Mozambique's Coming Natural Resource Boom: Expectations, Vulnerabilities and Policies for Successful Management

This development is welcome news for a low-income country with a substantial proportion of the population below the poverty line. However, it also foreshadows some economic management problems ahead. Research has documented the "natural resource curse," a pattern where low-income countries with large natural resource endowments experience inferior rates of growth compared to countries lacking such endowments. This phenomenon has been observed across a wide sample of nations. Three channels of transmission are highlighted through which abundant resources can lead to poor economic performance: volatility, Dutch Disease effects, and institutional weaknesses. Volatility is a key cause of the "resource curse" problem. World commodity prices are extremely volatile, and countries with low diversification and a large share of resources in GDP suffer large swings in revenues and growth per capita. Such high volatility and boom and bust cycles are harmful to economic growth, particularly where financial markets are less developed. Empirical research finds that volatility is a major contributor to the "resource curse" problem. Dutch Disease refers to the negative adverse spillover effects of booming resource exports. Four major Dutch Disease effects are emphasized in research on the resource curse: (a) large inflows of foreign exchange cause real exchange rate appreciation; (b) windfall revenues cause a huge increase in spending; (c) real appreciation and the spending effect influence relative prices in the economy, causing expansionary and contractionary effects; and (d) real appreciation and the spending effect create incentives for labor and capital to move into the booming sector and non-tradables production. The decline of non-resource tradables can have adverse effects on future growth, as tradables are crucial for technical change in the economy. Additionally, there are welfare effects that cause a redistribution of income in the economy, favoring firms and workers in the booming resource sector. Mozambique's economic record is particularly vulnerable to the adverse effects of the coming resource boom. The country's economy is heavily reliant on natural resources, and its financial markets are less developed. To mitigate the risks associated with the resource boom, policymakers must prioritize domestic investment, direct distributions to citizens, and coping with volatility. Dealing with Dutch Disease effects, such as real exchange rate appreciation and the decline of non-resource tradables, is also crucial for successful management of the resource boom. The author of this study, Tyler Biggs, acknowledges the contributions of several individuals, including Mr. Waldemar F. de Sousa, General Manager of Bank of Mozambique, and Mr. Antonio S. Franco, Economic Advisor to the SPEED project in Mozambique. Their input has been invaluable in providing data and insights that inform the analysis presented in this study. The study's findings are based on empirical research and data analysis, which highlight the potential risks and challenges associated with Mozambique's coming natural resource boom. By understanding these risks and taking proactive steps to mitigate them, policymakers can help ensure that the country's economic growth is sustainable and equitable.