28 Dec “How can something as beautiful as natural resources become a curse?”
A few years ago, I had the pleasure of attending a forum sponsored by the UNDP on global environmental issues. It was held in Doha, a city preparing for the West Asian Games, akin to the Asian Olympics. During my visit to Qatar, I was deeply struck by the fact that the infrastructure built for this sporting event would later, with some adjustments, be repurposed into health and education centers. Truly remarkable.
One of the speakers at this forum criticized the so-called “Resource Curse,” questioning, “how can something as beautiful as natural resources become a curse?” I reflected a lot on her perspective and now wish to share it with you, as I find it highly relevant to Bolivia’s current context.
When we think of natural resources, images like these likely come to mind:
Clearly, it would be absurd to label such wonders a curse. So, what were those who coined the phrase “resource curse” thinking? (probably economists). I assume they had images like these in mind:
Extensive literature has been written on this topic, essentially examining why, for some nations, exploiting natural resources becomes a curse, while for others, it proves a blessing. In the former case, people’s long-term well-being deteriorates after discovering natural resources (such as gas or lithium), while in other nations, well-being improves… with the same resources!
What is happening here?
Many documents explore this issue. I want to focus on one written by the excellent Venezuelan economist (MIT professor) Roberto Rigobón. Likely inspired by his country’s situation, he studied this topic and, in 2001, published an article titled: “Resource Curse or Debt Overhang?” linking this curse to external debt. The simplified argument is: countries with abundant natural resources often perform poorly because, among other factors, their resources enabled them to borrow heavily abroad. When the economic boom ended, they couldn’t sustain the debt levels, resulting in a crisis. You can download the paper here: link.
It’s like a father who, after winning the lottery, spoils his family with gifts, sweets, cars, and trips. When the money runs out, he borrows from the bank, which, knowing he won the lottery, lends him the money. Eventually, the money is spent, and the family is left in debt. Result: crisis.
Thus, it’s unsurprising that countries with abundant natural resources, after an economic boom, begin accumulating debt—just like Bolivia now. It’s akin to that father who fears losing popularity and turns to the bank to keep the family happy. What we should warn him about is that he could leave his family worse off, with no natural resource wealth and buried in debt.
So, what would Roberto Rigobón (the Venezuelan economist) tell that father? He’d likely say: debt for education, yes; debt for health, yes; debt for investment, yes; debt for extravagant luxuries, no; debt for buying more Chinese cell phones, no; debt to maintain ghost employees, no; debt to subsidize gasoline for a luxury car, no; debt to keep the aunt’s clearly unprofitable shop open, no. Simply put: “Sir, please spend that debt wisely and prudently, because your children and grandchildren will have to pay it back.”
Next year, Bolivia faces a tough situation. We must repay USD 500 million debt from 2012 (yes, during the boom), known as “sovereign bonds,” which, despite the grand name, are just external debt. Fuel subsidies are becoming a significant fiscal burden, gas revenues won’t recover, salary expenses seem inflexible, and we keep hoping Central Bank reserves will sustain the exchange rate. COVID-related issues will also persist.
In the future, external debt will become more expensive, harder to sustain, and scarcer. Therefore, I hope it is spent prudently and not just to keep national accounts “healthy” (like GDP growth) in preparation for tricky pre-election periods.
Let us hope that political times favor economic needs.
As this year, 2022, ends, I hope for health and strength to continue enjoying this bittersweet pleasure called life… and I wish the same for all of you.
Best wishes and happy holidays, always with a mask and, if possible, outdoors.
S. Mauricio Medinaceli Monrroy
La Paz, Bolivia
December 28, 2021
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