HIST363: Global Perspectives on Industrialization

Countries vary greatly in the share of their exports derived from resource-based activities. In those countries that obtain a large share of their export revenues from resource-based activities, a goal of reducing resource dependence is frequently a major influence on policy. The importance placed on this goal is particularly marked in resource-dependent developing countries, but has also emerged in high-income countries such as the Netherlands and Australia in the form of concerns about de-industrialization during periods of growth in resource-based industries. 

There are many reasons why policy makers may wish to reduce the share of a country's export revenues obtained from commodities produced using resource-intensive procedures. These include: (i) the concerns about potentially adverse trends in the terms of trade for commodities raised by Prebisch, (ii) concerns about the perceived instability of returns from commodities and possible resulting problems of unemployment and output loss, (iii) perceptions that the rate of technological change in resource-dependent activities may be lower than in manufactures or services, and (iv) concerns that resource-intensive production may promote rent-seeking activities, lower growth rates, and increase the risk of civil war. 

Clearly, given the potential stakes involved with decisions about changing resource dependence, and the fundamental nature of many of the policies advocated for achieving this objective, there is a great need for carefully formulated policies if this objective is to be achieved. Unfortunately, much of the policy debate surrounding these objectives takes place at a sufficiently high level of abstraction that it does not provide much guidance. Consequently, many of the policies adopted to this end seem ad hoc and potentially counter-productive. A very common response, for example, is a relatively arbitrary set of protectionist measures designed, perhaps, to promote activity and learning in manufacturing sectors. But, as we will see, protectionist policies may have quite contrary effects. In fact, it seems likely that liberalization is key to increasing diversification and not, as many have feared, to continuing dependence.

The choice of policy options for dealing with this problem also needs to be based on good diagnostics, and to take a broad view of the policy options. It is possible, for instance, that a country relying on a set of different commodities may find that the variance of returns from the resulting portfolio is not excessive - or that shifting from commodities to manufactures would not reduce the variance of returns. Further, if the problem of excessive instability of export returns is identified as a problem, then the most effective solution may lie in portfolio management approaches that allow reductions in the volatility of consumption without attempting to reduce the volatility of annual earnings. Such a solution is consistent with the general principle in economic policy of targeting the policy solution as closely as possible to the problem at hand. 

Policies that attempt to deal with the risks associated with commodity dependence by diversifying the structure of output should not generally be undertaken unless analysis indicates that: (i) there are market failures that are reducing the extent to which the production structure should shift away from commodities, and that (ii) policy options are available that will diversify output and improve overall economic performance. While these criteria might appear daunting, there are many cases where they will be fulfilled. 

Potential causes of resource dependence in the structure of output and exports include: (i) unusually large endowments of natural resources; (ii) limited supplies of factors such as capital and human capital that are used more intensively in manufactures and services than in resource-based industries; (iii) low productivity in manufactures and services; (iv) trade and pricing policies that discriminate against export-oriented manufactures and services; and (v) high transport and communication costs that discriminate against transport and communication intensive manufactures and services. Since countries would not generally wish to reduce their endowments of natural resources, the policy solutions to what is regarded as an "excessive" level of dependence on natural resources are likely to lie in the four areas (ii) to (v).

Although they may wish to consider the timing of exploitation of non-renewable resources.

These four influences on resource dependence are clearly strongly related to the basic determinants of structural change identified in the classic Chenery, Robinson and Syrquin study of industrialization and structural change. One other influence on the structure of output, and of exports, identified by Chenery, Robinson and Syrquin is non-homotheticity of consumer demand, although this is difficult to use this for policy purposes. Low income elasticities of demand for commodities may, in fact, cause a country undergoing unbiased growth to become more reliant on exports of commodities. 

A wide range of policies designed to promote the development of favored sectors have been discussed under the rubric of industrial policy. Industrial policies have included many specific policies, such as provision of infrastructure, support for education; export promotion activities; technology promotion programs; duty exemption and drawback arrangements for exporters; and preferential allocation of credit to exporting industries. All of these policies can be seen ultimately as affecting the level and structure of output through one of the three channels considered in this paper.

The process of developing growth models that go beyond balanced growth is only now getting under way. Specifying model features in a way that will allow them to be useful in analyzing the profound structural changes associated with reducing resource dependence seems likely to require more sources of structural change than are included in most current growth models.

As noted in World Bank, and in Martin, there have been dramatic changes in the participation of developing countries in world trade. The share of manufactures in total merchandise exports has increased dramatically, at the expense of the traditional stalwarts--agricultural products and minerals. This change has been associated with dramatic shifts in policy toward trade openness, and with increases in factor endowments, that raise the available capital and skills per worker.

In this paper, a simple general equilibrium framework sufficiently general to incorporate the structural changes associated with reductions in resource dependence is specified. It is then used as an organizing framework to examine some of the evidence available both in the literature and from data on influences on resource dependence. This analysis is then followed by consideration of policies that might be used to reduce resource dependence.