The Promise – and Pitfalls – of State-led Development in Resource-rich Countries: Resource Nationalism in Latin America and Beyond

miningThe eclipse of neoliberalism in 2000s coincided with the so-called commodity ‘super cycle’ that lasted between 2002 and 2012. In search of a new model, resource-rich states began to articulate resource nationalism as a development strategy. While ownership and control of minerals and hydrocarbons are intricately tied to claims of state sovereignty and exercise of political authority in development policy, resource nationalism can also be understood in terms of a power struggle between host states and global hegemons in their quest to secure resources for their own industrial needs. Hence, contemporary natural resource governance is reflective of the wider ideological return of the state despite two decades of reforms promoting market liberalization and privatization. Resource nationalism is a vital expression of the renewal of state agency amidst high external constraints imposed upon resource-rich countries.

Resource Nationalism as a State-led Development Strategy

It is not a coincidence that resource nationalism returned in mainstream political debates at the same time as emerging powers designed new industrial policies aimed at recalibrating state-market relations in favour of the former. With extraordinary high prices and rising demands for natural resources from China, domestic political configurations in resource economies appear to move towards reforms aimed at (1) capturing and maximising windfall profits amidst a boom, (2) extending the role of state in commodity production through a renewed role for state-owned enterprises, and (3) renegotiating the terms of contracts with multinational mining capital.

These policies are emblematic of a wider trend: the growing importance of state stewardship for industrial transformation in an era of cross-border production networks governed by global lead firms. Despite the rhetoric on economic globalization, the role of the state remains prevalent as observed in the number of state-owned enterprises, the significant expenditure on industrial policy, and the array of government-business partnerships in East Asia and beyond. State interventions are reconfigured not simply to reinforce the residual statist tendencies, but to actively construct new comparative advantages and build strong ties with economic elites who can compete in a globalized international economy. Perhaps, more importantly, political elites are forging new social contracts with ordinary citizens to enhance the legitimacy of the state, whether in terms of actively supporting social welfare programmes (as in the case of many conditional cash transfers in Latin America), or by creating new avenues to engage with marginalised groups (for example, through participatory institutions and FPIC process).

Amidst the resource bonanza, development plans were set in motion centred around the exploitation of natural resources. For example, Brazil launched a programme focussed on heavy investments in the capital goods sector, notably in oil, gas and ship-building industries.

Several Latin American countries also introduced new royalty fees and export taxes aimed at capitalising on high prices. Table 1 details the increasing role of natural resource rents in state revenues over the past twenty years.

Table 1: Public Revenues from non-renewable natural resources in percentages of GDP

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Alongside attempts at adding value in mining and hydrocarbons, Latin American governments faced redistributive pressures from their political base. ‘Compensatory states’ justified their resource extraction strategy as a necessary step for further income distribution and revitalization of manufacturing. While political citizenship in post-neoliberal Latin America is increasingly defined by redistributive politics, it also emphasised recognition and identity politics as a central feature of a contentious state-society relationship.

The Limits of the Resource Bonanza

It is now a widely held view that the Left-of-Centre governments successfully reduced poverty and extreme poverty (see Table 2), and although slow, inequality has begun to taper off (Figure 1). However, the data also confirm the fragility of the social achievements of Latin American governments – as the bonanza ended, so did the gains from poverty reduction. This points to several important shortcomings of resource-based strategies.

Figure 1 Gini Inequality Index in Latin America, 2002-2018

Screenshot 2020-03-24 at 09.29.28Source: CEPAL 2019

Most conspicuously, poverty gains may have created a trade off in making vital investments in the productive economy. Finite domestic revenues have been subject to immense political competition for rent-seeking, and without a coherent industrial strategy, an export-led growth model based on commodities are likely to be fragile and is vulnerable from price swings.

This, then, leads to a gloomy conclusion. Resource-rich states, without the institutional capacity to design a productivist strategy to diversify their export base and to set out an ambitious multi-year development plan to upgrade their industrial sectors, are likely to suffer from the vicissitudes of international commodity markets. At worst, those without political consensus over governance – Venezuela under Maduro being the emblematic case – are likely to waste the opportunities for development through their strategic mining sectors. The broader lesson, I suspect, is that institutional preconditions and pro-industrial policy coalitions are central to the success of developing countries advancing new strategies in an increasingly globalized international economy. Crucially, whenever crisis and uncertainty appear, the state as a stabilizing force becomes more prescient than ever.

Table 2: Poverty and Extreme Poverty in 18 Latin American Countries, 2002-2019 (in percentages)

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Jewellord (Jojo) Nem Singh is an Assistant Professor at the Institute of Political Science, Leiden University working on the political economy of development and democracy in Latin America and East Asia. He tweets at @jnemsingh.

Laissez-Faire, Laissez Mourir

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The spread of the coronavirus epidemic around the world in the past few weeks has exposed not only differences in the lack of preparedness of various public health systems, but also differences in reactions to the crisis. Some governments imposed an early lockdown in their attempt to ‘flatten the curve’ while others have taken a more gradual approach, proceeding from travel restrictions through limits on non-essential businesses to shelter-in-place regimes. 

As the epicenter of the pandemic shifts from Asia to Europe and the U.S, however, some reactions stand out among the rest in their utter disregard for human life. Federal and state officials in the U.S. have first downplayed the threat two months before it arrived in the country, as well as refused offers for help from the World Health Organization. Now, as the curve in the U.S. is about to get steeper (see the surgeon general’s warning), top levels of government are considering scaling back the moderate measures that have been taken so far, with a view to return to normal activity within a few weeks. While blaming China for not controlling the virus early enough, some officials are contemplating consciously allowing their own citizens to experience a much worse spread of infection and death than China has seen. 

