Monday, October 01, 2007

(Another) Natural Resource Curse

Dede of Ekonomi dan Politik di Indonesia (in Bahasa Indonesia) raised an interesting issue on the paradox between natural resource richness and low economic growth --or more technically called natural resource curse. He basically said that it is actually no wonder that countries like Indonesia, with its abundant natural resource, don't perform remarkably well in comparison to countries with limited resource for two reasons: First, the Dutch disease, real exchange rate appreciation makes producing tradable goods less attractive (Sachs and Warner, 1995). Second, weak institution as natural resources rich countries are more prone to corruption (Mehlum, Moene, Torvik, 2006).

Suppose, then, that we can get rid of those problems, are we now free from the spell? Alas, not that fast.

Hausmann and Klinger of Harvard (2007), --hat tip to undercover economist Tim Harford--, introduced the idea of economic space of production network (the proximity amongst products). In that space they spotted densed (manufacturing) and sparsed area (natural resource based products). Look at the paper for more detail of products.

And yes, they found that country with good economic performance tend to export products in densed (closely related products) space. Why? The flexiblity of country's acummulated capabilities to be redeployed across products, hence greater gain from trade.

It leads you to a very interesting situation: What to produce, and specialize in, matters and relying on exporting natural resource based products might be inherently a disadvantage. But it is costly for natural resource rich countries to redeploy production capabilties and to move into the centre of dynamic world production network.

At home, it also intuitively tells why after the crisis that brought back Indonesian revealed competitive comparative advantage to more natural resource based products, the country's export performance remains weak. Probably, we are now no longer that close to the most dynamic locus on global production network.


  1. I couldn't agree more. This is the main reason why Indonesia should enggage in production net-work. Specialization in non-resources tradable will minimize the risk of price volatility

  2. The problem is, for national resource rich countries, engaging in production network, that is, redeploying capacity, deliberately setting for new products with competitive advantage, is costlier than for otherwise limited resource ones, even when (right) market price incentive is actually big. What can we do about it?

  3. Rizal,

    What do you mean by "revealead competitive advantage"? I find the term "competitive advantage" confusing. Here's why:

    Porter said: "a competitive advantage, sustainable or not, exists when a company makes economic rents, that is, their earnings exceed their costs (including cost of capital). That means that normal competitive pressures are not able to drive down the firm's earnings to the point where they cover all costs and just provide minimum sufficient additional return to keep capital invested."

    Notice the last sentence. Isn't that just another term for monopolist?

  4. Oops, Pasha, yes you're right. It's a typo. I meant Revealed Comparative Advantage. Now, it's corrected.

  5. Ah..I see now. That makes sense. Just a little tidbit, when people talk about production network, they usually refer to the paper that you just gave the link. It's by Ng and Yeats. But, they rely on indexes such as RCA. They didn't really modelled the production network, they just showed you the indexes and based on that, concluded that there's an increasing trend towards production network.