Friday, October 23, 2009

Economic Freedom and the Resource Curse

Developing nations can benefit from natural resource development if they have a basic level of sound economic institutions like rule of law, property rights, open markets, and an independent judiciary, concludes a new study from the Fraser Institute, one of Canada’s leading economic think-tanks.

The study, Economic Freedom and the “Resource Curse”, offers an empirical analysis weighing countries’ resource abundances against the Economic Freedom of the World index to determine the impact of institutions on economic growth and how institutions interact with natural resources. Of the four categories of natural resources—fuel, food, agricultural raw materials, and ores and metals—only ores and metals were found to have a significant effect on economic growth.

The study suggests that for countries lacking sound economic institutions, natural resource dependence can weaken economic growth.

The good news is that even relatively low levels of economic freedom allow nations to benefit from resources, but the higher the level, the greater the benefit,

The study’s recommendations include:

Improving the rule of law to protect property rights, encourage investment, and reduce corruption. Without security of property rights and proper mechanisms for settling disputes, the market-exchange system is completely undermined.

Removing trade barriers. Closed markets limit the investment opportunities that natural resources can create since businesses can serve only a local market.

Simplifying business regulation to encourage investment and business creation by eliminating unnecessary regulatory barriers, reducing corruption, and therefore decreasing the administrative costs of businesses.

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