Thursday, April 28, 2011

Day by Day, Rock by Rock: Transforming Mineral Wealth into Economic Development

By Laura Villegas

Recent Graduate, Department of Political Science, Montana State University

There is no pretty way to say this, so I will just say it: I am an optimistic version of a masochist. I find lots of satisfaction in undertaking tasks that involve huge deals of effort. That's why for my political science capstone project I chose to find a solution to a problem that has been puzzling economists and political scientists for over 30 years.

Common sense says that countries that are rich in natural resources can grow faster than countries that lack natural wealth. Well, it turns out that what has happened in the developing world since 1970 is quite the opposite. In general, countries that are well endowed with natural capital have underperformed their counterparts.

This phenomenon is often called the "paradox of plenty" or the "resource curse". I wanted to investigate the mechanisms of transmission of this so-called resource curse and explore ways to avoid it. On top of that I wanted to apply my findings to the specific case of mining coltan in Colombia. Coltan is a very valuable mineral, relatively new to the world and hence highly controversial. I believe coltan has the potential to trigger Colombia's collapse, as it is believed to have done in the Democratic Republic of Congo.

I did not start my project with a question but with a vision. Death, despair, suffering, social injustice, infants dying suffocated in dark mines, women being raped in the fields, militias abusing of rural residents, and corrupted officials smoking million-dollar cigars. It was not a picture of the future, it the Democratic Republic of Congo.

Because on Earth humans are loss averse—I yet have to discover if this behavior persists in the blogosphere—the fear to lose my country to some economic model of development encouraged me to find an escape to fate. My specific research question was: How can the government of Colombia avoid the resource curse and responsibly transform coltan-generated wealth into sustainable social and economic development?

To make a long story short, I found that the resource curse is far less common in developing countries than originally thought. Moreover, the type of resource happens to matter a lot when determining the effects of natural wealth on future development. For example, it is not the same to be rich in forests than to be rich in gold. Obviously, countries rich in the so-called "point-source resources", like gold and diamonds, have had a harder time evading the resource curse, basically because it is a lot easier and much more profitable to smuggle gold than wood. Hence, smugglers and criminals are attracted to the country and set corrupted institutions that deteriorate the very foundations of society.

The key to turn natural wealth into a blessing is to coordinate the efforts of bureaucrats, mining companies, and institutions. First, for society to actually benefit from mineral wealth it must have a well defined set of laws and an adequate institutional framework that can regulate and enforce the laws.

Institutions are social capital creators. They attract certain kinds of personalities into certain activities and further promote particular types of legal, political, historical and cultural relationships. Also, they assign process incentives, and set frameworks of behavior that are fundamental for determining the tone of the legal discourse and for making policy. Moreover, institutions solve the problem of transaction costs and asymmetric information and thus foster economic efficiency and social welfare optimization. Finally, they help private and public entities to minimize the risk and maximize the profits associated with a potential deal. The bottom line is that efficient institutions allow countries to absorb benefits from thriving corporations and healthy states.

To build strong institutions that guarantee accountability and transparency Colombia’s government must privatize its mining sector; consolidate a diverse economy; and promote a healthy political environment.

Second to institutional development is the need to invest mineral revenues in interest generating assets.

In conclusion, the solution to avoid the resource curse is to open the mining sector to private domestic companies and to invest mineral revenues in social infrastructure to improve the quality of human capital and the productive capacity of Colombia's factors of production. In other words, the Colombian government must pass policies that allow the state to secure a sustainable source of revenue and policies that guarantee the fair and efficient distribution of those revenues—given a strong institutional framework.

Maybe the answer is not eccentric, but who says that parsimonious is easy? The fact that I have theory and evidence to support my findings make me feel comfortable about the way I am structuring my worldview and raising my level of awareness about the importance of managing natural resources for in the quest of allowing humans to flourish.

Tuesday, April 19, 2011

Rehberg and Tester: They Ain't Legislators

On Friday, both Senator Tester and Congressman Rehberg's March 31 Quarterly fundraising numbers were released and discussed in the media. Check out the article from the Helena Independent Record here.

Long story short: Both candidates had good quarters. The long story will have to wait until the reports are posted online at the FEC. Once that I have those numbers, I can dig into them more deeply to figure out how each campaign is doing.

In the meantime, I'd like to explore an issue raised by Senator Tester in some recent remarks he made here in Montana. Last month at a fundraising dinner in Helena, Senator Tester ripped Congressman Rehberg for his relatively slim record of legislative accomplishment. Tester said that Congressman Rehberg's record consists of naming a few post offices, and that's about it. The article can be read here.

The bigger point is how should we, as voters, evaluate the jobs that both Tester and Rehberg have done while in Congress. Should we evaluate them by their legislative accomplishments? If so, the record is pretty slim indeed for both candidates.

Using both THOMAS and the Congressional Bills Project, I examined the number of bills Tester and Rehberg have sponsored while serving in the Senate and House, respectively. I also looked to see if those bills passed their respective chambers and was eventually signed into law. For this analysis, I only looked at the bills where Tester and Rehberg were the primary sponsor. The analysis is in the chart below:

Neither candidate is what one might call a stellar legislator. None of Tester's sponsored legislation has signed by the president, and of the 77 bills sponsored by Congressman Rehberg, only four have (and yes, two of those bills are renaming post offices).

