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.