International economics subject For undergraduate students (semester 3)

1. Rybczynski theorem
Dutch disease
Resource curse
Meeting 3

2. Rybczynski theorem: intro
• At constant world prices, if a country experiences an increase in the
supply of one factor, it will produce more of the product intensive in
that factor and less of the other

3. Rybczynski theorem: explanation
• In the context of the Heckscher–Ohlin model of international trade,
open trade between two regions often leads to changes in relative
factor supplies between the regions. This can lead to an adjustment in
the quantities and types of outputs between the two regions
• The Rybczynski theorem explains the outcome from an increase in
one of these factor's supply as well as the effect on the output of a
good which depends on an opposing factor

4. Rybczynski theorem: example
• The Rybczynski theorem displays how changes in an endowment
affects the outputs of the goods when full employment is sustained
• The theorem is useful in analysing the effects of capital investment,
immigration and emigration within the context of a Heckscher-Ohlin
model

6. Rybczynski theorem: graphic explanation
• Suppose there is an increase in the labour endowment. This will
cause an outward shift in the labour constraint. The PPF and thus
production will shift to point B
• Production of the labour-intensive good, will rise from C1 to C2.
Production of the capital-intensive good, will fall from S1 to S2
• In general, an increase in a country's endowment of a factor will
cause an increase in output of the good which uses that factor
intensively, and a decrease in the output of the other good

7. H/w
• Sectors in economy
• Traditional/Industrial/Post-industrial
• Rostow stages

8. Dutch disease: intro
• Is the causal relationship between the increase in the economic
development of a specific sector (for example natural resources) and
a decline in other sectors (like the manufacturing sector or
agriculture)
• The mechanism is that as revenues increase in the growing sector (or
inflows of foreign aid), the given nation's currency becomes stronger
(appreciates) compared to currencies of other nations (manifest in an
exchange rate)
• This results in the nation's other exports becoming more expensive
for other countries to buy, and imports becoming cheaper, making
those sectors less competitive

9. Dutch disease: intro
• The term was invented in 1977 by The Economist to describe the
decline of the manufacturing sector in the Netherlands after the
discovery of the large Groningen natural gas field in 1959

10. Dutch disease: history
• Dutch disease first became apparent after the Dutch discovered a huge natural
gas field in Groningen in 1959. The Netherlands sought to tap this resource in an
attempt to export the gas for profit. However, when the gas began to flow out of
the country so too did its ability to compete against other countries' exports
• With the Netherlands' focus primarily on the new gas exports, the Dutch currency
began to appreciate, which harmed the country's ability to export other products.
With the growing gas market and the shrinking export economy, the Netherlands
began to experience a recession
• This process has been witnessed in multiple countries around the world including
but not limited to Venezuela (oil), Angola (diamonds, oil), the Democratic
Republic of the Congo (diamonds), and various other nations. All of these
countries are considered "resource-cursed"

11. Dutch disease: explanation
• The classic economic model describing Dutch disease was developed by the
economists W. Max Corden and J. Peter Neary in 1982
• In the model, there is a non-tradable sector (which includes services) and
two tradable sectors: the booming sector, and the lagging (or non-
booming) tradable sector
• The booming sector is usually the extraction of natural resources such as
oil, natural gas, gold, copper, diamonds or bauxite, or the production of
crops, such as coffee or cocoa. The lagging sector is usually manufacturing
or agriculture

12. Dutch disease: resource boom affects this economy
in two ways
• In the "resource movement effect", the resource boom increases demand
for labour, which causes production to shift toward the booming sector,
away from the lagging sector. This shift in labour from the lagging sector to
the booming sector is called direct-deindustrialization.
• The "spending effect" occurs as a result of the extra revenue brought in by
the resource boom. It increases demand for labour in the non-tradable
sector (services), at the expense of the lagging sector. This shift from the
lagging sector to the non-tradable sector is called indirect-
deindustrialization.

