Journal of Development EconomicsŽ.Vol. 59 1999 43–76The big push, natural resource booms andgrowthJeffrey D. Sachs, Andrew M. Warner)AbstractA simple application of big-push reasoning suggests that natural resource booms can beimportant catalysts for development in poorer countries. In this paper we present evidencefrom seven Latin American countries that natural resource booms are sometimes accompa-nied by declining per-capita GDP. We present a model with natural resources, increasingreturns in the spirit of big push models, and expectations to clarify some of the reasons thismay happen. q 1999 Elsevier Science B.V. All rights reserved.JEL classification: O4; Q33Keywords: Growth; Natural resource booms; Big push1. IntroductionIf low-income equilibrium traps are important in economic development—sothat a big push is necessary for development—then natural resource booms can bepotentially important catalysts for growth and development. After all, the big pushŽ.literature, exemplified by Rosenstein-Rodan 1943, 1961 and Murphy et al.Ž.1989 , stresses that poor economies need some sort of large demand expansion, toexpand the size of the market, so that entrepreneurs will find it profitable to incurthe fixed costs of industrialization. In the big-push logic, anything that stimulatesdemand will do, whether a large public spending program, foreign aid, discoveryof minerals, or a rise in the world price of a natural resource. Furthermore, acasual examination of the numbers suggests that the potential impact of natural)Corresponding author. HIID One Elliot Street Cambridge, MA 02138, USA. Fax: q1-617-495-0712; E-mail: [email protected]$ - see front matter q 1999 Elsevier Science B.V. All rights reserved.Ž.PII: S0304-3878 99 00005-X()J.D. Sachs, A.M. Warnerr Journal of DeÕelopment Economics 59 1999 43–7644Žresource booms defined as either a discovery or an exogenous world price.increase on aggregate demand certainly seems to rival that of a typical publicexpenditure program. To take some examples from recent history in LatinAmerica, in Bolivia, over an 9-year period between 1975 and 1984, revenue fromnatural resource exports rose from 11% of GDP to 23% of GDP, a rise of 12% ofGDP. In Ecuador, in just two years between 1972 and 1974, primary exportrevenue rose by 19% of GDP. In Mexico, between 1978 and 1983, revenue fromoil exports increased by 6% of GDP.The big push potential of commodity booms certainly has been recognized byanalysts in resource-rich Latin American countries. In a well known phrase,Venezuelan politicians speak of using oil revenues to ‘sow the seeds’ of economicdevelopment. Indeed, for most of its history, Latin America has been one of theleading laboratories for natural resource booms and busts. After the dust hadsettled from the Napoleonic wars and the struggles for independence in theearly-nineteenth century, the foundations for the commodity lottery were put inplace around the continent. Silver production doubled in Peru in the 1830’s. Goldproduction doubled in Mexico between 1820 and 1840. Copper production rose bya factor of about 7 in Chile prior to 1850, and Cuba had a major boom in Sugarproduction. Later in the nineteenth century, Coffee production grew steadily inBrazil, Colombia and Costa Rica. Peru had its Guano boom around 1850, andChile had a nitrate boom in the late 1890’s. Oil production emerged in theŽtwentieth century in Venezuela and Ecuador the facts are from Bulmer-Thomas,.1994 .The question this paper addresses is whether natural resource booms arebeneficial in the way that the big push reasoning would suggest—by providing thecatalyst for low-income economies to overcome the fixed costs of industrializa-tion. This question is a subset of the broader question of whether specialization innatural resources is a viable strategy for successful economic development. On thebroader question, several recent case studies have documented the problems withnatural-resource-led development in specific countries or groups of countries, seeŽ. Ž.for example Auty 1990 and Gelb 1988 . There is also recent cross-countryevidence of an inverse association between natural resource intensity and per-Ž.capital growth between 1970 and 1990 Sachs and Warner, 1997a,b . Thiscross-country evidence, however, needs to be complemented by time seriesevidence to study the impact of commodity booms on long term growth. This ispotentially an important issue because it is an open question whether the observednegative association between growth and natural resource abundance is due to thefact that natural resource abundant countries are more likely to experience booms,busts and the accompanying uncertainty, or whether something else about resourceabundance causes slower growth over the long term.Turning back to Latin American history, although we lack sufficient GDP datafor the period before the mid-twentieth century, there is some evidence that thenineteenth century booms had a positive effect on long-run development. Cuba()J.D. Sachs, A.M. Warnerr Journal of DeÕelopment Economics 59 1999 43–76 45became the first country in the region to construct a railway in 1838 after its sugarŽ.boom Bulmer-Thomas, 1994, p. 35 and the Guano boom in Peru led to theŽ.establishment of banks for the first time in the 1860’s Randall, 1977, p. 110 . Yetthe record is far from the unmitigated success that one might expect from a naiveapplication of the big push reasoning. Partly as a result, while the developmentstrategy led by natural resource exports was not seriously questioned in LatinAmerica in the nineteenth century, it has come under increasing challenge in thiscentury. To be sure, an important impetus for this challenge was the interwarexperience with declining commodity prices, and the early-postwar view associ-Ž. Ž.ated with Singer 1950 and Prebisch 1950 that commodity prices were on asecular decline. But the critique runs deeper than this, and has persisted even afterthe evidence overturned the view that commodity prices were on a secular decline.A leading text on the economic history of Latin America concludes that overall,Žthe experience with primary-export-led development has been a failure Bulmer-.Thomas, 1994, p. 344 .To focus on the economic effects of resource booms on growth, this paperstarts with a brief review of some of the findings from cross country research.Then we identify five country-episodes from recent Latin American
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