This research paper will investigate and analyze how natural resources affect economic development of a country; it will select an issue then relate with a non-renewable soil asset and then establish a connection with an aspect in economic development. According to economists economic development refers to the kind of progression made by a specific economy, both qualitatively as well as quantitatively, in a given period of time. Economic development cannot be defined without highlighting economic growth which according to experts is the definite rise in market productivity and GDP. “It is very fundamental in economic development based on the assertion that economic development improves the social wellbeing of the populace” (Barbier, 2015). It has been asserted that there are many factors that come into play when determining the economic development of a country and includes natural resources, physical capital and manpower resources. Economists across the world have recognized the vivacious part played by natural endowments in the pecuniary development (Barbier, 2015).
The paper will have an elaborate literature review that will capture valuable information and knowledge from economists and experts and the relationships that natural resources have on economic development, this section will emphasize on the role that natural resources play in economic development. This section will also single out an issue that will be related to a nonrenewable resource to establish the relationship that exists. Methodology for this investigation will be thorough document analysis to help pin down important issues. The analysis will comprise the relation of the issue and the non-renewable, and pointing out on the relationship that have with an outcome in economic development, this will form the basis of the paper and then conclusion will follow.
It is asserted that natural resources are those materials and substances that occur naturally in the environment and are readily available on the earth and includes land, water, coal, wood, sunlight, and oil. The natural resources are distributed throughout the world with each country having its own natural resources that when exploited assists in promoting economic development. Analysts have alluded that natural resources can be divided into renewable and non-renewable resources, where the latter can be used only once (Barbier, 2007). They are resources that can be depleted as they tend to lessen in magnitude, owing to their continuous usage. It is, hence, important to use the non-renewable resources wisely so that we do not deplete them; examples include coal, natural gas, gasoline and uranium among others (Barbier, 2007). On the other hand, the renewable resources are those endowments, which can be naturally reinstated (Barbier, 2007).
Environmentalists have confirmed that a section of the resources are available in plenty and are scattered everywhere like wind and sunlight, others like timber and water can be replenished. It has been pointed out that if these resources are used up at a faster pace than the time taken by nature to restore them, they are prone to getting exhausted (Pauling, 2009). Economists across the world have elaborated that the availability of plentiful natural resources, whether renewable or non-renewable, in a particular region, speeds up the economic development in that locality. However, it is worth mentioning that the usage and exploitation of the natural resources depends on the attitude of the people of a particular region, and hence, the above observation has also been seen to be reversed in some cases.
The volatility of resource prices in the global market
This is an issue that has affected local and global economic stability by negatively impacting on the economic development. It has been established that fluctuating and volatility of natural resources prices creates chaotic chain reactions prompting governments and businesses to get grips with new world order defined by resource politics. Research has found out that volatile prices of natural resources pose far greater threats to economic development than physical scarcities. Analysts have established that volatility of resource prices is the new normal menace, thumping both consumers and producers and the overall economic development of specific countries (Pauling, 2009).
Financial analysts have alluded that confronting volatile prices is effectively an insurance policy for the global economy. This has made it clear that capitalizing in social and environmental improvements in new producer states in the developing world is not charity but a critical part of this insurance policy. Literature available has confirmed that trade is becoming a frontline for conflicts over natural resources, at a time when the world is more dependent than ever on natural resources for trade and economic development (Pauling, 2009). Environmental experts have pronounced that environmental changes and degradation arising from over-exploitation of natural resources, especially water scarcity and climate change, is making business-as-usual practices obsolete and threatening the global production system that can stimulate the rate of economic development.
The volatility of natural resource prices is attributed to several factors that include weak organizational structures and political unrests in developing economies that has resulted to incomplete competition on the natural resource market. Climate change and loss of biodiversity that has led to reduction in the available natural resources contributing to scarcity, existing monopolies, cartels and oligopoly structures in natural resources extraction and pure speculations on the resources market. In addition, it has been established that the backstop-technologies substitution potential has also stimulated volatility for example, the solar industry that has the potential of reducing the demand of fossil energy and change the structure of the energy supply sector and technology development like fracking, it has led to environmental degradation and consequently led to general uncertainties about the existing reserves, thereby influencing the existing natural resources market.
Iron ore natural resource in Guinea, West Africa
It has been ascertained that Guinea is one of the countries in the world that have rich iron ore reserve natural resource and has not been able to benefit from the natural resource due to volatility in prices, sustained instability, political interferences and poor infrastructure. Experts have opined that due to the instability that was experienced by the government in 2011, the market for iron ore dropped creating a major barrier to the economic development of the country (Martinovich, 2010). The study has established that the country holds an excess reserve of bauxites and a high quality iron ore and has therefore presented significant opportunities for mining enterprises.
It has been discovered that Sable mining company is one of the largest institutions that exploit the mineral resources in the country; evidence available has confirmed that the location of the natural resource is on the North West of Liberia at the adjoining point of Guinea and Ivory Coast. It has been proven that the company has taken the full responsibility and initiative of assessing the potentiality of the non-renewable asset of the country and has sponsored a study that discovered the viability of the resource (Pearce et al, 2013). The study established that in-situ of high grade has a composition of about 58 percent, in Plateau 2 and 2 iron ore had a cut-off of 40 percent prospects. Moreover, the study also elaborated that that Plateau 2 has a 40 percent lump and a 60 percent finest ratio, in the consolidated zone the lump is standing at 15 percent with a fine ratio of 80 percent.
