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Natural Resources and Trade Policy

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The orthodox neoclassical theory considers natural resources to be a potential source of income and accentuates the positive role of natural resources in economic development. Despite the potentially beneficial impact of natural resource wealth on economic prosperity, empirical research has shown that natural resource-abundant economies tend to grow at a slower pace than natural resource-scarce ones. This paradox of plenty has been a conceptual puzzle to many, but empirical evidence has given rise to the hypothesis of the curse of natural resources.

Standard trade theory suggests that shifting resources from regions of relative abundance to regions of relative scarcity has the potential to improve efficiency and increase welfare. Yet welfare comparisons are complicated by dynamic factors, the exhaustibility of natural resources, and pervasive market failures such as imperfectly competitive markets. For instance, faster depletion can result from free trade of fish that suffers from an open-access problem and poorly defined property rights. In this case, the standard result of welfare gains from open trade may break down, at least for one country. The theory emphasizes that policy interventions in natural resource sectors can be justified on welfare grounds by the specific features of natural resources. Several studies have established a negative impact of natural resource endowment on economic growth. Others have taken a step further by investigating the reasons for this paradox. Few, however, have dealt with the resource curse in the context of trade. I will in this study attempt to analyze the relationship between natural resource abundance and openness to trade.

Trade in natural resources account for a growing share of world trade and a growing share of policymakers’ attention. Given the economic, environmental, and political implications of natural resources, this column asks how to design rules that can promote mutual gains from resource trade. It provides recommendations for export policy and domestic policy. The purpose is to investigate the relationship between natural resource endowments and openness to trade. With the help of regression analysis, the study tests for the impact of natural resource endowments may have on the probability of countries to be members of the World Trade Organization (WTO), as well as accounting for an impact on a country’s more general trade regime. Departing from empirical evidence of the resource curse and the assumption that open trade has a positive effect on economic growth, this study hypothesizes that countries abundant in fuels and minerals pursue a less liberal trade policy and that this may be an important channel for the resource curse.

Natural resources are naturally occurring substances that are considered valuable in their relatively unmodified form. A natural resource’s value rests in the amount of the material available and the demand for a certain material. The demand is determined by its usefulness to production. A commodity is generally considered a natural resource when the primary activities associated with it are extraction and purification, as opposed to creation. Thus, petroleum extraction, mining, forestry, hunting, and fishing are generally considered natural-resource industries, while agriculture is not. The total value of world trade in natural resources was $3.7 trillion in 2008 or nearly 24% of world merchandise trade. This value has increased more than six-fold between 1998 and 2008, mostly due to steadily rising prices of fuels and minerals, while the volume of natural resources trade has been quite steady in the past decade.

However, this report incorporates agriculture in the concept of the endowment of natural resources by providing samples of agriculture forestry and fishing with agriculture’s primary products as specified by the World Bank’s World Development Indicators. As we will see, the addition of farming in contrast will add benefit. Trade of natural resources is a rising portion of world trade and an increasing portion of the focus of policymakers. The increasing global population and economic conditions generate stresses that raise consumer demand for seafood, forestry, carburant, and mines, generating associated environmental policy debates and growth impacts.

One of the problems most industrial economies must confront is the conflict between the growing demand for natural resources and their scarcity. Indeed there appears to be increased tension, especially with a rebound from the recession from the world economy. Fears that resource-scarce countries have limited access to supply, and those resource-rich areas would be inadequately exploited may cause commercial disputes or even worse. All of this poses a significant question: how can laws that foster shared benefits from the trade-in resources are appropriately developed?

In the last couple of decades, the curse of natural resources, that is the finding that economic development in countries with a surplus of natural resources has continued to be poorly executed. In the inter-war era, Latin America first gained attention on an academic basis following the global commodities market crash of many Latin American economies.

During the post-war era, resource led skepticism persisted and finally was formulated in the Presbisch-Singer study, which argued that terms and conditions of exchange between primary and imported goods appear to deteriorate over time. Primary product exporters, typically developed countries, are now increasingly able to import for a given export value. Resource tales, especially Sachs and Warner and Gylfasón et al., were established at the end of the 20th century and went beyond structuralism projections, which proved to be a reckoning scientific reality that natural resources had been cursed by developments in commodity prices.

The empire’s support of the resource curse is ‘not bullet-proof, but rather strong’ according to Sachs and Warner. The author’s state from a casual view that:

  1. There is almost no overlap between a number and several countries with large amounts of GDP per capita, with significant natural resource endowment.
  2. Highly resource-rich countries such as Nigeria, Mexico, and Venezuela, or the oil-rich Persian Gulf States, do not witness continued rapid economic growth

Previous experiments support this informal finding. E.g., Gleason et al.; Sachs and Warner found that high resource intensity appears to correspond with sluggish growth, with a long list of more retrogressions using post-war growth evidence.

Concluding Remarks

The environmental resource curse may have political and structural vulnerabilities as well as the crowded approach of the economists. However, the finding has been empirically developed that countries with sufficient natural resources appear to perform poorly in economic development. In the sense of trade policy, no study was conducted on the resource curse. Furthermore, this research provided further insight into the resource curse by producing proof of the explicitly detrimental effects of the surplus of fuels on the acceleration of economic development.

The standard theory of commerce says, to maximize productivity and wellbeing, transfer capital from areas of relative prosperity to areas of relative lack. Comparisons of social programmers are affected by complex conditions, natural capital exhaustibility, and daunting market deficiencies, such as imperfectly competitive economies. For example, the free trade of fish which suffers from the problem of free access and poorly specified ownership may result in a faster depletion. In that scenario, at least for one country, the normal outcome of welfare benefits from free trade might break up. For the sake of health, the unique attributes of natural capital should also explain policy interference in the natural resources industries.

Work Cited:

  • Copeland, B. R. (2013). Trade and the Environment. In Palgrave handbook of international trade (pp. 423-496). Palgrave Macmillan, London.
  • Dean, J. M., & Lovely, M. E. (2010). Trade growth, production fragmentation, and China’s environment. In China’s growing role in world trade (pp. 429-469). University of Chicago Press.
  • Khambhaty, Y., Mody, K., Gandhi, M. R., Thampy, S., Maiti, P., Brahmbhatt, H & Ghosh, P. K. (2012). Kappaphycus alvarezii as a source of bioethanol. Bioresource Technology, 103(1), 180-185.
  • Spatafora, N., & Tytell, I. (2009). Commodity terms of trade: The history of booms and busts. IMF Working Papers, 1-34.
  • Sachs, J. D., & Warner, A. M. (1999). The big push, natural resource booms, and growth. Journal of development economics, 59(1), 43-76.
  • Sachs, J. D., & Warner, A. M. (1995). Natural resource abundance and economic growth (No. w5398). National Bureau of Economic Research.
  • Sachs, J. D., & Warner, A. M. (1997). Fundamental sources of long-run growth. The American economic review, 87(2), 184-188.
  • Sachs, J. D., & Warner, A. M. (1995). Natural resource abundance and economic growth (No. w5398). National Bureau of Economic Research.
  • Sachs, J. D., & Warner, A. M. (2001). The curse of natural resources. European economic review, 45(4-6), 827-838.

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