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Tuesday, July 18, 2006

Comments

Øystein Sjølie

The problems of aid are related to the Dutch Disease, a term named for the economic problems of Hollland following the explotation of natural gas. However, the clue is not in the real exchange rate. The clue is that aid and money made from natural resources are similar because they are not made from work. Therefore, the money is easy to "hide" from the general population, and are usually spent with far less attention than money made from normal economic activities, or from the governments point of view: taxes on these activities. If the aid or gas money make a substantial part of the nations income, there is a high risk that the most profitable business will be to get hands on a part of the free money, aka rent seeking. If rent seeking is the most profitable business in a country, it will never grow wealthy.

A. PERLA

"If rent seeking is the most profitable business in a country, it will never grow wealthy."

Then, how do you explain that Norway has pulled it off so successfully. Its treasure chest of accumulated oil wealth (in the billions) will see very nicely for its aging population, just as it is intended.

I am no expert on Norwegian industry, and it is not all that "thick" meaning diversified, but it does not seem to have the attributes of which you speak.

Isn't it therefore a matter of how the money is managed. Perhaps the Norwegians learned from Holland's mismanagement?

David Wiczer

It seems a bit cynical to say that Dutch Disease is the result of mismanagment, and kleptocrats "hiding" aid/resource boons from the people. The point of Dutch disease is the (mis)incentives that it creates by distorting the relative prices within the economy by its exchange rate impact. So the skewed economy is not just mismanagement from the top - everyone does their part just following the incentives given to them. Norway's fund impoves on Holland's experience by avoiding the incentive distortions.

Owen Barder

The 'Dutch Disease' effect discussed in the working paper which you were kind enough to link to is the narrow question of the impact on the real exchange rate as a result of the shift in the composition of demand.

The comments above refer to a wider set of issues known as "the resource curse" - that is, the effects on a country's political economy of sources of revenue such as oil, diamonds and (possibly) aid, which may reduce the accountability of government. I have discussed that wider set of issues in a companion working paper, 'Are The Planned Increases In Aid Too Much Of A Good Thing?', which you can read here:
http://www.cgdev.org/content/publications/detail/8633

Owen

Owen Barder

PS we runners hate being called a 'jogger'!

J. M. Lawrence

The problem is capital flight -

Unlike the U.S., the vast majority of defaulting emergineg market countries are net creditors to the rest of the world.

-"Is Africa a Net Creditor?…Capital Flight From Severely-Indebted Sub-Saharan African Countries, 1970-1996," University of Massachusetts, Amherst" "This paper presents estimates of capital flight from 25 low-income sub-Saharan African countries in the period 1970 to 1996. Capital flight totaled more than $193 billion (in 1996 dollars); with imputed interest earnings, the accumulated stock of flight capital amounts to $285 billion. The combined external debt of these countries stood at $178 billion in 1996."


-On the foreign bank accounts held by Nigerian elites, Mr. David Asonye Ihenacho writes for Nigeriaworld :
First, the sum of 170 billion dollars…is about 60% of the entire debt owed by the entire continent of Africa to the rest of the world…
Second, who are these Nigerians with this large sum of money stored overseas? The sum of 170 billion dollars is by far bigger than the entire wealth of the four richest people in the world combined. The wealth of Bill Gates III of Microsoft, Warren E. Buffett of Berkshire Hathaway, Karl and Theo Albrecht of Wal-mart retail and Paul G. Allen of Microsoft combined does not rise up to 170 billion dollars.

http://foreigndebtforgiveness.com, and please, also, note the links which include the first of the above.

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