06 September 2011

Election 2011 and the Resource Curse

During the current provincial election you are going to hear a lot about natural resources and the need to spend the money that comes from it on all sorts of things.

The province’s New Democrats wasted no time in bitching that oil money isn’t being poured into rural Newfoundland and Labrador:

"We have to have a plan in rural Newfoundland to make sure that our fishery is maintained as the backbone of rural communities," she said.

The Dippers are also hopped up on spending the cash on education, mostly likely to help Nova Scotians get a cheaper education.

Of course, the province’s Conservatives have been on a spending spree these past couple of years.  They’ve dropping dropping money on everything anything from road paving to hockey rinks.

The provincial Liberals are on much the same sort of kick, especially for the fishery. All three parties want to take over federal responsibilities like the dozen or so jobs at a coast guard marine rescue call centre.  The local pols want to buy the jobs just to keep them in Newfoundland and Labrador.

In fact, if you look at most major issues in the province, the only disagreement among the three parties is how much is enough to spend.  On any given issue and any given day, the incumbent Tories will announce cash for something.  The other two parties will scream:  “not enough!”.

Getting value for money.  Spending wisely.  thinking of the long term.

All wonderful ideas the three parties will talk about.  They just won’t do  it. The incumbent Tories will even claim they’ve reduced the public debt, even though they haven’t.  And even in the Tory construction paying down the debt is just paving the way for racking it back up again.

Spend ‘em while ya got ‘em.

Efficiency is not in the cards.  Look, for example, at the spate of hockey rinks the incumbent Tories announced towards the end of their most recent orgy of political spending announcements. Two new arenas in the neighbouring communities of  Conception Bay South and Paradise

The arenas for Conception Bay South, Paradise and Harbour Grace will be 5,700 square metres and include a 200 by 85 foot ice surface. The arenas will also have change rooms with washrooms and showers, support facilities for minor hockey and figure skating, a walking track and a community meeting room. An ice-resurfacer room, canteen, first-aid room, public washrooms, ticket booth and facility support space will also be included.

Two new rinks with all the bits that go with it, including two separate freezing plants.  One building with two ice sheets  – strategically located – could meet the local needs more efficiently than two separate spaces.

And if the provincial government took the same sort of approach not just with recreation centres but with everything, they could actually get more out of the same money.  If they paid a bit more attention to planning and management, they might just not experience quite so may massive cost overruns as they do;  just last week, the Premier  announced a historical restoration project will now cost more than  $22 million when the original estimate was a mere $3.0 million just five years ago.

Anyone familiar with Newfoundland history will recognise the syndrome from the 1920s.  “Instead of dealing with economic causes”, wrote political scientist Sid Noel in 1971, “throughout the twenties, Newfoundland squandered her meagre resources on the treatment of symptoms.” 

That wasn’t just the idea in the 1920s.  In the decade before the Great War, Ned Morris made himself into a highly popular prime minister by building branch lines to the already economically dubious railway.  Railways were a sign of modernity so they had to be good.  The branch lines would stimulate new economic growth, Morris and his supporters argued. And in communities hit hard by a downturn in the fishery, the jobs came in very handy.

All very familiar stuff.

These days there is even a term for it.  The academics might call it the resource curse.  As Michael Ross noted,  a couple of studies done in the 1980s and early 1990s found that the “developing world’s leading hard-rock mineral exporters had a per capita GDP growth rate …half the growth rate of a control group of non-mineral states.”

What tends to happen is that the economy relies on the comparatively easy activity of digging rocks, drawing water and other basic extraction activities rather than develop manufacturing and other sectors of the economy and the trade patterns that go with them.  

More to the argument here,  though, another paper by three European academics found that:

(1) politicians tend to over-extract natural resources relative to the efficient extraction path because they discount the future too much, and

(2)  resource booms improve the efficiency of the extraction path.

However, (3) resource booms, by raising the value of being in power and by providing politicians with more resources which they can use to influence the outcome of elections, increase resource misallocation in the rest of the economy.

In other words, resource booms encourage companies and governments to get lots of minerals, oil and gas out of the ground to maximize the revenue.  That’s point (2).

But politicians encourage too much extraction because they tend to ignore future needs or become excessively and irrationally optimistic about the future. That’s point (1).

But the biggie is point (3).  Politicians in power and those wanting to be in power tend to increase the misallocation of resources.  They spend money wastefully, in other words, for short-term political gain.

As another trio put it:

Resource abundance increases the political benefits of buying votes through inefficient redistribution.

Inefficient redistribution can often mean increased reliance on public sector jobs. That tends to be especially true in societies like Newfoundland and Labrador where patronage is a foundation of the political culture. 

Anyone who has looked seriously at how the three political parties in this province operate in practice will recognise immediately the central role that patronage has in shaping the political system. Neither of the parties is a well-developed institution that runs according to a functioning constitution. 

Each is run – in effect – by influential groups of insiders who jockey among themselves for position.  As everyone saw most nakedly with the Conservative leadership earlier this year, the controlling group or groups of insiders will invent reasons to exclude people who they wish to exclude despite what the written party constitution says.

Anyone who listened to some of the commentary about a connection between government road-paving contracts and political contributions will see the easy acceptance of patronage:  that’s just how things are done around here, to paraphrase one radio host.

It is how things are done around here. This sort of behaviour  - connecting government work with a political benefactor - would be normal. After all that’s exactly how politicians demonstrate their value to voters, by measuring the pork they have brought.

Sometimes, though, it is worthwhile to look beyond normal to see what is really going on.

- srbp -