The availability of the natural resource has prompted the county to partner with other organizations to help make good use of the natural endowment, for instance, the country recently struck a deal that is estimate to be to the tune of 20 billion dollars with Rio Tinto to retrieve the resource that is present in Simandou. Experts have estimated that there is a possibility of accessing around 2.2 billion tonnes of iron ore in the region as it is believed that the franchise comprises nearly as much as the entire global iron-ore industry that was produced in 2013. The deal will enable the company to mine around 95 million tonnes of iron ore annually, turning the country to one of the top producers of iron ore in the world and in the process doubling the country’s GDP and stimulating economic development. The study established that the government has a belief that this deal will help stimulate their growth in other sectors because the company will also construct transport infrastructure across the country.
Drop in GDP affecting infrastructure development
The study has established that availability of natural resources presents a clear opportunity for development and the challenge facing the country is how to transform the resources in the ground to assets that can lead to tangible sustainable economic growth, economic divergence, reduction of inequality and poverty, and equity between generations and development of critical infrastructure like roads in the country. It has also been established that the existence of positive wealth shocks from the natural resource sector generates an increased request for non-traded products and energies up non-traded production and prices and inflicting on the input costa and salaries. On the contrary, economists have pronounced that profits in traded activities such as manufacturing often suffer due to the country’s currency appreciation, which makes import cheaper and export more expensive and therefore undermining economic growth and development pace.
The study has established that volatility of iron ore prices in the global has been a pressing challenge as it has negatively affected economic growth outcome of development of infrastructure such as roads in the county (Martinovich, 2010). This has been attributed to the sudden end of the rush to produce and export iron ore, which have knowledgeable a sharp deterioration in the past three years (Martinovich, 2010). Statistics available has confirmed that iron ore prices have toppled from nearly 200 USD per Ton in 2011 to around 80 USD in the recent months and most investors have predicted a further decline.
Figure showing decline in iron ore prices globally
Source: Centro Einaudi
The reason for the changes in price is due to the reduction in the demand for steel in China that has been confirmed to be using around 65 percent of iron ore supply to constitute 50 percent of steel in the world.
Figure showing steel consumption growth: annual consumption as a percentage of cumulative
Source: PIMCO, CEIC, World steel organization
It has been ascertained that large operations like that at Simandou, which claims to be extracting one of the most valuable quality of iron ore, production remains highly profitable though volatility of price may affect the overall economic growth.
It is asserted that the fall in iron ore prices has weighed greatly on real GDP of the country and is expected to do so in the coming future. In the process, it reflects on the unending effects on the terms of trade, particularly, the dropping in iron ore prices has positioned downward pressure on national income, which has weighed on consumption and government revenue. Financial experts have confirmed that the effects are as a result of variations in the exchange rate, the reactions of monetary and fiscal policies and the magnitude to which families and businesses rejoin to the vicissitudes in relative prices they face (Pearce et al, 2013).
A reduction in the exchange rate alleviates the size of the alteration in prices in Guinea dollar terms and offsets some of the economic effects of the decline in the terms of trade by stimulating demand in other trade exposed sectors of the economy, such as manufacturing, tourism and education. “These demands also require development outcomes of the infrastructure of roads and transport systems in the economy of the country” (Pearce et al, 2013). This is because tourists require good transport network to circumvent the country, manufacturing industries relies heavily on transportation of supplies and education also requires good roads.
Researchers have established that falling iron ore prices in the global market can reduce household income, and therefore household expenditure, through several different channels. It has also been discovered that the government will reduce its spending on infrastructure so as to address others issues in the economy. In such cases, it stifles economic development in the country at large since lack of transport infrastructure will also affect other sectors of the economy outlined above. Reduction in prices of iron ore has an impact as it will reduce the demand for workers and the impact of dwindling household one-use income on real GDP are contingent on how households retort to the effects.
It is clear that natural resources affect economic development of the country; in this case it is a negative impact because of the assertion that a drop in the iron ore price over recent years has abridged royalties for the government in terms of taxes because throughout the mining prosperous, the government respond by increasing tax base that is again invested in the development of transport infrastructure and hence stimulating economic growth. Instead, the government has chosen to counterbalance subordinate tax and royalty receipts partly through fiscal limitation on current expenditures, such as transmission payments to households, and partly by increasing borrowing and thus reducing the rate of economic development.
The study has established that natural resources affect rate of economic development, in this examination it is clear that volatility of iron ore prices in the global market has affected the economy of Guinea negatively. This is because due to the drop in incomes arising from sale of the resource, the government has reduced spending on improving transport infrastructure and thereby affecting other sectors of the economy like tourism, manufacturing and education. It is also a fact that natural resources should be used optimally; the government should find other ways of putting the resource to good use so as to generate more revenue, improve the GDP and stimulate economic development outcomes in the country.
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Pearce, D., Barbier, E., & Markandya, A. (2013). Sustainable Development: Economics and
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