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Working with natural resources

A country's natural resources will feed into the global commodities cycle. In the modern world, with the cost of freight so low, it is impossible not to be part of global commodities markets without becoming bankrupt. The principal consequence of this for the developing world is that the gross sale prices they can achieve from such natural resources as they may have at their disposal is fixed by reference to considerations quite outside the domestic context. If the price of oil is at an all-time low or an all-time high, there is likely relatively little a developing world country can do to change that.

Therefore natural resource exploitation needs to be scalable to fluctuations in price. That is particularly the case where there are heavy domestic externalities to pay in the process of exploitation. A business model must in all cases be designed by the development economist that is responsive both to current prices and future hypothetical price movements, even if they seem quite unlikely. Unlikely things do happen in commodities markets. At lower prices, a development model for natural resources might encourage subsistence; at higher prices, the same model needs to encourage investment. At all stages the externalities must be costed, so as to prevent wanton damage to the environment or other livelihoods without adequate compensation.

If the economist does not follow these principles, then the international investors whose capital natural resource exploitation requires will not find their incentives co-aligned with the developing country's interests. A price hike may encourage profiteering; a price fall abandonment of the country. Resource investors may say they want to work in cooperative partnership with the country; but their contractual liabilities must be tailored to carefully obtained costing data in order to ensure that investors' incentives to act in the country's best interests are maintained over the time needed for them to recoup their initial capital investments.

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