Question

Why might some economists argue that plentiful commodities (natural resources & minerals) might be an economic drag overall? What is your view, as for example regarding Russian oil and other such examples? discus through the article....

Raw materials need not undermine the countries that export them

THE LAMP POSTS in Kliptown, South Africa, do not all stand up straight. One lists awkwardly, laden with cables carrying stolen electricity to a squatters' settlement nearby. Many families in this suburb of Soweto, a formerly black township in greater Johannesburg, are still crammed into makeshift housing. When it is hot outside, the temperature inside is "times two", says one resident, who shares six rooms with 20 others. And when it turns cold, the chill inside is also "times two".

On the other side of the railway tracks the government is investing heavily in Walter Sisulu Square, where in 1955 the African National Congress (ANC) and its allies adopted the Freedom Charter, a statement of principles for a post-apartheid nation. The charter's commitments, written in stone on a monument in the square, include demolishing slums and building well-lit suburbs. They also include transferring ownership of the mineral wealth beneath the soil to the people. The contrast between what the charter says and what the slum itself reveals tells you how broken the system is, says one squatter.

The resources beneath South Africa's soil, including iron ore, precious metals and coal, ought to be an unmitigated blessing. Johannesburg, the city of gold, owes its existence to these riches. Its landscape is still dotted with piles of sandy residue, or "tailings", from mining and quarrying. The industry accounts for over 20% of South Africa's exports and employs over 450,000 people. But it also adds to the volatility of South Africa's economy and the pugnacity of its politics.

Mining and quarrying shrank by 4.7% in 2016, then rebounded, growing by 4.3% year-on-year in the first half of 2017. This improvement partly reflects stronger growth in China, which consumes almost half of the world's coal, 30% of its gold jewellery and over 40% of its steel. But the industry's economic prospects remain hostage to its political fortunes.

Like any industry, mining must offer sufficiently rewarding pay and profits to attract the capital and labour it requires. Unlike other industries, however, mining tends to generate excess returns or "rents" on top of that. Bosses, workers and politicians are then tempted to squabble over the division of those rents, sometimes to the detriment of the sector as a whole. This kind of economic volatility and political bitterness are two of the more troublesome "tailings" from resource wealth, not only in South Africa but in many emerging markets. In 11 of the 24 countries in MSCI's benchmark equity index, resource rents exceeded 5% of GDP between 2011 and 2015. That qualified them as "resource-rich", according to the World Bank. The rents of all 24 members taken together also amounted to about 5% of their combined GDP.

Many of these resource-rich economies have gone through a twin-peaked or "M-shaped" cycle since the mid-2000s. Their commodities sector (as a proportion of GDP) peaked on the eve of the financial crisis in 2007, plunged, then rebounded between 2008 and 2011 and faltered again after 2014. The first drop reflected a collapse in demand following the global financial crisis. The second one was more complicated. A slowdown in Chinese commodity purchases played a part, especially in the case of coal and construction-related resources such as iron ore. But in the case of oil, a rise in supply (and projected supply) was more important. The boom in tight oil and shale production in America prompted OPEC, the oil exporters' cartel, to pump more crude to defend its market share. Cheap energy, in turn, cut the cost of agricultural production and dampened demand for biofuels, leading to lower prices for grains and soyabeans.

It is not easy to cope with a commodity cycle of this magnitude, driven by a boom in demand in the world's second-biggest economy, then a supply boom in the biggest. In the face of these global forces, emerging economies can resemble the squatter's house in Kliptown: their economies run twice as hot when commodity markets warm up, and twice as cold when the temperature drops. But although resource-rich economies cannot entirely escape the ups and downs of global commodity cycles, they can do a lot to moderate them. By containing the upturns, they can cushion the downturns. The key to this lies not in the mining industry itself, but in a country's central bank and finance ministry. Resource-rich economies need equally resourceful macroeconomic policies.

One of the best examples is Chile. Its fiscal rule curbs government spending when the copper price exceeds its long-term trend, as judged by an independent committee of experts. During good times, fiscal restraint makes room for mining to boom without unduly squeezing the rest of the economy. During bad times, it leaves scope for fiscal easing to offset the damage.

Chile's fiscal benchmarks were better calibrated than the rule Russia introduced in 2008 (and overhauled in 2013). Rather than allow an independent committee to estimate the long-term oil price, Russia used a backward-looking average. According to the IMF, that resulted in a benchmark oil price of $85 a barrel in 2016 when prices had already fallen to $42.

