Mary Jane O’Leary
IBEI BARCELONA
Masters in International Relations
Political Economy of Development
Prof. José Fernández Albertos
April 2009
Introduction
Myanmar and the Democratic Republic of Congo are two of the world’s poorest countries yet both boast large reserves of natural resources. Coltan, a metallic mineral used in computer electronics, including mobile phones, can be found in abundance in the forests of the Congo while huge gas reserves have been located off the coast of Myanmar in the Arakan Sea. One country is ravaged by civil war and invasions by foreign armies and the other under a represseve military dictatorship since 1962. Both countries experienced spurts of growth at different times in the last three decades but in general terms natural-resource-led development has failed. This paper aims to explain the different economic and political problems that these countries face in developing their economies; to highlight the causal effects between natural resources and growth and to explore some of the possibilities for solving these problems. Taking as a starting point the asumption that investment is key to growth this paper draws on several authors (Sala-i-Martin, Subramanian 2003), (Collier 2004), (Sachs 2006), (Acemoglu et al 2004) to argue that natural resources affect institutions, and it is in turn institutions that affect growth. In expanding the theory of institutions the social conflict view is employed to account for the different institutions in place in the two countries.
Price volatility and Dutch Disease
The fluctuations in prices of commodities on the international market make it difficult for government's who depend largely on natural-resource revenue to formulate long-run budgets and plan for the future. Often governments overspend in times of plenty and later find it difficult to slash such spending even as a fall in prices cuts their revenues (Collier 2007:40). In the case of Myanmar, China’s growing need for energy has endowed the gas exporter with a reliable source of revenue, but energy resources are susceptible to shocks on the market. Myanmar could find itself falling victim to demands for cleaner, renewable sources of power in the future. Furthermore, the potential for growth in Myanmar is more deeply impacted by the diversion of revenues into sustaining the regime’s political power rather than by simply a short-sightedness in policy formation and public spending (Sala-i-Martin, Subramanian 2003).
Dutch Disease is the second major link between natural resources and low growth. Dutch Disease occurs when a positive shock, experienced by the increase in price of a commodity, causes the real exchange rate to become overly appreciated (Sala-i-Martin, Subramanian 2003). This in turn leads to a contraction of the tradeable sector. As wealth increases from the sale of the natural resource, so to do consumer preferences for non-tradeable goods, this demand drives up non-traded prices, including non-traded production costs and wages, this then reduces profits on traded sectors such as manufacturing, and the entire growth process is thwarted (Sachs, Warner 2001:833).
The spike in demand for coltan when the Playstation II was in production illustrates how resource-abundant countries are vulnerable to this. The DRC’s other export activities (usually manufacturing) become less competitive and domestically there is redirection of other resources in society into producing this more lucrative export. This is called the crowding-out effect (Collier 2007:39). In many cases it is these alternative, non-resource traded goods sectors of a developing country’s economy that could potentially provide the best sources of growth, primarily through technological progress and innovation (Sala-i-Martin, Subramanian 2003: 5). In 2000 the price of coltan jumped from $30 a pound to $380 a pound on the international market. In the DRC the obvious lure of such large potential for profits drew away from other activities and further exacerbated the conflict as the stakes were now dramatically higher.
The shift of workers to this sector is just one aspect of this ‘factor movement’, capital is also diverted by the government away form developing other export goods and funnelled into this one lucrative sector. In the case of the DRC, this temptation extended beyond state boundaries and attracted the interest of neighbouring Rwanda and Uganda. Both governments were accused of funding militias in smuggling coltan into their own countries. In Myanmar, where the gas business is believed to be worth 30 percent of total exports, it is suspected that the military will fulfill its gas contracts with China through seizure of land and forced labour, again funnelling production factors to this one export (Palekar 2007).
Institutional Quality
A third causal observation between natural resources and low growth provides a more systematic and robust explanation of the links between the two. In short the hypothesis asserts that natural resources effect economic growth through institutional quality (Sala-i-Martin, Subramanian 2003: 8). In the literature on the topic, institutional quality is measured by variables such as the rule of law, accountability, effectiveness of government, control over corruption and political stability (Sala-i-Martin, Subramanian 2003: 6). The hypothesis here states that resources generate rents which in turn lead to “rapacious” rent-seeking, this is called the voracity effect (Sala-i-Martin, Subramanian 2003: 4). In their research Xavier Sala-i-Martin and Arvind Subramanian argue that lobbying for allocation of the “massive” rents earned by oil and minerals is what undermines the quality of the political and economic institutions (Sala-i-Martin, Subramanian 2003: 7).
