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Collier, P. and Goderis, B. (2009) ‘Commodity Prices, Growth, and the Natural Resource Curse: Reconciling a Conundrum’
Precept 10 states that resource revenues can be used by governments to facilitate private investment for diversification as well as exploiting opportunities for domestic value added. The strategy chosen for doing so can significantly affect growth of the domestic economy. The paper by Collier and Goderis provides a number of insights on some of the potential transmission channels through which growth can be negatively affected as a result of natural resource booms.
Precept 8 states that revenue volatility ought to be addressed through gradually and smoothly building up domestic expenditure and investment from resource revenues. The paper by Collier and Goderis provides evidence on resource volatility. Supporting Precept 8, it is found that resource booms have short term positive effects but long term negative effects which need to be mitigated, through, for instance, establishing a stabilization fund.
Paper begins with the finding that whilst the literature predicts negative effect of commodity booms upon growth, evidence has been shown that such booms significantly raise growth. These findings could be short lasting however. The paper therefore examines data from 1963 to 2003 to consider short and long run effects of commodity prices on growth. In doing so they investigate all the potential causes of the resource curse proposed in the literature. The authors find that no single transmission channel determines whether resources are a curse. However, a combination of private and public consumption, total investment and exchange rate overvaluation accounts for a substantial part (p. 3). They also find that commodity booms have positive short-term but adverse long-term effects. The results support the view that such booms provide incentives for non-productive activities such as rent seeking and lobbying. The authors note, however, that the existence of strong institutions and good government can mitigate the curse and enable positive growth for resource rich countries.
Access the paper here.