Russia was forced to abandon its fiscal rule in 2015. By then the country's central bank had also given up trying to defend the rouble, allowing it to fall in line with the price of crude. At the time Russia's devaluation was humiliating. But a cheaper exchange rate can be a godsend for an oil exporter when the price of crude drops. Russia's diminished currency kept the rouble value of oil revenues steady. And by boosting Russia's competitiveness, it helped to offset the damage that lower oil prices inflicted on the country's trade balance. Unemployment is now lower than it was in 2013, when oil prices were around $100 a barrel.

Having survived the M-shaped commodity cycle, resource-rich emerging markets can hope for an easier script in the years ahead. China's growth has stopped slowing and OPEC production has stopped rising. The cartel decided in November 2016 to cut production by over 3% to 32.5m barrels per day (a decision matched by restraint from 11 other oil producers, including Russia). America, meanwhile, has become an "unwitting swing producer" of oil, in the words of the Economist Intelligence Unit, a sister company of The Economist. When crude prices drop below $45 a barrel, shale producers withdraw, pushing the price back up. When prices rise above $56, America's nimble operators invest in new rigs, pushing the price back down. So another bout of commodity-price volatility should not scupper the emerging-market recovery.

The economic instability and political division sometimes associated with natural resources have caused some economists to think of them as a curse, not a blessing. In a seminal paper published in 1995, Jeffrey Sachs and Andrew Warner, two economists then both at Harvard, found that economies dependent on resource exports grew more slowly than others not so blessed.

But economic thinking on this issue is also prone to division and swings in sentiment. Several researchers have questioned whether the resource curse is real or just a statistical illusion. The seminal Sachs-Warner study, they say, may be marred by reverse causality: rather than resource dependence leading to slow growth, it could be the other way around. This is because the two authors calculate resource exports as a proportion of GDP, so anything that lowers GDP will mechanically increase resource dependence by their measure, creating the illusion of a causal link from resources to growth.

Economists may have missed the blessings of natural resources because they were looking in the wrong place. Oil, gold, copper and other endowments may add to the level of GDP but not its growth rate. Imagine, for example, a $100bn economy growing at 1% a year. Suppose it suddenly discovers a big platinum deposit, which yields a steady additional income of $100bn, year in, year out. That would double the country's GDP to about $200bn, much to the benefit of its people. But it would also halve the country's growth rate, because now half of this $200bn economy is growing at 1% and the other half not at all.

Graham Davis of the Colorado School of Mines calls this phenomenon "resource drag". In South Africa the mining and quarrying industry has been growing more slowly than the economy as a whole since 1980, dragging down South Africa's overall GDP growth by about 0.4 percentage points. But having both the resources and the drag is still better than having neither.

Patricio Meller of CIEPLAN, a Chilean think-tank, reckons that economists have been biased against natural resources ever since Adam Smith, who witnessed impressive advances in pin-making but comparative stasis in agriculture. Even in Smith's day that was a mistake, says Mr Meller. After all, Britain's industrial revolution owed a lot to coal-mining.

Mr Meller sees the natural resources in his country as a platform for technological innovation. Many of the lorries that serve Chile's mining industry, for example, are remotely controlled by people sitting in an office in Santiago, over 1,000km away. Indeed, the combination of technologies--big data, end-to-end sensors, analytics--now being applied to advanced manufacturing could also be applied to mining and agriculture.

The application of new technologies to commodities may alleviate whatever curses natural resources can bring. But their application to manufacturing industry is raising a different fear in labour-rich emerging markets. As industrial machines become more sophisticated, will they increasingly replace industrial workers? And if fewer jobs are on offer in metal-bashing and clothes-making, who will employ them?

Block quote: Economists have questioned whether the "resource curse" is real. Rather than resource dependence leading to slow growth, it could be the other way around

Answer 1

There was rapid decrease in the prices of oil during the second half of 2014 in russia whuch people of russia celebrated . this decrease had an impact in various ways. these issues that is decrease in oil price may effect different countries in different ways. Some countries go through economic backlash due to decrease but in some countries the imort of oil increases , there will be more import than export and hence low prices are preffered when doing more buying than selling . countries with benefits from cheap oils are usually the developed ones.

In united states the export is really low compared to iys import and hence tis benefits them . it has greater purchasing power because less income is spent at gas pumps.

In russia the case is totally different when oil prices drops it suffers greatly. the oils and gas is responsible for the 60 % of its export.and provides more than 30% of GDP in 2015 russia had the lowest purchasing power parity along with ukraine. PPP effects living standards . Russia receives less economic benefit from lower pump prices than US s it is the net importer of almost everything except oil and vodka .

Now when it coes to south africa, as we know that environment provides us water , land and minerals this also effects the development of a country. stats has developed many environmental economic accounts for south africs . they are energy which is produced by coal,crude oil, gas, hydro,etc. minerals and fresheries.