natural resources: curse or blessing? · the natural resource paradox dutch disease the norwegian...
TRANSCRIPT
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NaturalResources:CurseorBlessing?
Trinidad&Tobago,February2014
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The natural resource paradox
Dutch disease
The Norwegian paradox
Natural resources governance: sustainability and the new paradigms
Outline
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TheNaturalResourceParadox
Countries with abundant natural resources, tend inaverage to grow less than countries with few naturalresources
That phenomenon happens with particular emphasisin countries with non renewable natural resources,likeminerals and oil
Why is that?
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Therateofgrowthofpercapitaincome islowerforresourcedependenteconomiesthanfornonresourcedependenteconomies.
Example: XLandhasnomineralresourcesandhasarateofgrowthofpercapitaGDPof2.5%
YLandhascopperandhasarateofgrowthofpercapitaGDPof1.6%
TheNaturalResourceParadox
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TheNaturalResourceParadox
Evidencewasgathered.
Source:Manning(2004)
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TheNaturalResourceParadox
Evidencewasgathered.
Source:Manning(2004)
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Evidencewasgathered.
Source:WorldBank
0
5,000
10,000
15,000
20,000
25,0001961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
Gross National Income PerCapita,US$
Per
Chile
Nigeria
Korea
T&T
7
TheNaturalResourceParadox
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Explanationswerelookedfor
Source:Gylfason (2000)8
TheNaturalResourceParadox
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Andalogicalconclusioncameup:
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Resourcesareacurse!!!
TheNaturalResourceParadox
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TheResourceCurse
0
5
10
15
20
25
30
35
40
45
50
0 5 10 15 20 25 30 35 40 45 50
PerC
apita
GDP
Time
Whatisitallabout?
ResourceDiscoveredinYear 20
With Discovery
WithoutDiscovery
Source:RWI(2013)10
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TheResourceCurse
SonaturalResourcesbroughtusthesevenplagues,butwhichoneswerethemechanisms:
DutchDiseaseandlossofcompetitiveness Decliningcommoditypricesbecauseinnovationandsubstitution
Overproductiondrivingpricesdown Volatilityofinternationalpricesofcommodities BoomBustCycle
Accesstoeasycredit debtcrisis Consumerismfever Corruptionopportunitiesfueledbyeasywealth Unproductiveuseofresources Distorteddistributionofproductionfactors
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Soresourcesbroughtusthesevenplagues,butwhatwerethemechanismsforsuchacurse:
Clustereconomy Scarceaddedvalue onlyrawcommoditiesproduction Decreasingreturns Wealthconcentration,increasedinequality:theBelindiaSyndrome
Monoexportermentality DegradedenvironmentalandSocialdegradation Excessofrevenuefuelsfiscallazinessandirresponsibility Promotesauthoritarianandclientelistregimes
TheResourceCurse
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TheResourceCurse
Datasupportedthisperspective:
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TheResourceCurse
Itistrue!:goodsarereplaced
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Andnewways toexploitaresourcecandeveloped
Thus, nobodycanbe100%sure
TheResourceCurse
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Andnewsourcesofenergyaredeveloping
Theonlythingweknowforsureaboutthefutureisthatwearenotthereyetbutitiscoming
TheResourceCurse
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Werethoseprojectsreallynecessary?
TheResourceCurse
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Werethoseprojectsreallynecessary?
TheResourceCurse
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WereaboutT&T?
TheResourceCurse
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Andwhereaboutauthoritarian, populist,corruptregimes?
