Critical reiew

TSUI, K. K. (2010), Resource curse, Political entry, and Deadweight costs. Economics & Politics,22: 471–497. DOI: 10.1111/j.1468-0343.2010.00373.x

 Is being resource rich good or bad for a country’s development in both economics and politics? In other word, is resource abundance the Curse or the Blessing? This is a widely debated question among economists and it is getting more popular in developing countries. Tsui’s article based on an empiric model analyze reaches his purpose to answer to that question. In result, Tsui raises some sufficient argument against the theory of certainty of resource curse in economics, but agrees with possibility of political curse– a new idea. In my opinion, despite some oversimplification, his model could be useful to explain the correlations between natural resources and development of economics and governance in a short term, but not in long term. This paper will provide evidence and supports for my opinion.  

 Before going through, it is necessary to explain the core concepts of topic which are “resource curse” and “political curse”. In 1995, Jeffrey D. Sachs and Andrew M. Warner found in their research that natural resources are not a decisive advantage to economic growth, however it certainly might pose actual disadvantage like a curse. (Sachs, 1995)  Since then, concept of resource curse has been used officially. But, the political curse is not a widely accepted concept and it has not an official definition. In this paper, I will use this idea as a possibility that windfall revenue from natural resource worsen functioning of government institutions and good governance as described by Fernanda Brollo and her colleagues. (Brollo, 2010)

To demonstrate his arguments regarding the curses issues, Tsui suggests a model named “An endogenous political entry barriers model in a two-sector economy”. In his article, he briefly reviewed the previous theoretical studies in first section, introduced the model in second section and then he analyzed economics and political impacts of natural resource wealth in third to fourth section. In the last two sections he reinterpreted the empirical evidences and made the concluding remarks. Tsui concludes that ‘natural resource wealth is an economic blessing (not curse), although resource dependence can be positively associated with bad economic performance.’ (Tsui, 2010) Also, he implies that natural resource wealth can be a political curse. Particularly, Tsui argues that however natural resource abundance is a blessing to economy, it could be a curse in politics. This means resource wealth increases the competition in political market and leads to civil conflict. (Tsui, 2010)

 In addition to concurring with his notion, I evaluate the article “Resource curse, Political entry and Deadweight costs” using some very own criteria. Firstly, I review the methodology of econometric model suggested by Tsui, in this section also some oversimplification of components would be criticized. Secondly, I emphasize author’s arguments on economics and political impacts of natural resource with some points of extension. Finally, it assesses the durability of his recommendations.     

 Methodology

With a purpose to analyze how the natural resource wealth affects the economics and the politics, Tsui used a model, which is based on a proposition of equilibrium between economics and political aspects of resource revenue. To make that complicated econometrical model understandable for the people without professional background, who would be its potential users, I simplify the equation as below;

Econ + Politic = Deadweight * Non-resource tax + Resource tax

Here,

·         Econ – Economic policy cost (provision of public goods)

·         Politic – Political rent (entry barrier for new competitors, enforcement cost for holding media and power, rent seeking or grabbing )

·         Deadweight – The Deadweight cost[1]  

·         Non-resource tax – Taxation of non-resource sector

·         Resource tax – Taxation and rent of resource sector

According to this model, country’s total income from resource and non-resource sectors, adjusted by deadweight cost, must be equal to the cost for implementing economics policy and political rent. (Tsui, 2010) To examine efficiency of natural resource revenue under any economics policy or political regime, we must monitor the deadweight cost. If it is high the efficiency is low, if it is low efficiency is high. Therefore, Deadweight cost is the core indicator to measure economic and political impact of resource.

 Here we can see that the author does not distinguish the difference between provision of public goods and economic development and the difference between high competitive, low-rent politics and the good governance.

Despite these oversimplifications, I support Tsui’s approach that measuring political and economic impact of resource richness by one variable which is useful in econometrics modeling.

Economics impact of resource abundance

I strongly support Tsui’s conclusion that natural resource wealth is no longer a curse, but it is the blessing and could be abused under wrong political management. The historic evidence of this notion could be the cases of Australia, Norway, Canada, and the contrary some African country.

Practical benefit of that notion against the curse theory is its potential to encourage resource rich developing countries like Mongolia. Furthermore, developing countries should find the obstacles to their development in the quality of governance instead of the wealth.

 Political impacts of resource. The political curse?

For Tsu’s inference of political curse, I have two points to criticize. Firstly, the competition is not a conflict but the fair political competition which is essential to consolidate democracy. Secondly, the author should be challenged by a question –will not political conflict cause the curse in economics? Sierra Leone provides an excellent example of this, when long lasting political conflict followed by civil war destroyed economics of the country, could empower that question.

 Conclusion

Because of reasons mentioned above, I am not sure for the durability of Tsui’s arguments. Then, I think his model can be useful in the short term but not in long term.

Also, it is notable that he expresses some consideration on his conclusion; ‘To cure the political resource curse, my theory suggests that it is important to improve our understanding of the formation and evolution of good institutions and of how resource wealth affects the cost of counterinsurgency’. (Tsui, 2010)

References

Economic Glossary. (2012). Retrieved from Economic Glossary: http://glossary.econguru.com

Brollo, F. e. (2010, January). The Political resource curse. NBER Working paper (15705).

Lane, P. a. (1995, May). Power concentration and growth. Discussion paper (1720).

Sachs, J. D. (1995). Natural resource abundance and Economic growth . Cambridge : National Bureau of Economic Research .

Tsui, K. K. (2010, November). Resource cost, Political entry and Deadweight costs. Economics and Politics, 22(3).

[1] A net loss in social welfare that results because the benefit generated by an action differs from the foregone opportunity cost. Deadweight loss can result from government actions (taxes, price controls) or from market failures (externalities, market control) (Economic Glossary, 2012)