Wednesday, April 15, 2009

Lousy Economist: Jeffrey Sachs

In several papers (1995, 1997, 1999, 2001), Sachs and Warner argue that there is a resource curse: countries rich in natural resources experienced slow growth from 1970-1989. This may actually be true, as shown by Stijns (2005), but not for lack of poorly presented evidence.

A good summary of Sachs & Warner´s stunning oversight comes from their 2001 paper:
Empirical support for the curse of natural resources is not bulletproof, but it is quite strong. First, casual observation suggests that there is virtually no overlap in the set of countries that have large natural resource endowments and the set of countries that have high levels of GDP. Many resource-rich countries have been resource rich for a long time. If natural resources really do help development, why do not we see a positive correlation today between natural wealth and other kinds of economic wealth?
Very casual observation, in fact. Sachs omits the U.S.A., Canada, The Arab Gulf states, the U.K., Germany, and Australia, among others. All of these countries are resource-rich, in oil, coal, agriculture, other minerals, or all of the above. In all of their analysis, Sachs and Warner look at the share of exports that are primary commodities as indicative of resource wealth. This begs the question: since the resources are, by their nature, limited, any rich country must be one that exports many other goods as well. The U.S. even now extracts prodigious amounts of raw materials (and is the world´s leading food exporter), but is not considered `resource rich´ by the bizarro-world definition of Sachs and Warner.

So the next time Jeff Sachs tells you to send billions of dollars here or there for aid and development, remember that he´s not even a good economist. (Wright, Ferranti, Stijns, and others have since taken Sachs to task for his sophistry).

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