TheResourceCurse
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Andthisishappeningrightnextdoor
TheResourceCurse
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Country GovernmentEffectiveness
RegulatoryQuality
VoiceandAccountability
Algeria 29th 11th 18th
Egypt 32nd 41st 16th
Iraq 10th 15th 13th
Jordan 57th 57th 25th
Libya 5th 5th 6th
SaudiArabia 41st 53rd 3rd
Tunisia 57th 46th 36th
UnitedArabEmirates
78th 63rd 20th
Source:WorldBankGovernanceIndicators(2011)
TheResourceCurse
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Andthereareserious governanceandtransparencyissues
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TheDutchDisease
An economic phenomenon where the revenues from naturalresource exports damage a nation's economy , affecting itsdiversification and competitiveness
The name comes from the economic disturbances experiencedby the Netherlands after huge gas fields were discovered
Appreciation of the local currency Increase in the price of factors (labor, capital) Tradable sectors lose competitiveness in and out thecountry
Why was that?
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TheDutchDisease
Netherlandshastraditionallybeenamanufacturingandtradingpower
Bythe1950stheDutchmanufacturingsectorwasworldclass.EverheardaboutPhillipsTVandradiosets?
In1959thebiggestgasfieldinEuropewasfoundinGroningen
Fieldproductionstartedin1963andtheDutcheconomybegantoreceivemassiveinflowsofgasrevenues
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TheDutchDisease
3effectsoftheDutchDisease
FactormovementeffectLaborandcapitalflowsintotheresourceextractionsectorattheexpenseofotherproductivesectors
SpendingeffectIncreaseddemandfromtherecipientsofresourcesrevenuespressesthenationaleconomy
Spillover losseffectLossofcompetivenessinotherproductivesectorshampersinnovationandeconomicdevelopmentinthewholeeconomy
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TheDutchDisease
The increased supply of foreign currency brought theappreciation of the local currency
Consequences:Dutch products became more expensive for foreigners andforeign products became cheaper for Dutch people
Therefore loss of competitiveness for the tradable sector(manufacturing)
Also the demand from the oil sector increased the cost ofproductive factors for all the economic sectors
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Oilstartsflowing Inflowofforeigncurrency
Peopleandcapitalmovefromothersectorstotheoilsector
Valueofdomesticcurrencyrisesand/orinflationrises
Exportindustriesbecomeless
competitiveanddecline
TheDutchDisease
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TheDutchDisease
TherehavebeenalotofapparentepisodesofDutchDisease:
Spain(16th century)UnitedKingdom(1970s)Nigeria(1990s)Australia(2000s)
WhereaboutT&T?
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Therearegainsandlossesfromfindinganaturalresource.
Thekeyistomakesurenetgainsarepositive.Inthiscase,realGDPgoesup.
Example:IfoilisfoundandGDPgoesdown,thenoilshouldnotbeproduced.Oilhasnegativevaluetotheeconomyinthiscase,andtherefore,dontproduceanyoilifproductionmakestheeconomypoorer.
Thisisthefundamentalissue:DontlookatthegrossgainsfromExtractiveIndustries.Ratherlookatthenetgains
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TheDutchDisease
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OfCoursetherearePolicyResponsestoDutchDisease
1. Macroeconomic policy to neutralize the exchange rate appreciation. Sterilization might be useful. Hold foreign exchange earnings overseas in an attempt to keep domestic consumers from increasing the relative price of non-tradables.
a. Might work for a period of time, but domestic nationals may undo in part what the government does via sterilization. That is, domestic nationals may bring their own foreign reserves back into the country and offset the net gain in the governments foreign reserve position.
b. Foreign investors might bring foreign exchange into the economy to offset the governments attempt to reduce imports.
c. The fact that the government holds more foreign exchange will tend to increase the exchange rate.
2. Fix the exchange rate (China): Keep the exchange rate undervalued. Encourages exports but discourages domestic consumption.
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TheDutchDisease
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3. Part of Dutch Disease is a distributional problem.
a. Government gets the mineral revenue.b. Citizens in affected sectors bear the cost.c. Need policies to help with the adjustment (not export subsidies but
investments in areas that will promote employment and exports).
4. Diversify the economy: Not subsidies for industries but investments in infrastructure and skills.
5. Dutch Disease works in reverse:
a. As mineral developments are depleted, foreign exchange earnings fall and the exchange rate may depreciate.
b. Need investments to take over when mines are depleted. c. There needs to be increased savings and investment.