In Michale L. Ross’ article we can see the far-reaching and tragic consequences of such a theory for Africa. On the institutional-quality view the violent conflict in the DRC is an ‘extreme manifestation of institutional collapse’. In a Security Council press release the UN acknowledged the “effective collapse” of state structures in the Republic. And while ethnic divisions and relations with Rwanda and Uganda play a significant role, there are few aspects to the conflict that are untouched by struggles to control natural resources. Rent-seeking in its extreme form is manifested in the Congo through predatory and violent struggles to control coltan mines and their profits. Profits from the mines allow rebel groups to become better armed and funded, and thus attract more and more young, unemployed men to their ranks. If it can be argued that natural resources did not cause the complete collapse of the structures of the Democratic Republic they are indeed making recovery and development of a functioning state almost impossible.
In linking natural resources and institutional collapse to growth in the DRC we see that the continued lawlessness is a primary contributing factor to the destabilisation of property rights. To explain fully the institutions argument we can see that insecure property rights frighten off investors, and thus stifles growth.
Property rights
Before moving on we need to look at how property rights as an institution effect growth. If property rights are made insecure by the presence of an autocrat, or a myriad of decentralised rebel groups, who cannot plausibly commit to refrain from expropriating land or capital to maximise their own rents, investors and entrepreneurs are discouraged from investing in the economy (North, Weingeist 1989). This feeds into the idea that property rights that advantage a broader section of society create incentives for a larger group to constrain power-holders who might attempt to expropriate rents, it also means that with wider distribution of resources there are less rents to be acquired from any one expropriation, and thus create a more conducive climate for investment (Acemoglu, Johnson, Robinson, 2004: 2). The reversal of fortunes for countries that were colonised by Europeans illustrates this point. Thus the institutions that define redistribution are what effect long-run growth.
This is where we see the main divergences between the DRC and Myanmar. While the DRC is ravaged by political instability, violence and lawlessness, essentially weak or non-existent institutions, the military junta in Myanmar represents a strong state, (if seriously lacking in scope). In comparison to the DRC could this situation provide a more stable atmosphere for investment with a stronger rule of law? After all, Myanmar experienced a 10.4% growth rate in the first 10 months (April-January) of the 2008-09 fiscal year and is notorious in its swift repression of social uprisings. Applying Acemoglu’s (et al.) argument that “economic institutions encouraging economic growth emerge when political institutions allocate power to groups with interests in broad-based property rights enforcement” (2004: 2) seems paradoxical as Myanmar has experienced steady growth rates since 1975 and has been under the control of this narrow elite since 1962. So how do we explain this?
Social Conflict View
The argument here asserts that the military junta must necessarily sacrifice potentially higher growth rates implicit in broad-based property rights in order to retain political power. This perpetuates the poverty and political weakness of the majority and ensures rents for the junta into the future. Thus Myanmar may have had a growth rate of 10.4% last year but it was ranked 135 out of 179 countries measured on human development in 2006 (UNDP.org 2006: Human Development Reports), or 162 out of 178 countries sorted by their gross domestic product (GDP) at purchasing power parity (PPP) per capita (Factmonster.com 2009). The theory is called the social conflict view and rests on the idea that institutions are chosen by groups that control political power, these groups then chose the economic institutions that will maximise their own rents into the future regardless of whether these institutions can maximise the total possible surplus and social welfare (Acemoglu et al. 2004: 36). How does this theory then interact with natural resources in Myanmar?
Using the assumption that natural resources assert a drag on growth through institutional quality we can assume the discovery of gas off the coast of Myanmar will somehow impede growth by distorting institutions conducive to growth. And, if we assume that the political institutions in Myanmar are a result of a social conflict in which the more powerful group won out, then we can expect to see this group shape economic institutions concerning the production and sale of this gas to further entrench its political power and wealth into the future rather than to maximise growth.
