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Volatility is bad for growth, but also for investment, income distribution, poverty and
educational attainment (Aizenman and Marion, 1999; Flug et al., 1999). To get round these
curses, one could resort to stabilization and saving policies and improve efficiency of
financial markets. It also helps to have a fully diversified economy, since then shocks to non-
traded demand can be accommodated through changes in structure of production rather than
expenditure switching. This is important for inefficiently specialised countries such as Nigeria
and Venezuela, but less so for diversified countries like Mexico or Indonesia or naturally
specialized countries such as some Gulf States. Many resource rich economies have highly
specialized production structures and thus are very volatile.
3.7. Natural resource wealth induces voracious rent seeking12and armed conflict
The political economy of massive resource rents combined with badly defined property rights,
imperfect markets and poorly functioning legal systems provide ideal opportunities for rent
seeking behaviour of producers, thus diverting resources away from more productive
activities (Gelb, 1998; Auty, 2001ab, 2004; Ross, 2001ab). Economists demonstrate that
resource revenues are prone to rent seeking and wastage. Indeed, self-reinforcing effects of
rent seeking if rent seekers compete and prey on productive entrepreneurs can explain wide
cross-country differences in rent seeking (Murphy et al., 1993; Acemoglu, 1995). More rent
seekers lower returns to both rent seeking and entrepreneurship with possibly large marginal
effects on production. Since more entrepreneurs switch to rent seeking in times of a resource
boom, multiple (good and bad) equilibrium outcomes arise. More rent seekers induce negative
external effects that depress profits for remaining entrepreneurs, which stimulate even more
people to shift from productive entrepreneurship to wasteful rent seeking. Increased
entrepreneurship can also crowd out rent seeking. For example, private business can invent
and supply new substitutes for restricted imports and thus destroy the rents of quota licenses
(Baland and Francois, 2000).
The ‘voracity effect’ also causes a drag on growth as seen after the oil windfalls in
Nigeria, Venezuela and Mexico (Lane and Tornell, 1996; Tornell and Lane, 1999). This effect
implies that dysfunctional institutions and poorly defined property rights lead to a classical
commons problem whereby there is too much grabbing and rapacious rent seeking of natural
resource revenues. It supposes a fixed number of rent seekers. Capital can be allocated either
to a formal sector where rents derived from a common-good stock may be appropriated or to
an informal sector with lower returns and no rent seeking. During a natural resource boom
12 Rent seeking is also relevant when countries receive foreign aid (Svensson, 2000). Aid can remove
pressure to reform, induce recipients to overstretch themselves, cause a Samaritan’s dilemma with the
donor expected to bail out bad policies, siphon skilled workers away from government and thus weaken
institutions, and spark conflict over aid rents (Brautigam and Knack, 2004; Harford and Klein, 2005).