13. Dutch disease: cure
• There are two basic ways to reduce the threat of Dutch disease: by
slowing the appreciation of the real exchange rate and by boosting
the competitiveness of the adversely affected sectors
• One approach is to sterilize the boom revenues, that is, not to bring
all the revenues into the country all at once, and to save some of the
revenues abroad in special funds and bring them in slowly

14. Dutch disease: cure
• Examples of these sovereign wealth funds include:
• the Australian Government Future Fund
• the Government Pension Fund in Norway
• the Stabilization Fund of the Russian Federation
• the State Oil Fund of Azerbaijan
• Alberta Heritage Savings Trust Fund of Alberta, Canada
• the Future Generations Fund of the State of Kuwait

15. Dutch disease: cure
• Another strategy for avoiding real exchange rate appreciation is to
increase saving in the economy in order to reduce large capital
inflows which may appreciate the real exchange rate. This can be
done if the country runs a budget surplus
• A country can encourage individuals and firms to save more by
reducing income and profit taxes. By increasing saving, a country can
reduce the need for loans to finance government deficits and foreign
direct investment

16. Dutch disease: cure
• Investments in education and infrastructure can increase the
competitiveness of the lagging manufacturing or agriculture sector
• Another approach is government protectionism of the lagging sector,
that is, increase in subsidies or tariffs

17. Dutch disease: examples
• Australian mineral commodities in the 2000s and 2010s
• Indonesia's greatly increased export revenues after the oil booms in
1974 and 1979
• Russian oil and natural gas in the 2000s
• Post-disaster booms accompanied by inflation following the provision
of large amounts of relief and recovery assistance such as occurred in
some places in Asia following the Asian tsunami in 2004
• H/w more examples or explain at least one from the
abovementioned

18. Resource curse or paradox of plenty: intro
• Refers to the paradox that countries with an abundance of natural
resources, tend to have less economic growth, less democracy, and
worse development outcomes than countries with fewer natural
resources
• H/w
• What is economic growth? How to measure it?
• Solow model

19. H/w
• 10 Countries With The Most Natural Resources

20. Resource curse: example
• The IMF classifies 51 countries as “resource-rich.” These are countries
which derive at least 20% of exports or 20% of fiscal revenue from
nonrenewable natural resources
• 29 of these countries are low- and lower-middle-income
• Common characteristics of these 29 countries include
• (i) extreme dependence on resource wealth for fiscal revenues export
sales, or both;
• (ii) low saving rates;
• (iii) poor growth performance;
• (iv) highly volatile resource revenues

21. Resource curse: effects
• In many poor countries, natural resource industries tend to pay far
higher salaries than would be available elsewhere in the economy.
This tends to attract the best talent from both private and
government sectors, damaging these sectors by depriving them of
their best skilled personnel
• Another possible effect of the resource curse is the crowding out of
human capital; countries that rely on natural resource exports may
tend to neglect education because they see no immediate need for it
• Resource-poor economies like Singapore, Taiwan or South Korea (East
Asian Tigers), by contrast, spent enormous efforts on education, and
this contributed in part to their economic success

22. Resource curse: oil impact (wars)
• A 2016 study finds that "oil production, oil reserves, oil dependence,
and oil exports are associated with a higher risk of initiating conflict
while countries enjoying large oil reserves are more frequently the
target of military actions
• e.g. African countries, Iraq, Iran etc

23. Resource curse
• Research shows that oil wealth lowers levels of democracy and
strengthens autocratic rule
• Only one type of resource has been consistently correlated with less
democracy and worse institutions: petroleum, which is the key
variable in the vast majority of the studies that identify some type of
curse

24. Norwegian paradox
• The Norwegian paradox is a dilemma of Norway's economic performance
where economic performance is strong despite low R&D investment
• Norway has not been successful in developing non-resource based
industries, yet managed to achieve substantial results in resource-based
industry development and resource-based innovation elaboration
• Norway's resource-based sectors have beneficially contributed to
developing knowledge and adapting to new challenges
• Finally, Norwegian institutions and politics managed to extend a relatively
narrow definition of science, technology, and innovation policy. Due to this,
broad perspective of innovation systems was successfully implemented