Are Resource-Abundant Economies Disadvantaged?
Seminar Paper 97-03
Posted: 25 Nov 1997
Date Written: March 1997
Empirical evidence suggests that economies well endowed with natural resources relative to other factors of production have grown slower than other economies over the long term. This paper explores why that might be so and whether their fortunes might be changing with the increasing demand for environmental regulations. Proposed explanations for their relatively poor growth record, such as declining terms of trade and rising restrictions to primary product markets abroad, on closer inspection are unconvincing. The most likely reason is their own distortionary policy regimes, whose recent reforms in some esource-rich economies are already yielding growth dividends. Why it should be that their policy regimes had been more distortionary than those of other economies, and why they are currently being reformed in some but not other resource-rich economies, are moot points which have been addressed only in a cursory way to date. The paper also examines the impact of the greening of world preferences and politics on the prospects for resource-abundant economics. While this development has the potential to boost resource-rich economies more than others, there is a considerable risk that the environmental policies adopted (including at the global level) will be far from first-best, so thwarting this potential opportunity. Looking for free-lunch policy outcomes should be a priority: removing rather than adding a policy could improve the economy and the environment simultaneously. The example at the multilateral level of removing coal import barriers as a means of lowering carbon emissions is but one reform that would help energy exporters directly as well as the rest of the world. More typically, though, there is an economic cost to improving the environment. In those cases, care is needed to avoid excessive regulation, taking into account indirect as well as direct effects. The example of quarantine restrictions may well be a case where Australia's interests are being harmed by its own heavy regulation - a point economists have largely ignored. Lowering some of its excessive quarantine import restrictions may well be justified economically on the grounds that consumers and exporters would gain more than import-competing producers might lose - even in cases where an industry is eliminated by import competition in the wake of higher disease-prevention costs. Such reform would help Australian exporters indirectly in three ways: via the standard general equilibrium effects of reduced protectionism at home, via the exporting of economically enhanced risk assessment procedures that ultimately could lead to less-excessive quarantine restrictions to our export markets abroad, and via the strengthened position of Australia's trade negotiators who could argue in bilateral talks against excessive barriers to our potential export markets without appearing hypocritical.
JEL Classification: O13, O40, Q11, Q17
Suggested Citation: Suggested Citation