Of course, these data need to be placed into some broader context. Using the 110th Congress as a baseline, I looked at the total number of bills sponsored in each chamber and then broke out the average number of bills introduced by member and their success at passing legislation into law.

As one can plainly see, most legislation goes to Congress to die. Very few bills become law, and the average number of bills sponsored becoming law is only 1 in the Senate (close to 2 if you just look at the Democratic majority in the Senate), and less than 1 in the House. The mean number of bills sponsored in the Senate is 36 and only 16 in the House.

If we use these numbers as a guide, both Congressman Rehberg and Senator Tester are less active than the average member in terms of bill sponsorship (although Congressman Rehberg approaches the mean in the 11th Congress). Their inability to pass any of their preferred legislation into law is not surprising either. If you look who was the MOST successful legislators in the 110th Congress, they tended to be more senior, more seasoned, and holders of key instituitonal positions such as committee chairmanships. They also, surprise surprise, tend to come from the majority party. Senator Kennedy successfully sheparded 13 bills to passage in the 110th Congress, followed by Senator Leahy (8), and Senators Biden, Feinstein, and Harkin (7 each). In the House, Congressmen Oberstar and Berman got 8 and 7 of their bills passed, followed by Congressmen Conyers and Kildee (6 each). As you look at those names, the amount of seniority is clear--and this is not surprising at all. The literature on congressional careers (see Hibbing in particular) shows that legislative productivity increases over a member's term in office.

Neither Senator Tester or Congressman Rehberg are particularly senior, and Congressman Rehberg has only now achieved a leadership post as chairman of one of appropriations subcommittees. Evaluting their accomplishments as sponsors of legislation is perhaps not the best approach to figuring out who is doing a better job for Montana. Quite simply, neither are particularly distinguished legislators but we should not expect them to be given their career stage.

As Mayhew (2000) points out, legislating is only half of what members of Congress do. Members of Congress investigate, they take stands, they oppose presidents, they engage in foreign policy discussions, and they attempt to affect the flow of public discourse more generally. In the words of Richard Fenno, members of Congress are not just policy experts. They are constituent servants and they strive to demonstrate to voters that they are in touch or "one of us". Members can chose which aspects of their jobs to highlight to constituents. Perhaps the most useful way to evaluate both Tester and Rehberg is less on their legislative accomplishments, and more on their work as constituent servants and how close they are to the voters of Montana in terms of policy positions. Do they listen? Are they responsive? Do they successfully help Montanans navigate the federal system? And what are they doing to make sure the needs of Montanans are address? All of these questions can and often do have very little to do with legislation.

Thursday, April 14, 2011

Jobs vs. the Environment, Part II

In my last post, I suggested the jobs vs. the environment policy debate and legislative agenda was a false choice and cited a recent paper that demonstrated a positive relationship between economic well-being and environmental quality. Here is what that relationship could look like in Montana.

When we produce basic commodities like wheat, beef, or minerals, global markets set prices; commodity producers are price takers not price makers. Nationally, U.S. cattle producers slaughtered 2.96 million head totaling 2.29 billion pounds in 2010. Montana producers shipped 1,700 head or 1.5 million pounds. A consumer would be hard pressed to differentiate a steak from Chouteau from one raised in Texas because of the way beef is distributed and marketed. As a result, beef producers make far less money that they could. What if we branded our beef as being raised in an environmentally sensitive way and capitalized on Montana’s clean environment, water, and open ranges? The short answer is – producers could make more money on each cow.

There are many niche markets for beef – Lean, Organic, Natural, and Pasture-finished are just a few examples of efforts to brand meat raised and finished in a nontraditional manner. They all base their higher prices on issues of quality. In Montana, we have the advantage that quality is already inherent in our state. For many of our products, the Made in Montana label should be a proxy for “clean and healthy”. Efforts to undermine environmental protections are economically short-sighted and counterproductive to a state economy that could be less dependent on global markets. Our beef market is so relatively small (we are not in the list of the top ten beef producing states), the adjustment could be done in a few years.

This version of economic good tied to environmental quality demands that we need to rethink how we do business. If, as a rancher, your customer is a meat packer, your production will have to conform to industry standards for everything from breed selection to use of antibiotics to yield and quality grades. But, if your customer is an individual looking for lean beef raised and finished on a local family farm, or raised organically, you will be working with a very different production model. This requires new skills and ways of thinking about what and how we produce goods and services. It would require infrastructure and human investment.

The logic can apply to other areas. Montana could adopt a quality management assessment for public policy including not only food but also timber production (i.e. sustainable, low impact to watersheds), predator control (predator friendly wool), tourism (triple bottom line accounting), and manufacturing (energy and water efficient). None of this is revolutionary and examples can be found around the world. Montana’s competitive advantage is that we already have the environmental quality; all we need to do is design an economy that benefits from it.