OfCoursetherearePolicyResponsestoDutchDisease
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TheDutchDisease
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AddressingDutchDisease:FiscalSterilization
Oilstartsflowing InflowofforeigncurrencyValueofcurrencyandinflationremainstable
Fundsareinvestedoverseas
Exportindustriesremain
competitive
OtherMeansofAddressingDD: Investment,economicdiversificationandgrowth Monetarysterilization
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TheDutchDisease
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TheNorwegianParadox
However,realityiscomplex.Itisnotassimple
Norwayisagoodcaseofhowcauseeffectrelationshipsrelatedtotheresourcecursedoesntalwayswork
ThatiscalledtheNorwegianParadox
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TheNorwegianParadox
NorwaywashistoricallythesmallerandleastdevelopedeconomyamongtheScandinavianscountries
Incomparativeterms,itwaslessdiversifiedandsophisticatedthanitsneighbors
However,in1969Norwaydiscoveredhugeoilfields,withcommercialproductionstartingin1971
Whathappenedthen?
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TheNorwegianParadox
Norways economystarted to catch uptheir neighbors, afteroil was founds
However, Norwaywas able to keep acontinuous growtheven after oilrevenues permeatedthe economy
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TheNorwegianParadox
Continuoushigheconomicperformance
ComparativelyreducedinvestmentinResearch&Development
Lowleveloftechnologicalinnovation
Whathappened?
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TheNorwegianParadox
AfundamentalfacthastobeconsideredinordertoexplaintheNorwegianParadox:
Adequatepoliticalandeconomicinteractionbetween
Institutions
Specialinterestgroups
Electorate
Inotherwords:astrongSocialContract
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TheNorwegianParadox
There was a set of public policies and institutionsplaying a role supporting economic growth
Norway was unsuccessful developing non resourcebased industries, BUT was successful developingresource based industries
There was an entrepreneurship sector available,eager to take advantage of the opportunities broughtby the oil boom
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NorwegianParadox
TheNorwegianstateimplementedafullsetofpolicies
FactorMovementPolicy SpendingEffectPolicy SpilloverEffectPolicy EducationresearchanddevelopmentpolicyActivecountercyclicalpolicy Labormarketpolicies Industrialpolicy
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TheNorwegianParadox
As a consequence:
Factor movement was controlled through incomecoordination, and a centralized wage formation system
Spending effect was controlled by fiscal discipline andinvesting abroad
Spilloverloss effect was compensated by industrial policy andlearning by doing in the oil extraction sector
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TheNorwegianParadox
WhatthecaseofNorwaytellus?
Thereisacurse,butalldepends
ItispossibletoescapetheDutchDisease,butalldepends
Itispossibletoescapethecurse,butalldepends
Therecanbesustainablegrowth,butalldepends
Ineconomics:alldepends
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TheNorwegianParadox
Natural resources can be a blessing, if managedcorrectly
Two key conditions:
Discourage rent seeking and redistribution conflicts. Theremust be a strong social contract, reflecting an integratedsociety, with a common vision and shared principles
Proper planning and allowance for the impact from thebooming sector on the whole economy
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RecentworkhasbeguntocastdoubtontheResourceCurse
IthasbeenshownthatpercapitaGDPishigherforcountrieswithmineralresourcesrelativetothosethatdonothavemineralresources.
Thereareseveralresourcerichcountriesthathavemanagedtogrowthconsistently
NaturalResourcesManagement
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NaturalResourcesManagement
Several countries, other than Norway, have been quitesuccessful managing the wealth coming from naturalresources: Canada, Chile, Australia, New Zealand
All those countries had to learn and adapt to their newcircumstances
In this process of adjustment (economic, social, political, evenenvironmental) there are gains and losses
With a clear understanding and agreement on how to betteruse the natural resources, those resources are a true blessing
There is always going to be an impact, but we can manage thatimpact
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Someresourcerichcountriesarenotdoingbad.
