Mozambique’s coming natural resource boom

Mozambique is set to become a world-class natural resource exporter with projections indicating that it will experience rapid increases in windfall revenues over the next several decades and well beyond. While this is welcome news for a low-income country with a substantial proportion of the population below the poverty line, it foreshadows some economic management problems ahead. The main concern is the poor economic record of many other low-income countries with large natural resource endowments. It is remarkable how often these countries have experienced inferior rates of growth compared with countries lacking such endowments. This pattern, known as the “natural resource curse,” has been documented in empirical research across a wide sample of nations.

The first section of this study reviews the research that examines the causes of this resource curse in low-income countries. Three channels of transmission are highlighted through which abundant resources can lead to poor economic performance -- volatility, Dutch Disease effects, and institutional weaknesses. Taking volatility first, world commodity prices are extremely volatile. Countries with low diversification and a large share of resources in GDP therefore suffer large swings in revenues and growth per capita. Such high volatility and boom and bust cycles are shown to be harmful to economic growth, particularly where financial markets less developed. Empirical research finds that volatility is a key cause of the “resource curse” problem. Volatility is harmful to growth because cyclical shifts of resources (labor, land, equipment) back and forth across economic activities incur costs (particularly transaction costs). Frictional unemployment and incomplete utilization of capital raises costs and reduces productivity. Volatility in commodity prices and revenues in developing countries often leads to macroeconomic and political instability because monetary and fiscal policy often tends to be pro-cyclical – expansionary in booms and contracting in busts, adding to extent of volatility (resource riches create incentive to borrow and spend and booms act to undercut political decision-making and create false sense of security, encouraging wasteful investment, increases in government employment and benefits, expansion of welfare programs, etc.) In addition, there are pro-cyclical private capital inflows as speculators move into local assets.