The main arguments within the resource curse hypothesis

As noted above, six central arguments are outlined below, with contrasting views summarised in each case.

1. The finite character of natural resources: This argument states that primary

production based on non-renewable resources – as in the mining industry – cannot contribute to sustainable long-run economic growth because of the finite nature of the natural resource base on which production depends.

However, it has been argued that the exploitation of non-renewable resources can be progressively extended through exploration, technological progress and investments in appropriate knowledge. This has been the case for the mining industry in the US, Canada, Norway, Chile and Australia among others (Meller, 2002; Ramos, 1998; Wright and Czelusta, 2002).

2. Deteriorating terms of trade: This argument, states that resource-abundant

economies face continuing declines in their terms of trade (Prebisch, 1959). This means that the price of primary products relative to manufactures in international markets appears to have been on a long-run decline. The explanation of this trend can be summarised as follow: It is assumed that demand for primary products is income and price inelastic. If there is productivity growth that shifts out the supply curves then a rise in income resulting from that productivity growth will shift out the global demand curve, but less so for primary products whose demand is less income elastic. As a consequence, economies with a comparative advantage in primary products would grow less rapidly than other economies. For the relative price decline of primary products not to occur, given the differences in income elasticity, the slower growth in the global demand for primary products would need to be matched by slower growth in their global supply. But even then, resource-rich economies, and specifically those whose primary sectors are relatively dominant, would still be growing slower than others because of slower aggregate output growth. The relative price of primary products would decline even more if there was relatively faster growth in their supply, for example because of faster productivity growth in primary sectors. In that case the lower price elasticity of demand for primary products would contribute too. This

greater price decline means that real incomes of resource-rich economies still grow more slowly than those of resource-poor economies, despite the greater output of primary products.

This argument has been contested by showing that the supposed decline of commodity prices over the early part of the 20th century (the case used by Prebisch) was probably misleading (Maloney, 2007). It was rapidly decreasing transport costs that made commodities appear relatively cheaper in London, where they were usually measured. The reverse trend would have been observed if prices had been measured at the port of origin. In addition, the demand curve for commodities in the first half of the 20th century was significantly different from that in the second half (US Geological Survey Minerals Yearbook, 1998). Additionally, over the past decade, mainly driven by the entry of China into the global market, the pattern of relative prices between commodities and manufacturing has been changing. The prices of some commodities have been increasing and the prices of many manufactures have been falling. These price changes may reverse the decline in the terms of trade of commodity producers (Kaplinsky, 2006).

3. The Dutch disease: According to this argument, the large exports of

commodities or raw materials can generate increases in the real exchange rate of the currency, which can lead to both an increase in manufacturing costs and increases in the sector‟s wages, attracting labour from other industries and raising wages. Furthermore, repeated booms and busts of raw materials prices tend to increase exchange rate volatility, thus reducing investment in the tradable sector (Gylfason, 2001).

However, despite the possible difficulties generated by the Dutch disease, some countries have used their mining activity as a basis for the development of a mining equipment manufacturing sector, the growth of which was export- oriented. Different countries have shown different trajectories of mining equipment sector development. This can be illustrated by Figure 3.1. This shows the level of mining equipment exports from seven countries in 1987 and those countries‟ metallic mining production level with respect to the eight most important metals (copper, iron ore, gold, nickel, zinc, silver, lead, bauxite).

Behind this cross sectional comparison three different development trajectories can be identified.

The first trajectory lies behind the observations for Canada and the US. These countries had developed a mining equipment exporting sector along with the expansion of their metals production. It is argued that the growth of mining interacted with the development of a mining equipment industry and its export growth (Duhart, 1993). Australia might also be considered in this group, although in the period up to the 1980s the development of the mining machinery industry and exports was not as closely linked to the scale and growth of the mining industry as in the other two countries.

The second trajectory was associated with the three countries in the top left- hand quadrant of Figure 3.1 – Japan, Sweden and Finland. These are countries that in earlier years had followed paths like the US and Canada, evolving a symbiotic relationship between their mining and mining equipment industries. However, by the 1980s their domestic mining industries had declined substantially, leaving the legacy of strong, internationally competitive mining equipment industries.

Figure 3.1: Metallic Mining Production and Mining Equipment Export in Seven Countries (1987)

Source: Based on Duhart (1993) and USGS (2008).

