ChainWhat it assumes · how to break it
Start
Prices of diamonds, oil or metals rise, giving a resource-rich developing country a large windfall in export and government revenue.
1
As a result, government revenue from royalties and state-owned producers rises sharply.
government revenue · resource rents
government revenue · resource rents
Assumes: The state captures a large share of the resource income.
But: Weak contracts with foreign producers can leave most of the income with them.
2
This means the government can spend more on schools, health care, water and roads without raising taxes.
public spending · merit goods
public spending · merit goods
Best link to attack
Assumes: The revenue is spent on public services that benefit the population.
Assumes: The revenue is spent on public services that benefit the population.
But: Resource revenue can be captured by elites through corruption and rent seeking, and governments that do not depend on taxpayers face less pressure to deliver services.
3
Consequently, life expectancy and years of schooling rise as more people gain access to health care and education.
health and education · human capital
health and education · human capital
Assumes: The services reach the wider population.
But: Spending can be concentrated in the capital and on prestige projects.
4
Therefore, HDI rises as both GNI per head and its non-income components improve.
Human Development Index
Human Development Index
Assumes: Higher income is shared widely enough to raise averages for health and education.
But: If resource income goes to a small group, GNI per head rises while health and education barely change.
End
Development improves if the commodity windfall is spent on health, education and infrastructure, raising the HDI.
Evaluation chain
- E1However, whether the windfall raises development depends on the quality of institutions that decide how resource revenue is spent.
- E2When institutions are weak, resource revenue encourages corruption and rent seeking, and governments that do not rely on taxes face little pressure to provide services.
- E3As a result, many resource-rich countries have lower development than their income suggests, which is known as the resource curse, while Botswana is often cited as using diamond revenue relatively well.
- E4So a commodity price rise improves development where governance is strong, and may do little or even harm development where it is weak.
Another way to attack it: Commodity prices are volatile, so programmes started in a boom may be cut in the following slump, reversing the gains.
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Questions this answers
- Evaluate the view that natural resources are a curse for developing countries.
- Assess the impact of a rise in commodity prices on development in a primary-exporting economy.
- Explain why some resource-rich countries have low levels of development.
Diagram
No standard diagram. Compare HDI rank with GNI per capita rank: a country ranked much lower on HDI than on income suggests resource income is not reaching the population.
Reverse and related
Fall in commodity prices → government revenue falls, so spending on health and education is cut and development slows.