s comparative advantage when it is rich in resources and has an abundant labor supply?
As surprising as it may seem, there is a deep dark secret at the core of the System of National Accounts (SNA) – the accounts used by Finance ministries worldwide to measure economic performance. The numbers don’t add up. We can see this in the table below, showing the net worth of Brazil and its composition in 2005. The final two lines in the table report a measure of Brazil’s net national income and the implicit rate of return on wealth (the ratio of income to net worth). The return to Brazil’s produced and natural capital is over 18%! As good economists, we should all be investing our pension funds in Brazil. Why? Because financial market data tell us that the long run real rate of return across the broad range of assets averages only about 5% a year.
|Table – Net worth and net national
Income (NNI) in Brazil, 2005, $million
|Net financial assets||-117,221|
|Implicit rate of return||18.2%|
|Source: The Changing Wealth of Nations
World Bank (2011)