Neither Curse nor Destiny: NR’s in LA Development

1. Neither Curse nor Destiny: NR’s in LA Development Fedesarrollo 2013 Bill Maloney World Bank Development Economics Research Group And Universidad de los Andes

2. Based on: • Does What you Export Matter?(2012, forthcoming, Los Andes) • Engineers, Innovative Capacity and Development in the Americas (2012) • In Search of the Elusive Resource Curse (2009) • Natural Resources: Neither Curse nor Destiny (2007) • Missed Opportunities: Innovation and Natural Resources in Latin America (2007) www.worldbank.org/wmaloney

3. The missing resource curse: no negative growth effect on average • Most cited resource curse findings fragile (eg. Sachs and Warner) • Lederman & Maloney (2007, 2008), Alexeev and Conrad (2009) • Subsoil mineral wealth endowments robustly correlated with growth: • Davis (1995), Sala-i-Martin et al. (2004), Stijns (2005), Brunnschweiler (2008, 2009). • Higher commodity prices raise growth • Deaton and Miller (1995), Raddatz (2007) for poor countries. NRs: Not cursed.. but they do have “issues” 1. Governance, 2. Concentration, 3. Productivity/dynamism

4. NR Issues: Low productivity/growth • Smith (1776), Matsuyama (1996), Sachs et. al (1995 to 2001) • Rationale for Dutch disease concern (aid too) • Rich Country Goods better • Hausmann, Hwang, Rodrik 2007, Lall 2007 • Country should produce the highest productivity good within its CA • PRODY, EXPY correlated with higher growth.

5. NRs have very mixed PRODYs..

6. Low productivity/ ME • Demand side • Rodriguez-Clare critique • Are rents higher where rich countries already are? • If easy to move into these goods, then barriers to entry/rents low; ditto MNCs permanence

7. But the Key- to understand the heterogeneity of experience Leamer Measure: Net Exports of NR/Worker Resource Scarce Resource Abundant Maloney 2007

8. Historically, natural resources have been a dynamic source of growth, but not in LA • Agriculture • Productivity growth is higher in agriculture than manufactures (Bernard and Jones 1996, Martin and Mitra 2001) • But not in LA (or LDCs more generally) • Forestry • Dynamic in Finland, Sweden • Moribund in Brazil, Chile until late 20th century • Mining • Foundation for sustained prosperity in Australia, Canada, US • Latin America: “mineral underachievers” (Wright 2007) • True enclave economies

9. Ancient History: MiningSame good, different outcomes • Mexico, Chile in 1800 were dominant global powers in Mining but nearly dead by 1900 • US experience with exactly the same goods exactly the opposite. • US dominates mining in Mexico, Chile-Able to employ and perfect the Bessemer process, leverage human capital accumulation • Wright (1987) - US Copper industry-an example of national learning as a network effect. • Not product mix-LAC unprepared for the 2nd industrial revolution (See Does what you export matter?- Lederman and Maloney 2012)

10. Innovative/Entrepreneurial capacity the driver?

11. MEn Density of Engineers~ 1900 Quintil Bajo Quintil 2 Quintil 3 Quintil 4 Quintil Alto Source: Maloney and Valencia (2013)

12. Any formalizations? • Aghion, Howitt, Mayer (2005), Howitt and Mayer-Foulkes (2005). • Invention, Adoption Stagnation Eqs • Depends on “frontier adjusted human capital” (relative innovative capacity) • Low HC- can slip into a stagnation eq. when tech advance occurs. • LAC Mining-slipped into stagnation eq. • Antioquia-actually maintained/increased HC • Asia: struggle to reach increase HC and better eq. • Huge literature on building firm capacity, ability to learn.

13. Hausmann: NRs as isolated trees? • Theoretically, does it matter if monkey climbing one very tall tree vs jumping among trees? Diversification? • Demand side? • Rodriguez (again): being a tree in a dense area is like a ME • If easy to jump from one tree to others, then easy to jump to.. • Quality ladders: better to jump to goods that don’t exist yet • The past as predictor? • With death of distance, past NR monkey jumps may not happen-Steam Engine, Saab, Nokia • What will new adjacent products be?

14. Hot High Tech products on RT 128-why not Chile? • Frankenfish • Splice in growth gene from Ocean Pout (eel) • Salmon grows twice as fast as normal • AquaBounty Maynard, MA

15. Better trees, or better monkeys? Scandanavia’s Forestry Cluster Nokia: Site of an early pulp mill in Finland Learn how to learn

16. Managing risk: lessons from unit values • Quality measure by price/unit value • Huge variance within products (Schott 2004) • Average quality rises with development • Low possibilities for UV growth in NR (Hwang) • Yes, there is convergence • But are quality ladders shorter? • Yes for most, but not for metals

17. NRs do seem to show a lower risk-return combination Figure 4: Unit Values: Drift and Standard Deviation, Country Fixed Effects, HS-1 1990-2001 Krishna and Maloney 2009

18. But again… the how matters Krishna and Maloney (2009)

19. NR issues: Harnessing their dynamic potential • How get the most out of extractive industries themselves? • How leverage NRs to generate new industries-diversification? • Choice: • Enclave with limited development effects or • Provide foundation for economic dynamism. • Critical element: • development of national learning/ innovative capacity • Management of risks of entering new sectors/techniques

20. Innovation/Learning capacity seems key to lifting LAC’s game • The variance in development impact around any particular production basket is large • The focus on particular goods (trees/forests) diverts attention from more important issue: • LAC needs better Monkeys. • Asia has been training (networks of) Monkeys for decades. China struggling now • Middle income trap? Countries exploit simple rents (NR, cheap labor) and then can’t make the transition to adopting or invention eqs.?

21. Fin