Source:WorldBank
0
20,000
40,000
60,000
80,000
100,000
120,0001961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
Gross National Income PerCapita,US$
NorwayChileNewZealandAustraliaCanadaT&T
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TheNaturalResourceParadox
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ThedebateabouttheResourceCursemaybeacademic,butpoliciesareimportant
Goodinstitutionsmakeeverythingbetter.
Transparencycanincreaseinstitutionalquality.
Savingisimportantandprudenceinhowsavingsareinvestedisequallyimportant.
Carefulplanningandevaluationisessentialfordomesticinvestments
NaturalResourcesManagement
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NaturalResourcesManagement
WhereaboutRevenueManagement&Investment? Challengesofresourcerevenueandexpendituremanagement:
Resourcedependence Revenuemanagement Economicdiversification
ThatmeansimplementationofadequateInstitutionsandmechanisms
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NaturalResourcesManagement
ResourceCurseNO YES
DutchDisease
NOOverallgrowthanddiverseexportbase
Stagnantgrowth,butdiverseexportbase
YESOverallgrowth,butstronglycontractedmanufacturing
Stagnantgrowth,andstronglycontractedmanufacturing
Source:Larsen(2004)48
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NaturalResourcesManagement
4Issuestoaddressregardingrentdistributionfromtheextractivesector
Largescaledistributionconflicts
Smallscaleillegalrentseeking
Smallscalelegalrentseeking
Politicalpurchaseofpowerthroughelectoralclientelism
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NaturalResourcesManagement
Howtoaddressrentseekinganddistributionconflicts:
Strongsocialnorms
Transparentdemocracy
Propermonitoring
Effectivejudicialsystem
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TheNaturalResourceCharter Purpose: to assist governmentsand societies of resource richcountries to manage thoseresources generating economicgrowth, promoting welfare andenvironmentally sustainability
Drafted by an independent groupof economists, lawyers andpolitical scientists under anoversight board of distinguishedinternational figures
NaturalResourcesManagement
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TheNaturalResourceCharter
NaturalResourcesManagement
Precept1:MaximizingBenefits
Precept2:AccountabilityPrecept3:FiscalRegimesPrecept4:Competitive
ProcessesPrecept5:Environment
andSocietyPrecept6:National
Companies
Precept7:PromotingGrowthPrecept8:Smoothing
SpendingPrecept9:Effective
SpendingPrecept10:PrivateSectorPrecept11:International
ActorsPrecept12:RoleofCompanies
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TheExtractiveIndustriesTransparencyInitiative(EITI)NaturalResourcesManagement
Joint initiative of governments,companies and civil society toimprove openness and accountablemanagement of revenues fromnatural resources
Countries implement the EITIStandard to ensure full disclosure oftaxes and other payments made togovernments
EITI Reports allow citizens to knowhow much their government isreceiving from their countrys naturalresources
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TheExtractiveIndustriesTransparencyInitiative(EITI)NaturalResourcesManagement
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Currently, T&T is a candidate country to the EITI Standard
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So,whowantstoberesourcerich,yet?
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ToTshock+Procyclicalfinancialsector+Procyclicalfiscalandmonetarypolicy
Outputvolatility
Lowergrowth+Poorinvestment
(2)RevenueVolatility,MacroeconomicVolatilityandProcyclicality
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DutchDiseaseDefinition:Asituationinwhichtheintroductionofanewasset
intoaneconomyadverselyaffectseconomicactivityinothersectors.
Example: OilwasdiscoveredintheNorthSea. OilproductionincreasedinTheNetherlands. Exportsoftulipbulbswentdownandunemploymentinsome
sectorswentup.
