Natural Resource Wealth and Economic Performance: Three Channels of Transmission through which Abundant Resources Can Lead to Poor Economic Performance

Three primary channels of transmission through which this occurs are volatility, Dutch Disease effects, and institutions. Volatility is a significant issue in countries with low diversification and a large share of resources in GDP. World commodity prices are extremely volatile, causing large swings in revenues and growth per capita. High volatility and boom-and-bust cycles are detrimental to economic growth, particularly in countries with less-developed financial markets. Research has found that volatility is the core issue of the "resource curse" problem. Cyclical shifts of resources back and forth across economic activities incur costs, particularly transaction costs. Frictional unemployment and incomplete utilization of capital raise costs and reduce productivity. Volatility in commodity prices and revenues in developing countries often leads to macroeconomic and political instability. Monetary and fiscal policy tends to be pro-cyclical, exacerbating the extent of volatility. Resource riches create an incentive to borrow and spend, while booms can undercut political decision-making and create a false sense of security, encouraging wasteful investment and increases in government employment and benefits. Dutch Disease effects refer to the negative adverse spillover effects of booming resource exports. Four major Dutch Disease effects include large inflows of foreign exchange, causing real exchange rate appreciation; windfall revenues leading to huge increases in spending; real appreciation and spending effects influencing relative prices in the economy; and the expansionary and contractionary effects on the economy. The decline of non-resource tradables can have adverse effects on future growth, as tradables are crucial for technical change in the economy. Welfare effects on the economy include gains for firms and workers in the booming sector, as well as government benefits from higher taxes and dividends. However, producers of non-tradable goods and services, including import-competing activities, are the primary losers. Resource dependence has a significant influence on the quality of institutions, which is a major channel through which the resource curse affects growth. Booming revenues can worsen governance, resulting in corruption and policy mismanagement, which undermines growth. Conversely, the effects of a resource boom on the economy are moderated by the quality of institutions. Countries with strong institutions at the start of a boom tend to do better, turning a possible curse into a blessing. Countries with weak institutions tend to fare worse. Mozambique is particularly vulnerable to the adverse effects of the coming resource boom. Expectations regarding the extent of the boom and its impact on the economy are significant. The country's vulnerabilities include volatility, sensitivity of the exchange rate to fluctuations in commodity prices and capital inflows, quality of institutions, and absorptive capacity and non-tradable prices. Early estimates of the mega-projects' contribution to GDP and living standards in Mozambique suggest a significant boost to the economy. However, more recent IMF estimates assume a 50% rise in Sasol, start of coal production by Vale and Rio Tinto, and full capacity by 2020. Projections with new Anadarko and ENI gas discoveries suggest that mega-projects will add another 20% to the IMF-projected GDP in 2020. By around 2020, mega-projects are expected to account for roughly 40 to 50% of GDP, plus capital inflows.