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22 April 2024

Need to focus on natural resources

By Insead Knowledge

Even though the signs of recovery from the financial crisis are strongest in Asia and the region is touted to be the most likely source of economic growth, rural poverty remains rampant.

"The focus on agriculture is absolutely essential," said Nobel Laureate Joseph Stiglitz, referring to developing agrarian countries in Asia, in particular Myanmar, where he was invited by the United Nations Economic and Social Commission for Asia (ESCAP) to advise on the country's economic policy and rural poverty alleviation.

So why then has Myanmar, once touted as the 'rice bowl of Asia,' failed to achieve the growth that was predicted by many? Stiglitz believes it's partly because they've succumbed to what he calls the 'natural resource curse'.

"Most countries with large (production) of natural resources do more poorly than those without, which is an irony," he told a press conference in Singapore organised by the Foreign Correspondents' Association. And he attributes this to "very big failures in the development and management of natural resources, (and) in agricultural development".

"Quite often, countries with large amounts of natural resources suffer from exchange rate appreciation and the result is when they sell the natural resource, the value of currency goes up – they produce natural resources but no jobs. You can see this all over the world where you have rich countries and poor people. That's why it's so important to manage the natural resources from a macro-economic point of view," he said.

Emerging economies, which fail to exploit the potential of the assets they have below the ground – such as oil and natural gas – are likely victims of the 'curse'. If you can't "re-create" these assets above the ground, he says, "you're poor, because you're destroying your asset base. If you squander your assets, you're jeopardising the future of your country."

The problems are further exacerbated in the agricultural sector, with farmers currently facing interest rates of up to 10 per cent per month. According to Stiglitz, this has resulted in many farmers not being able to get the credit they need to buy fertiliser and high-quality seed, so the full farming potential is not realised.

Trade finance has been a problem for emerging economies in Asia following the financial crisis, but has since improved, Stiglitz told Insead Knowledge.

"Capital flows more broadly are down very markedly. And when I say capital flows, particularly foreign direct investment, and in some cases reverse capital flows. You saw that at the moment of the crisis, where money was flowing into the United States. Why? Because we had basically underwritten all our banks. If the government guarantees, where is it going to be the most strongest? They're going to be the strongest from the US government than a smaller developing country, so money flowed into the United States."

"More generally and more long lasting – foreign direct investment, trade in general. The lower economic growth means that trade is lower. The impact effect of trade finance is now being ameliorated. That is part of the reason why Asia is recovering. Another part of the reason is that China is engaged in much stronger policies… and had prudent policies beforehand. So unlike the United States, which had a huge deficit as it went into the crisis, which became bigger, China has built up a large reserve, so that they can engage in much stronger counter cyclical fiscal policy."

Another key issue for developing countries relates to remittances, which are a major source of income for most emerging economies.

"When the economy goes down, the first people to lay off are your immigrants, your migrant workers. So that is having an impact on many countries... One of the interesting things is the complexity. Nurses don't get fired, people still get sick. So the countries that are exporters of nurses have been relatively insulated. Construction – some countries that send migrant's workers in construction – they've been devastated. So that's an example of the varied patterns."

"On climate change, I can't help but feel – as anybody who has been engaged in work on climate change – great disappointment. It is a form of words, better than nothing, to say that we are committed to doing something to make sure that there won't be an increase in two degrees. The hard part, it's not just that [the accord] wasn't legally binding… The real question is the burden sharing. Who is going to reduce their emissions and the framework for an agreement for reducing the emissions. There is no progress on that as far as I can tell."

"In particular, the United States, which has the highest emissions per capita, did not make a commitment to say it will reduce its emissions to a level that is commensurate with the rest of the world. And so as an American, I felt disappointed."

"Also, we have to address the problem of climate change in ways that does not impede the rights of countries to develop and that means assistance, a commitment of resources. If we can give trillions of dollars to our banks, why can't we give a little bit of money to help save the world, the planet from climate change? I think it's unconscionable."


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