Food security

Domestic demand increasing domestic price level

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Unformatted text preview: dependence is associated with bad institutions The revenue collecting machine apparatus is the main indicator of institutional quality Natural resource extraction crowds out tradeable manufacturing activities, since manufacturing drives growth natural resources harm growth (DUTCH DISEASE) Oil and the economy: Russia: Stock price market of Russia moves completely with the oil prices Dutch Disease: Term invented after discovery of natural gas in the Netherlands in 1959 “direct” de- industrialization a resource boom shifts investment capital towards the booming sector workers move from manufacturing to resource extraction note: some kinds fo extraction employ few people Indirect de- industrialization Extra revenue is generated from booming sector, increasing domestic demand ! increasing domestic price level Capital flows into the booming sector ! currency appreciates Results… Other effects: Natural resource abundance crowds out innovation and entrepreneurial activity in the non- resource economy, if wages in the natural resource sector rise (strong evidence) Natural resources lead to consumption booms ! lower savings and investment (no evidence) Exchange- rate appreciation is a big fear of governments in resource- abundant countries which try to minimize the effect by Sterilizing currency inflows Using sovereign wealth funds to reinvest capital abroad Encouraging more investment in manufacturing Protectionism A “political” dutch disease? In addition to the price effects, res...
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