2012-2013 Essay Contest Second Place Essay

Promoting Entrepreneurship in a Resource-Cursed State

Max Wang
Mounds View High School
Arden Hills, Minn.

Oil drilling in the Bakken Formation, spurred by innovations in horizontal drilling and fracking¹, has brought about an economic boom in North Dakota; it has the nation's highest state GDP growth rate² and the nation's lowest state unemployment rate³. This is a reversal of the economic trend of the prior 20 years, during which North Dakota experienced negative population growth⁴ and stagnant GDP growth^{5 6}. While such unprecedented growth is a boon for the state economy in the short run, turning a boom into long term economic growth can be challenging, especially faced with the troubles of the resource curse. Alleviating the effects of the resource curse on entrepreneurship and innovation will direct economic incentives towards innovation and diversification rather than dependency, and lead to long term economic growth.

An analysis of the oil boom must begin with a discussion of its duration. As Jeff Rotenberger, Energy Program Manager at the North Dakota Department of Commerce, said in a recent interview, “I think you could safely say that the oil development in North Dakota is not going to dial back anytime soon”⁷. Other sources agree, predicting that the economic boom in the state derived from oil investments will continue for 10 to 20 years, until the labor-intensive drilling phase ends and new investment flows diminish^{8 9}. The only caveat is that oil prices will need to remain above 70 dollars a barrel for drilling to remain profitable¹⁰, a reasonable assumption given rising demands for oil from developing nations¹¹.

With the presumption of a lasting oil boom established, North Dakota's resource curse can be discussed in the long term. Economists generally accept two primary economic causes of the resource curse: the Dutch disease and rent-seeking behavior^{12 13}. The Dutch disease “occurs when resource booms cause real exchange rates to rise and labor and capital to migrate to the booming sector. This results in higher costs and reduced competitiveness for domestically produced goods and services”¹². Rent-seeking is behavior that promotes the persistence of excess incomes or rents through both legal and illegal means.

Viewing the North Dakota economy through a resource curse model needs special consideration, as it has a stable political system and exists in a large, developed economy, unlike third-world nations in which the resource curse usually occurs. As such, the change in real exchange rates predicted by the Dutch Disease against domestically produced goods is independent of the effects of the oil boom, since the value of the dollar is impacted only minimally by the small North Dakota oil exports, relative to the entire American economy. Rising wages in the oil industry and rent-seeking behavior, though, seem to be more potent problems.

It is here that a conceptual framework of entrepreneurship must be introduced. Entrepreneurs are defined as “persons who are ingenious and creative in finding ways that add to their own wealth, power, and prestige”¹⁴. Such a definition does not preclude the fact that entrepreneurs—so favorably viewed as “innovators”—may benefit themselves but harm society as a whole. Indeed, as Baumol states in his widely cited paper on entrepreneurship, “the exercise of entrepreneurship can sometimes be unproductive or even destructive, and that whether it takes one of these directions or one that is more benign depends heavily on the structure of payoffs in the economy”¹⁴. Thus, the payoffs of the system could direct entrepreneurs to act in a negative manner.

This is particularly true in a state, such as North Dakota, where high wages and high rents disincentivize innovation and promote rent-seeking among entrepreneurs. It is hard to imagine a young entrepreneur risking it all to start a new firm when he or she could earn 70,000 dollars a year driving a truck. A number of non-oil companies have reported losing employees to better-paying oil jobs¹⁵, further exacerbated by the slowly adjusting North Dakotan labor market which has kept wages high¹⁶ and raising labor costs for new startups. Similarly, some oil firms have taken to dumping brine water—a by-product of the fracking process—in illegal wells, often with little consequence because the state can't handle the overwhelming number of cases¹⁷, an example of rent-seeking. Entrepreneurial activity is working against North Dakota's economy, not for it.

While North Dakota has a number of characteristics that would make it attractive to entrepreneurs, such as laws against non-compete agreements and low costs, changes are needed to make innovation much more economically attractive than rent-seeking. Such goals may be achieved through loosening the credit system, creating an inclusive business model, and building the infrastructure for new industries in North Dakota.

As a result of the 1980s oil boom gone bust, North Dakotan banks are much more conservative lenders than banks nationwide¹⁵. While this may be beneficial in an economic downturn, it makes it difficult for entrepreneurs to find startup funding and take advantage of the new business opportunities brought by the boom. The state of North Dakota should leverage the funds of the Bank of North Dakota, the only state-owned bank in the nation¹⁸, to specifically promote entrepreneurship in the state through special, low-interest loans and an entrepreneurial incubation program. Such policy has precedent, as special loans are already given by the Bank to students, rural mortgages, and export companies¹⁹.

Encouraging an inclusive business model, as laid out by the United Nations Development Program, would develop and diversify North Dakota's industries. By working in the community, oil companies can “integrate local SMEs [small and medium sized enterprises] into their value chains, thus creating indirect employment and fostering the development of local entrepreneurs”²⁰. Larger projects that require greater sophistication may be more difficult to develop, but can also provide oil companies with cost savings in the long run and boost local industry²⁰.

Finally, new infrastructure projects should be started to promote future industries. An example is wind energy; North Dakota has a comparative advantage in wind power production, with the highest average wind speeds in the nation²¹. A large problem with wind farm development in North Dakota is that it is far away from energy sinks that require electricity and the basic infrastructure—transmission lines and converters—is lacking. “Transmission lines are always a contentious issue; the Not In My Back Yard syndrome if you will,” said Rotenberger⁷. A better infrastructure system would attract new developers to the state or encourage current developers to expand their projects.

North Dakota has been handed a chance to reinvent its economy. While many would-be innovators are drawn to working for the oil industry, policies should be made to encourage growth and innovation in other, more sustainable areas. By leveraging the funds and benefits it receives from the oil boom and using it to promote innovation, North Dakota can usher in a new era for its economy.

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