As we have seen Myanmar has awarded China long-term access to its two largest offshore natural gas fields. Natural gas from Myanmar also generates about 20% of electricity in Thailand earning it $2.8 billion from the government in Bangkok (Asia Time 2004). In a project involving a consortium of South Korean and Indian companies Myanmar is expected to earn another $800 million a year from this year on (Asia Time 2004). Considering the domestic population is so poor a plausible option would be to subsidise and use the gas internally for the benefit of the Burmese people, however, the junta has chosen the option that earns it more rent and is selling rights to extract the gas to foreign investors in the region. This puts the junta in a propitious position. Considering Asia's growing need for energy, its natural resources now afford the military a new more powerful position on the world stage. Demands for the junta to respect human rights and to allow for a democratic transition have become less vociferous. As Thai officials lament: ‘If we don’t buy the gas someone else will’ (International Herald Tribune 2007). The rents earned on new contracts have also allowed the military to expand its armed forces. So it is clear, economic institutions chosen by those in power secure their wealth and political ascendancy into the future, natural resources effect this dynamic by perpetuating or even strengthening the narrow-based property-rights system like that installed in Myanmar. And as we have seen this situation stifles potential for a higher rate of growth. While it may appear that gas creates a high rate of growth, the potential for maximising this growth is sacrificed in favour of securing rents and power in the hands of the politically powerful minority. This argument does not preclude susceptibility to Duth Disease or price volatility, but rather explains how institutions of ‘low quality’ are chosen over those that may maximise growth.
Conclusion: Political reforms
In their study on oil and Nigeria Xavier Sala-i-Martin and Arvind Subramanian propose a radical plan to overcome the resource curse by redistributing oil revenues directly to the population on an annual lump-sum basis. They proposed that this money would in turn feed back into consumer spending, savings and small-business investments, boosting the potential for over-all economic growth in the economy. The reasons why this plan is unlikely to be implemented in Nigeria holds for the DRC and is intrinsically linked to the social conflict theory. Diffusing rents would take power away form those that currently wield it, and considering the possibility that governance based on rent-seeking does not attract the most altruistic politicians then the proposal is unlikely to be considered as a plausible policy in either country. If the state institutions in the DRC were somehow supported by perhaps the international community and it could manage to exert some scope across the economy then the government could consider redirecting some of the rents earned on coltan into diversifying manufacture at home. Supporting manufacture for exports (though not through total subsidisation) would allow at least for some technological progress. Minimum rates of return on investments could also be imposed to save money on public projects, as is the case in Botswana (Collier 2007: 50). However, if institutions are the primary cause behind higher or lower growth then there is a lot of work to be done in the Republic.
Similarly in the case of Myanmar it is clear that the system of checks and balances inherent in democratic institutions are conspicuous in their absence. Unrestrained, the military autocracy continues to buttress its regime and hamper growth. Although there is no straight forward empirical data linking democracies to growth, the redistributive measures would at least provide a fairer starting point for discussing economic policies, and with more interests represented, less opportunity for expropriation by a small elite. Again however, the question arises, why would the junta allow for a transition to democracy that would, by its very nature divert their rents to the majority? In looking at Myanmar we could perhaps argue that the trickle down effect of gas-induced growth may eventually enable the poor to overcome their collective action problem, rise up against the regime and force a transition. But this belies another theory, the initial institutions theory, if the economic institutions already in place do not even allow for this trickle-down effect then how can growth empower the poor to overcome the junta?
In any analysis of the solutions to the resource curse an examination of role of the international community is vital and comments by the Thai officials hint at a major problem in international relations when it comes to this topic: the prisoners dilemma. It would be better all round for foreign governments not to support despotic regimes or violent rebel groups, but if one government doesn’t do it they fear others will. The only response to this can come from the people of the developed world. Considering the massive gap between the quality of life in the West and the desperate situation in the world’s poorest countries, it would not require a huge drop in our standard of living to boost theirs by a large amount. The billions earned by oil companies and their handful of beneficiaries needs to be redistributed among the worlds poor, if we in the West could put down our iPods for a few minutes we could think about overcoming our own collective action problem, after all, we already have democracy, why not use it and demand fairer conditions for the people who provide us with the coltan to play the music and the oil to drive to PC World to buy it.
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