KUCHING: Commodity booms are infamous for creating short team windfalls while undermining longer-term growth, often referred to as the ‘natural resource curse’.
Being a resource rich country, Malaysia needs to keep in mind that while in the short term, the extraction of natural assets increase incomes and growth but a boom in commodity can reduce overall economic output for decades.
According to the regional development arm of the United Nations (UN), the Economic and Social Commission of Asia and the Pacific’s (ESCAP) Economic and Social Survey, natural riches should not be a curse but the problem was that resource abundant economies were tempted to rely too long on a limited number of primary exports.
“This delays economic diversification into other primary products and slows both industrialsation and urbanisation,” the report stated.
It explained that the boom would leave the rural areas with surplus labour, which raised both income inequality and social tensions.
A boom in commodity terms of trade and an appreciation in the real exchange rate might also expose countries with a low productive capacity to ‘Dutch Disease’ and cause deindustrialsation.
The report stated that the boom in primary products also drew resources out of other sectors such as manufacturing and in addition, higher real income created excess demand for non-tradable products and services such as restaurant meals, school tuition and vacations, and drove up prices.
This in turn would squeeze profit in tradable activities such as manufacturing, which used non-tradable products and services as inputs but had to sell the output on international markets at relatively fixed international prices.
ESCAP noted that this seemed to have been the experience over the past decade with some countries being the beneficiary of the commodity boom having seen real exchange rate appreciation but the appreciation at this scale imposed a heavy burden on the non-resource-based export sector and import competing sectors, particularly manufacturing whose prices were set by the international market.
“Faced with this competitive disadvantage, manufacturing would likely decline and may also shrink as a proportion of total production and trade,” explained the report.
For economies like Malaysia that was on the verge of moving itself as a manufacturing based economy, it would lead to serious problems in the future based on current trends as manufactured exports in global trade declined for Malaysia between 2000 to 2010.
Commodity boom economies like Malaysia aiming to mitigate the risk of ‘Dutch Disease’ needed to shield import competing and non-resource export sectors from deindustrialsation and foster economic diversification and productive employment.
“Towards achieving this, it should foster linkages and complementarities between the resource and non-resource sectors with an objective to encourage spillover of technology and knowledge and facilitate diversification towards export goods.
“Development banks could finance new economic activities that would expand productive capacity and increase employment and use resource rents to finance the transfer of technology and accumulation of capital,” stated the report.
Countries like Malaysia should also boost human capital development to foster technical progress in resource exploration, extraction and potential substitution to help it in its quest to achieve a developed nation status while negating ill effects from the commodity boom.