One clear example of this misguided and dangerous ideology can be seen in the pressure put on the U.S. government by corporate lobbyists not to activate the Defense Production Act – which enables the executive branch to order corporations to manufacture the direly-needed medical supplies for testing and treating the virus. Large swaths of the political elite, instead, are relying on the private sector’s voluntary offers to produce such goods. Worse, these same politicians are aching to get the economy back to normal, so as to boost the stock market and their own ratings at the same time. The  lieutenant-governor of Texas even went as far as suggesting that older citizens – the group most prone to dying from the virus – would gladly ‘sacrifice’ themselves in the interest of getting the economy moving again.Read More »

Does one size fit all when it comes to financial inclusion? Scrutinising the effects of class, race, gender, and age

524195139_1c8a3ec97c_b.jpgIn recent decades, market-based solutions such as financial inclusion have become more popular in developed countries to reduce inequalities and boost wealth and incomes of the poor. There is no better example of this than the recent thrust of low-income families, women, ethnic minorities, and the young into the subprime mortgage lending expansion in the USA since the early 2000s. Higher access to formal loans for these households was argued to enable them to climb the magical ladder of homeownership and achieve their American Dream. But as we know, the picture didn’t turn out to be quite so rosy.

10 years since the Great Recession, many families are not seeing recovery as the impact of the crisis was substantially harsher for the subprime borrowers (Young 2010; Henry, Reese, and Torres 2013). Financial inclusion in the subprime period turned out to be predatory. In this post, I explore how things went wrong when policy makers failed to account for the institutional conditions in the US economy, which led to dramatically different experiences of financial inclusion across social classes, gender, race, and generations.Read More »

Financial Education in Malaysia: A Driver of Nation-Building or Inequality?

Moonrise_over_kuala_lumpur.jpgA decade has passed since the Global Financial Crisis (GFC) which seems an apt time to begin talking about the event that has pushed the concept of financial education to the core of global policymaking debates. Despite its growing popularity today, financial education has existed in the premise of global policymaking for the past few decades. The benefits of financial education seem endless; poor national financial literacy levels have been blamed for adverse socioeconomic effects such as high national household debt and/or a general irrational exuberance in financial consumption behaviour (see e.g. here). Along the same lines, low national financial literacy rates have been seen as indicative of overall financial instability, the types that have been argued and blamed as causal mechanisms of the GFC. Thus, financial education is held as an empowering dogma, its dissemination seen as providing citizens with the knowledge that would empower them to access financial services in a sustainable and meaningful manner. Read More »

If India gave minimum support incomes to the rich before, it can do the same for the poor. Rahul Gandhi can do it.

rahulghandi.jpgIndia’s opposition leader has recently floated minimum income support. The 1.5% GDP equivalent it requires can be financed through a 3% tax on the richest 3000. It is not just an idealized safety net for the poor – it has been done before, for the super elites. If it works, it can be a model for adoption in other emerging democracies. Read More »

Revisiting Hirschman’s Tunnel Effect and Its Relevance for China

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As within-country inequality is on the rise worldwide, considering how people actually perceive inequality in their societies and how they respond to it is a question worth asking. In 1973 Albert Otto Hirschman proposed an explanation of changing tolerance for inequality associated with different ‘stages’ of the development process. In this post I’ll revisit Hirschman’s theory and link it to emerging studies of how inequality is perceived in China. The Chinese people generally seem to be satisfied with rising inequality, yet it is unclear how long this tolerance will last.Read More »

Not just r > g but r + q >> g: Piketty meets Ricardo in the long run of Indian history

Wealth-income ratios are rising everywhere – they are not cyclical but rather unambiguously upward trending for the past three decades. Put simply, the accumulation of wealth is outpacing economic growth. This is true in America, Europe and Japan (Piketty and Zucman 2014), as well as China and Russia (Novokmet, Zucman & Yang 2018). In recent research (Kumar 2018), I found this same trend to persist in the world’s largest democracy – Indian wealth-income ratios have been rising since the 1970s. Why are these trends so similar in countries with such deep structural differences and distinct economic trajectories? By themselves, high wealth-income ratios are not necessarily a social dilemma – they may imply more wealth for everyone. But in general, there is a tendency for wealth to be more concentrated than income. As a result, a rise in wealth over income tends to increase wealth inequality. This is certainly the situation in most economies today. Thus, these trends and the mechanisms behind them need to be understood with careful attention.

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The long run evolution of the rich in India 1937-2012

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Inequality in India may be returning to levels last seen during British Rule. To understand this, it is necessary to put India’s elite at the center of macro-history.

One of the central questions in political economy is how wealth evolves, particularly at the top. In Europe and the USA, we now accept that progression of wealth inequality followed a “U” shape or what has been called the “Inverted Kuznets Curve.” Briefly put, on the eve of World War I, the richest few percentiles dominated Western society with their massive wealth holdings. Fast forward to a decade after World War II and we see that their wealth declined substantially, but then started rising again in the late 1970s. Much has been written on this since (and due to) the publication of Piketty’s (2014) Capital in the 21st Century. My new and revised paper (Kumar, 2017b) puts the rich at the center of India’s economic history over the last eight decades. The main question I want to ask is the following: Is the state of contemporary wealth concentration in India a continuation or a break from its history?Read More »