Avoiding the Financial Resource Curse

By Noah Smith – To understand the financial version of the so-called resource curse, it helps to remember what the original version was.

The resource curse is the name economists give to the bizarre fact that countries with more natural resources tend to grow slower than countries without such endowments. A lot of the reason is political, but some is due simply to the math of exchange rates.

The more oil or copper that a country exports, the more expensive its currency gets, and the more difficult it then becomes to export anything other than oil or copper.

Gianluca Benigno, Nathan Converse [2], and Luca Fornaro postulate that capital inflows cause a sort of Dutch disease [2] variant. When foreign money flows into a country, it redirects the country’s resources toward things like construction, or other non-tradeable goods like finance. Manufacturing is starved for resources, and contributes less to the economy. more> http://tinyurl.com/o4zyvn4

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