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.

1 comment:

Ken & Carol said...

"There is no pretty way to say it, so I will just say it:"

I gather that English is not your first language. It might be helpful to ask someone to serve as an editor.

You sound as if you might have some good ideas tucked away in there somewhere. Have you read any of Deidre McCloskey's work?