This paper addresses a ma jor paradox of the economic world, the seemingly negative impact of wealth in form of natural resources and development aid on growth. In the last 50 years a striking discrepancy in the economic performance of countries blessed by massive windfall gains became obvious. Robust empirical evidence was produced showing an inverse relation of both natural resources and development aid on economic growth. Regressions involving migrant's remittances did also yield ambiguous results under certain conditions. I try to embrace all windfall gains under the notion of "Easy Rents", characterised by easy generation of, easy access to and easy control over the abundant monetary assets.
The influence of the rents is proposed to work through biased price distortions, induced by sectoral competition, rent-seeking and \bad" economic policy, creating unfavourable conditions for the growth-driving tradables sector.
The conducted research and empirical testing indicates the appreciation of relative prices caused by political and economic disturbance. Following the results, a strong tendency of "Easy Rents" to exert deteriorating influence on a economy seems to be in place.
Table of Contents
1 Introduction
2 The Model
2.1 Fundamentals
2.2 Dynamics
3 Easy Rents
3.1 Basics
3.2 Natural Resources
3.3 Development Aid
3.4 Remittances
3.5 Dutch Disease
3.6 The culprit “tau”
4 Reality Check
5 Concluding Remarks
Research Objectives and Themes
This thesis investigates the paradox of why countries with abundant natural resources or high inflows of development aid often experience stagnation rather than growth, proposing the concept of "Easy Rents" to explain this phenomenon through sectoral price distortions and institutional decay.
- The impact of "Easy Rents" (natural resources, foreign aid) on economic growth.
- Mechanisms of price and allocation distortions in the tradable sector.
- Institutional deterioration, rent-seeking, and corruption induced by windfall gains.
- Empirical analysis of cross-country growth regressions and their limitations.
- Critical evaluation of the "big push" development theory and aid effectiveness.
Excerpt from the Book
3.1 Basics
The introduction already allowed a glimpse at the idea of “Easy Rents” and their, to say the least, ambivalent impact on economic performance. In this section the concept is developed and explained in depth. Further a deeper insight is given into the effects and implications of abundant funds for the economic and political processes and, at last, the variable τ is explained.
The term “Easy Rents” itself was found and taken from a World Bank paper, dealing with the effects of natural resources and it referred to the effortlessly generated revenues from resource booms. A similar notion is introduced by Alan Gelb with the usage of the term “Windfall Gains” for the revenues of oil-exporting countries and by Djankov et al. in a 2005 paper, who described foreign aid as “windfall resources to recipient countries”. Another type of inflows, migrants’ remittances, is also considered a windfall earning by McCormick and Wahba (2005) and is looked at for its growth implications. All three pose a notable share of GDP in a lot of developing countries and can therefore be considered as factors of some impact on the economic exploits.
Up to here the entry card for being at least considered an Easy Rent was effort of generation relative to the amount yielded. However, a few more conditions are to be met to actually qualify under the assumptions brought forward. The label “easy” was so far applied to the object of easiness, the funds and their generation, e.g. the gain of revenues from nationalised resource sectors versus the relatively tedious business of running a fiscal system to finance the operation of a nation. Although this is a necessary condition, it is not sufficient. A matter of concern are also governments and/or major influence groups and their ability to influence the monetary assets of an economy.
Summary of Chapters
1 Introduction: Discusses the paradox of resource-rich countries failing to achieve sustained economic growth and introduces the study's focus on "Easy Rents."
2 The Model: Establishes a theoretical framework using a stylized endogenous AK-model to analyze how "tau" (distortion) impacts capital allocation and growth.
3 Easy Rents: Defines and analyzes the three pillars of Easy Rents—natural resources, development aid, and remittances—detailing their transmission channels to economic performance.
4 Reality Check: Provides a basic empirical validity appraisal using cross-country linear regressions to test the relationship between windfall gains, institutional quality, and economic growth.
5 Concluding Remarks: Summarizes findings, confirming that Easy Rents often exert a deteriorating influence on long-term growth through price distortions and institutional incentives.
Keywords
Easy Rents, Resource Curse, Economic Growth, Development Aid, Windfall Gains, Dutch Disease, Rent-seeking, Price Distortions, Corruption, Institutional Quality, Tradable Sector, Capital Allocation, Remittances, Economic Performance, Developing Economies
Frequently Asked Questions
What is the fundamental problem this thesis addresses?
The thesis addresses the "resource curse" paradox: why countries blessed with abundant natural resources or significant development aid often experience lower economic growth compared to resource-poor nations.
What is the core concept of "Easy Rents"?
Easy Rents are windfall gains characterized by easy generation, access, and control of funds, which distort relative prices and incentivize rent-seeking behavior rather than productive economic activity.
What is the primary research goal?
The goal is to develop a conceptual framework explaining how windfall gains distort the economy and lead to institutional decay, and to test this empirically across different countries.
Which scientific methodology is used?
The author uses a stylized endogenous AK-model to describe theoretical mechanisms, supplemented by cross-country linear regression analysis using datasets from sources like Penn World Tables and the UNCTAD.
What does the main body of the work cover?
It covers the theoretical modeling of capital allocation, a detailed descriptive analysis of natural resources, foreign aid, and remittances as Easy Rents, and an empirical evaluation of institutional and economic impacts.
How are the keywords defined for this study?
The keywords reflect themes such as institutional quality, economic growth constraints, the specific mechanisms of the resource curse, and the distortive nature of windfall-driven capital inflows.
Why are migrants' remittances treated differently than natural resources?
The study concludes that while remittances are windfall-like, they are decentralized and lack the "centralized control" pillar characteristic of the other forms of Easy Rents, thus having a less negative or even positive impact.
What does the model say about the "Dutch Disease"?
The model suggests that Dutch Disease is a core characteristic of Easy Rents, as windfall inflows appreciate relative prices, rendering the non-resource tradable sector less competitive and slowing down long-term growth.
- Quote paper
- Cornelius Frhr. v. Lepel (Author), 2007, The Impact of Easy Rents, Munich, GRIN Verlag, https://www.grin.com/document/132715