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DutchDiseaseFormalized(123Model) Onecountry Two sectors (ProductionandConsumption) Three goods (Imports(M),Domestic Production(D)andExports(X))
Producers can substitutebetween DandEimperfectly Consumers can substitutebetween DandMimperfectly Differs from modelwith tradeables andnontradeables byallowing tradedness
tobe amatter ofdegree
Production Consumption
CET CES
D MX
BoT
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Therearegainsandlossesfromfindinganaturalresource.
Mustmakesurenetgainsarepositive.Inthiscase,realGDPgoesup.IfoilisfoundandGDPgoesdown,thenoilshouldnotbeproduced.Oilhasnegativevaluetotheeconomyinthiscaseifitisproduced.Weneedtomakesurethatthelowestvalueiszero.Therefore,dontproduceanyoilifproductionmakestheeconomypoorer.
Thisisreallyanexampleofthebasicpoint:acountrymustnotlookatthegrossgainsfrommineralproduction.Rather,acountryneedstolookatthenetgains.
Ifcashflowsaremeasuredperfectly,thenthereisnoproblembecauseDutchDiseaseeffectswouldbeautomaticallytakenintoaccount.
Cashflowsarenotperfectlymeasuredandthussomeadjustmentforlossestoothersectorsisnecessary.
DutchDisease:Summary
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FramingtheChallenge
IsthereaResourceCurse? Naturalresourceshavethepotentialtobetransformativeiftheyareproperlyharnessedfordevelopment
Butthedecisionchainfromdiscoveryofmineralsthroughtheirconversionintoaproductiveeconomyislongandcomplex.
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FramingtheChallenge
Effectivelynavigatingthislongandcomplexdecisionchainrequiresanuancedunderstandingofpowerstructuresandincentiveswithinthenaturalresourcesector,aswellastechnicalskills.
Governmentpolicymakers,civilsocietyrepresentatives,membersofParliamentsandtheMedia:allhaveimportantrolestoplay.
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Precept1:MaximizingBenefits
Precept2:AccountabilityPrecept3:FiscalRegimesPrecept4:Competitive
ProcessesPrecept5:Environment
andSocietyPrecept6:National
Companies
Precept7:PromotingGrowthPrecept8:Smoothing
SpendingPrecept9:Effective
SpendingPrecept10:PrivateSectorPrecept11:International
ActorsPrecept12:RoleofCompanies
NaturalResourceCharter:12Precepts
Natural Resources: Curse or Blessing?The natural resource paradoxDutch diseaseThe Norwegian paradoxNatural resources governance: sustainability and the new paradigmsThe Natural Resource ParadoxSlide Number 4The Natural Resource ParadoxThe Natural Resource ParadoxSlide Number 7Slide Number 8Slide Number 9The Resource CurseThe Resource CurseSlide Number 12The Resource CurseThe Resource CurseSlide Number 15Slide Number 16Slide Number 17Slide Number 18Slide Number 19Slide Number 20Slide Number 21Slide Number 22The Dutch DiseaseThe Dutch DiseaseThe Dutch DiseaseThe Dutch DiseaseSlide Number 27The Dutch DiseaseSlide Number 29Of Course there are Policy Responses to Dutch DiseaseOf Course there are Policy Responses to Dutch DiseaseSlide Number 32The Norwegian ParadoxThe Norwegian ParadoxThe Norwegian ParadoxThe Norwegian ParadoxThe Norwegian ParadoxThe Norwegian ParadoxNorwegian ParadoxThe Norwegian ParadoxThe Norwegian ParadoxThe Norwegian ParadoxSlide Number 43Natural Resources ManagementSlide Number 45The debate about the Resource Curse may be academic, but policies are importantNatural Resources ManagementNatural Resources ManagementNatural Resources ManagementNatural Resources ManagementThe Natural Resource CharterThe Natural Resource CharterThe Extractive Industries Transparency Initiative (EITI)The Extractive Industries Transparency Initiative (EITI)Slide Number 55Slide Number 57Dutch DiseaseSlide Number 59Dutch Disease: SummaryFraming the ChallengeFraming the ChallengeNatural Resource Charter: 12 Precepts