US Finland Canada Japan Sweden Australia Chile 1 10 100 1,000 10,000 0 5 10

Metallic Mining Production [Billions US$]

M in in g Eq u ip men t Exp o rts [T h o u san d s U S$ ] 1 2 3 4 6 7 8 9 US Finland Canada Japan Sweden Australia Chile 1 10 100 1,000 10,000 0 5 10

Metallic Mining Production [Billions US$]

M in in g Eq u ip men t Exp o rts [T h o u san d s U S$ ] 1 2 3 4 6 7 8 9

The third type of trajectory is illustrated by the Chilean case. Here there was a significant level of mineral production but almost no development of mining equipment exports. In other words, the growth of the mining industry, with Chile becoming the world largest copper producer during the late 1980s, had not been linked to a corresponding development of the mining equipment industry (see the discussion of capital goods exports in Section 3.8)

This raises interesting questions about why Chile appears to demonstrate a different pattern from the other two groups. In particular, had the historical conditions associated with the symbiotic relationship in the case of the first two groups changed by the time of the growth of the mining industry in Chile? For example, is the process of technological learning that is now needed for effective entry to the equipment industry now much more complex and demanding than it was earlier? Are there now much greater barriers to entry? Alternatively, is there a key issue about the absolute scale of the mining industry needed to stimulate the emergence of an equipment supply sector? Also, since this focuses on the services sector, not equipment production, how do these issues apply in the case of the development of an internationally competitive services industry in association with the growth of a domestic mining industry?

4. Lower opportunities for technological progress: Adam Smith (1776) first

argued that, compared with primary production, manufacturing industries produce more externalities or spillovers that reinforce economic growth. Also Marshall (1890) suggested that there are lower possibilities for technological progress in primary industries, because manufacturing is subject to increasing returns while primary production faces decreasing returns. More recently, some authors have argued that manufacturing industry leads to more learning effects, which result in higher productivity growth in the economy as a whole, and therefore an economy specialised in primary products would benefit less from externalities inherent in manufacturing production (Sachs and Warner, 2001). Other authors argue that the important issue is not what is produced, but how (Anderson, 1997; Lederman and Maloney, 2007). Particularly important, it is suggested, is whether primary production is embedded in an enabling

environment for adopting technologies, producing knowledge and commercialising knowledge-based products over the long term. Much of the discussion of that issue has focused on developing new industries „downstream‟ from natural resources. The research reported here focuses on „upstream‟ industries and on knowledge-intensive services in particular.

5. Rent seeking behaviour: The argument on this point states that significant

natural-resource rents, under conditions of badly defined property rights, imperfect markets and lax legal structures, may create opportunities for rent- seeking behaviour, distracting resources away from more socially fruitful economic activity. Such behaviour can lead to corruption in business and government, therefore distorting the allocation of resources and reducing both economic efficiency and social equity (Auty, 1994).

These types of rent are called „exogenous rents‟ and are a consequence of having access to particular endowments (e.g. abundant natural resources) that arise from barriers to entry created by parties external to the value chain. In other words, the barriers are generated outside the firm, and the firms that profit from them do not make any significant entrepreneurial effort or investment, and the rents are available only to a selected group of producers (Kaplinsky, 2001, 2005).

But rents do not arise only from having privileged access to natural resource endowments. They may arise from having other resources such as capability, knowledge or some form of endowment that others do not possess. In particular, sustained growth requires rents that arise from the command over production processes and product technology, which enables firms to build barriers to entry (Kaplinsky, 2001, 2005). These more developmentally constructive types of rent are called „endogenous rents‟ and they include the following:

Technology rents: producers command scarce technological capabilities with regard to processes and products;

Human resources rent: producers have a relatively more skilled labour force than their competitors;

Organisational rents: producers have particular organisational and managerial skills, which create superior command over organisation and logistics;

Marketing rents: producers possess better marketing capabilities and/or establish brand name prominence in major markets;

Relational rents: producers have inter-firm relationships that may involve the management of production linkages with other firms, the development of strategic alliances, or the management of relations with clusters of small and medium sized enterprises.

In principle, these types of rent can be created in and around natural resource- based industries like mining. However, in order to profit from endogenous rents firms need to maintain a deliberate effort and investment in acquiring the capabilities that are the sources of these rents. In addition, endogenous rents are dynamic, the barriers to entry can diminish and others may have access to the resources or capabilities that generate the rents, which also push to keep a continuous deliberated effort to upgrade the capabilities these rents are based on.

6. Distortions at home: Abundant natural resources may create a sense of

security, which leads governments to lose awareness of what is needed to encourage economic growth, including free trade, bureaucratic efficiency, institutional quality and sustainable development (Gylfason, 2001).

It is possible to take an alternative perspective on these six arguments, one that puts technological learning at the centre of the debate. An outline of this learning-centred perspective is presented below.

3.5.2 An overview of alternative arguments: steps towards a learning-