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economy experiences temporary appreciation of the real exchange rate and other Dutch
disease symptoms. However, these are reversed as home-grown capital is accumulated.
There are many other resource management issues. First, governments should realize
that, if imports are mostly financed by an exogenous stream of foreign exchange coming from
resource rents, revenue generated by tariffs is illusory as the increase in tariff revenue is offset
by reducing real resource revenue (Collier and Venables, 2010). Tariffs effectively reduce the
domestic purchasing power of the windfall of foreign exchange. Second, tax capacity
typically erodes quickly during windfalls. Since legal and fiscal capacity are likely to be
complements (Besley and Persson, 2009a), this leads to grave concerns about the adequate
supply of common-interest public goods such as fighting external wars or inclusive political
institutions. Third, the political economy of windfalls dictates that incumbents may avoid
putting resource revenues in a liquid sovereign wealth fund which can be easily raided by
political rivals. There is thus a bias to excessive investment in illiquid, partisan projects,
especially if the probability of being kicked out of office is high (Collier et al., 2010). There
may also be a tendency to over-invest in partisan projects with negative social surplus (‘white
elephants’) if politicians find it hard to credibly commit to socially efficient projects
(Robinson and Torvik, 2005). Fourth, harnessing windfalls in face of the notorious volatility
of commodity prices implies that governments build precautionary and liquidity buffers (by
postponing spending and bringing taxes forwards) and extract natural resources excessively
fast (compared with the certainty-equivalent Hotelling rule) to minimize the commodity price
risk of future remaining reserves, especially if the degree of prudence is high and commodity
price shocks are persistent and have high variance (van der Ploeg, 2010b). Future work needs
to extend existing results on uncertainty about future demand for the resource and about
exploration and reserves that will ultimately be available for exploitation (e.g., Pindyck, 1980)
to a setting where governments must decide on their intra- en intertemporal allocation of
public goods and setting of tax rates. It is also necessary to investigate how options and other
financial instruments can be used to shield economies from commodity price volatility and
what political constraints prevent these instruments from being used in practise.
6. Concluding remarks
A quasi-experimental within-country study of the districts of Brazil suggests that the
economic argument that a resource bonanza induces appreciation of the real exchange rate
and a decline of non-resource export sectors may have some relevance, but much more panel-
data and quasi-experimental studies are needed to shed light on this key issue. The best
available empirical evidence suggests that countries with a large share of primary exports in
GNP have bad growth records and high inequality, especially if quality of institutions, rule of
law and corruption are bad. This potential curse is particularly severe for point-source