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countries also suffer from poorly developed financial systems and from financial remoteness,
so that they are likely to experience bigger macroeconomic volatility (Rose and Spiegel,
2009).
Building on Aghion et al. (2009), van der Ploeg and Poelhekke (2009) show that with
commodity price volatility liquidity constraints are more likely to bite and thus innovation
and growth will fall. Extending Ramey and Ramey (1995), they offer evidence that the
adverse growth effect of natural resources results mainly from volatility of commodity prices,
especially for point-based resources (oil, diamonds) and in landlocked, ethnically polarized
economies with weak financial institutions, current account restrictions and high capital
account mobility. Instrumenting resource exports with subsoil resource stocks, estimates
suggest a strong negative and significant effect of macroeconomic volatility on growth and a
strong and positive effect of exports of especially point-source resources on macroeconomic
volatility (van der Ploeg and Poelhekke, 2010).11 The indirect negative effect of resource
exports on growth via the volatility channel outweighs any direct positive effect of resources
on growth. A nonlinear specification suggests that the resource curse is operative only for
countries with a volatility of unanticipated growth exceeding 2.45% per annum. So it is
operative for Bolivia but not for Norway (both have a dependence of about 15% on point-
source resource exports over the sample). Volatility thus seems the quintessence of the
resource curse, but is offset somewhat in countries with high degree of financial development.
Volatile resource revenues hurt risk-averse households, but welfare losses induced by
consumption risk are tiny compared with those from imperfect financial markets. If only debt
contracts are available and bankruptcy is costly, the economy and the real exchange rate
become more volatile when there is specialization in traded goods and services and the non-
resource traded sector is small (Hausmann and Ribogon, 2002). Effectively, shocks to
demand for non-traded goods and services - driven by shocks to resource income - are not
accommodated by movements in the allocation of labour but by expenditure switching. This
demands much higher relative price movements. Due to bankruptcy costs, interest rates
increase with relative price volatility. This causes specialization away from non-resource
traded goods and services, which is inefficient. The less it produces of these traded goods and
services, the more volatile the economy becomes and the higher the interest rate has to be.
This causes the traded sector to shrink further until it vanishes.
11 The IV estimates yield an insignificant coefficient for the effect of point-source natural resources on
mean growth in GDP per capita, but a significant coefficient of -0.394 at the 1% level for the effect of
the standard deviation of unanticipated growth in GDP per capita, and a significant coefficient of 11.8
and 5.3 at the 1% level for the effects of point-source and diffuse natural resource dependence on the
variance of unanticipated growth in GDP per capita. The effects of financial development, openness,
the distance to nearest coast or navigable river on the variance of unanticipated growth in GDP per
capita are also significant at the 1% level.