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FIVE QUESTIONS FOR - Jeffrey Sachs Watchdog Economist

For some 20 years economists have recognized the so-called resource curse, whereby the economies of resource-rich nations grow at a slower rate than those of countries with few commodities.

For some 20 years economists have recognized the so-called resource curse, whereby the economies of resource-rich nations grow at a slower rate than those of countries with few commodities. Worse, an abundance of resources can lead to increased political unrest and devastating corruption.

Economist Jeffrey Sachs has long studied ways to mitigate the problem. Sachs, director of the Earth Institute at Columbia University, author of the best-selling book The End of Poverty and Vanity Fair–featured crusader for African development, was one of three editors, along with Macartan Humphreys, politics professor at Columbia University, and Nobel Prize–winning economist and former World Bank chief economist Joseph Stiglitz, to produce Escaping the Resource Curse. The book, a collection of essays, was published last month by Columbia University Press. “Its point is mainly that the problems are political rather than economic,” says Sachs. “The curse is not intrinsic to being an oil and gas country. The real problem is whether the money is squandered in corruption or in unsustainable consumption, or whether it’s used effectively to convert the assets under the ground into investment for human and physical development.” Sachs spoke to Institutional Investor International Editor Tom Buerkle during a recent telephone interview.

1 Do the high prices that we are seeing for commodities increase the temptation for political actors to take off with the booty?

Sachs: Well, no question, but [there is also] the opportunity to turn this situation into something useful. In places where the oil prices have gone up but governance is very bad, one can expect a lot to be squandered. But I think there have been surprises as well. Despite all of the difficulties and the reputation of Nigeria, a lot of its increased oil earnings in recent years have been saved, have been used to buy down debt and have been channeled into increased social spending. The shame, of course, is that this is also happening in a context of increasing violence and disarray in the oil-producing delta state.

2 To what do you attribute such improvements in resource wealth management? Are there lessons to be drawn for other countries?

When we sat back and read all the chapters, one thing that came out was how important transparency is in this process. It is not necessarily decisive in protecting the flow of money, but it sure can play an important role in cutting down on the abuse and diversion of funds. What’s also true, of course, is that when you have so much wealth that can be skimmed, the level of secrecy is pretty high. Even the international institutions have not done all that they could for transparency’s sake. But I think this kind of thing will change.

3 We’re also seeing a counter-trend — more nationalism. Venezuela springs to mind. Do you see this as a big risk, and is this inherently bad?

Without oversimplifying it, when you see the situation in Venezuela or Bolivia, a lot of it is a long-term backlash after very long abuse and misuse in this sector. And this is not to comment on particular policies right now, but to say that the shadow of abuse and corruption and poor management of natural resources can go well beyond any particular regime.

In Russia we have a somewhat different phenomenon: high energy prices consolidating a very strong state. But part of what happened was a terrible, corrupt privatization of resources in the mid-1990s and a massive public backlash against that. And so we’ve got to get the pendulum swinging less dramatically from one side to the next.

4 Should resource-rich countries today be diversifying out of the dollar?

Absolutely. Especially given the changing structure of the world economy, the idea of holding the bulk of reserves in dollars just doesn’t make sense. I think a couple of things will happen. First is that there will be a much more balanced structure of reserve holding. And second, I think there will be some kind of Asian monetary standard gradually taking shape. Not a currency all at once, but something that makes it possible to hold reserves effectively against some basket of Asian currencies. This is bound to happen. The U.S. simply doesn’t pull the weight in the world economy that it did 20 years ago.

5 How do you ensure that governments invest resource-driven funds wisely?

Identifying what should be done is really much less complicated than it seems. I would put the emphasis on core infrastructure — that’s transportation, telecommunications, power, water and sanitation — as one major area. And I would put the second major area of urgently needed investments in most of these poor, resource-rich countries in education and in health, so in social service delivery.

My belief is that we need well-specified plans and a lot of financial transparency and that, if we have that, you can get a surprising amount of compliance over time. I won’t deny that one would lose 10 percent here and 10 percent there. That’s life in American cities and in just about anyplace in the world. But the investment job would get done.