The golden curse

Written By: - Date published: 10:05 am, June 17th, 2010 - 15 comments
Categories: afghanistan, Economy, Mining - Tags: , ,

You know, if we don’t give those mining companies some more free seismic data, rent-free access to our most precious natural environments, and only demand low royalties when they dig up our minerals, we’ll lose them to the lucky country. That’s right, Afghanistan. It’s sitting, quite literally, on a gold mine and it makes ours look like small change.

Under Afghanistan is a one and a half trillion dollars worth of previous undiscovered iron, cobalt, copper and gold deposits, even some of those rare earth minerals, according to the  US Geological Survey (wait, what were they doing surveying Afghanistan….). See the Daily Show’s take:

Anyhoo, before we get too jealous, great windfalls of wealth are actually a bad thing. The WTO has just released a paper on how becoming a ‘rentier state’ (where the economy is dominated by the extraction of resources for export, effectively an economy based on clipping the ticket) can seriously screw a country up:

Volatility in world commodity prices resulting in wild economic swings, permanent crowding out of manufacturing, poor institutions, unsustainably rapid depletion, civil war , and cyclical Dutch Disease.

Look at the countries based on extractive industry, especially those with a rare and high desired resource, and you see a pattern of authoritarian government, extremes of wealth and poverty, and social unrest and conflict – the Middle East and its oil, Congo and it cobalt…

Dutch Disease is named after what happened to the Netherlands when it started producing natural gas. All the exports of the expensive commodity send the currency up, making other exporters uncompetitive and domestic production uncompetitive against imports. The result of big exports of a highly demanded commodity often turns out to be a large current account deficit. Governments tend to spend up the windfall gains, easing the pain for those who have suffered from the high currency but making people more dependent on the State and the State dependent on continued exports and high prices. When the gas ran out, or whenever the price dropped, the Dutch were screwed.

Actually, you have to wonder if we already have a touch of Dutch Disease from the way dairy’s upward pressure on the currency is making it harder for other industries to compete against foreign producers (another 174 freezing work jobs gone this week).

Our institutions are strong enough to avoid the worst of the rentier state trap but if we start extracting a lot more oil and minerals like the government wants, we’re going to need to take steps to avoid Dutch Disease.

How? By copying the Norwegians. They didn’t just use their oil royalties and the dividends from Statoil to replace tax and fund government spending. Instead, they’ve put most of the money into a huge fund that has invested in assets all over the world. By not importing all that revenue into their domestic economy and consuming it now, they’ve stopped their currency getting so high that it destroys other industries. As the oil runs out, they will slowly use the fund to ease the transition of the economy. Basically, rather than going on a consumption spree funded by extraction, followed by a massive hangover, the Norwegians are spreading it out over generations (kind of like what Labour did for the cost of superannuation with the Cullen Fund).

Will we handle our wealth smartly like Norway or will we fail to learn the lessons the Dutch taught us 40 years ago? Either way, at least we’re not Afghanistan, where a natural endowment looks set to be yet another curse.

15 comments on “The golden curse ”

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  1. mickysavage 1
    17 June 2010 at 10:19 am

    Will we handle our wealth smartly like Norway or will we fail to learn the lessons the Dutch taught us 40 years ago?

    Whatever the moneymen who fund the National Party deem to be in their best intersts.

  2. Jim Nald 2
    17 June 2010 at 10:23 am

    I hope our Prime Minister is not for sale.

  3. Lindsey 3
    17 June 2010 at 10:30 am

    Great comment on this on Tumeke – “First we bombed them into the stone age, now we want their stones”.

  4. insider 4
    17 June 2010 at 11:12 am

    Perish the thought we’d have a GDp as high as the Netherlands or a high tech industry, or the art and architecture standards. Nope. Don’t want that disease here, no way, no how

    • Marty G 4.1
      17 June 2010 at 11:30 am

      grow up insider.

      the issue is the economic negative economic effects of Dutch Disease that can be easily avoided by doing what Norway has done. Yup, the Netherlands are richer than us, so is Norway. Doesn’t mean we should repeat the Netherland’s mistakes.

      • insider 4.1.1
        17 June 2010 at 12:26 pm

        MAybe they are only as rich as they are because of those ‘mistakes’? From what I understand it’s qquite difficult to make a direct causal link. Can we prove they would have been even wealthier if they didn’t catch this disease?

        • Bright Red 4.1.1.1
          17 June 2010 at 1:42 pm

          Dutch Disease doesn’t make you rich. That’s why its called Dutch Disease. That’s why the WTO is recommending simple steps to avoid it.

          Managing your resources properly makes you rich, not spending it all in an orgy..

      • Bored 4.1.2
        17 June 2010 at 12:37 pm

        Marty,
        What you have said makes logical sense, so does the feedback from parties pointing out that the financial interests of this country as represented by the Nacts don’t have a long term enough viewpoint, only short term gain for private (and normally international) capital.

        How this plays out is the interesting bit. If you consider that he ‘clever’ Norwegians have invested wisely offshore in a whole heap of countries they will have done so on the prudent basis of repatriating profits and a safe spread against defaults etc. Let’s examine both with regard to the world as it is today and as it will be in the future.

        Repatriating profits is based upon the well tested idea that people outside of Norway do the work adding value to the capital input. The implication is that the world of mobile capital flows and supportable growth rates will continue. The basic premise here is indefinite “growth’ based upon cheap abundant energy supply and a willingness of the taxed populace to allow their financial institutions to stack up future debt (with interest paid from current profit). A highly likely scenario will face Norway (and the rest of us per se) energy crisis blocking growth, and the follow on effect of inability to maintain payment of interest / dividends on invested capital (and more importantly debt). Bankruptcy and national insolvency happens next, Norway loses all it invested.

        A safe spread against defaults in the above scenario every nation is going to be hit with zero / negative growth scenarios. Hidden in your article is the statement “as the oil runs out’. You refer to I think Norwegian oil, as opposed to the effects of “Peak Oil’ which will not be locally uniform but will follow a predictable trend globally. There are no safe havens to mitigate this event as the world is now far too interlinked and uniform in its capital / financial / energy structures. Expect extreme currency volatility, conflict, protectionism, hyper inflation, extreme deflation, currency collapses etc etc. The only “safe’ investment the Norwegians can now make is a local one based upon local sustainability. Investment in local institutions that can carry polities through a serious financial and energy crisis are the only realistic options for any country. This is also the risk faced here in funds (such as the Cullen fund), if a Citibank or similar hits the wall, there goes the fund.

        My point is that any NZ “capital’ generated by oil or other means needs to be used locally to assist the transition to a sustainable low energy future. We need to be investing in local technology and infrastructure rather than allowing what little surplus capital we generate in the near future to be siphoned off to “global capital’. I dont see the Nacts thinking broadly enough to even conceive the real issues, the left too are far to blinded by the current “growth’ based models of economy.

        • Draco T Bastard 4.1.2.1
          17 June 2010 at 1:02 pm

          The only “safe’ investment the Norwegians can now make is a local one based upon local sustainability.

          That’s pretty much true for every nation.

  5. Name 5
    17 June 2010 at 11:35 am

    Up until last week the US and other nation’s troops who were fighting and dying in Afghanistan could at least console themselves they were going through that special hell to protect the Afghan people from the barbarism of the Taliban and denying terrorist groups the territory for training camps from which to assault the west.

    Now they know better.

  6. Mac1 6
    17 June 2010 at 12:48 pm

    Coalition of the Shilling?

    Similar reasons for fighting in Vietnam. Holyoake talked about ‘guns for butter’.