Oxford Centre for the Analysis of Resource Rich Economies
Department of Economics

AbstractWe test for pollution haven effects in outward foreign direct investment (FDI) for different sectors using a comprehensive and exhaustive dataset for outward FDI from the Netherlands, one of the most environmentally stringent countries and a major source of global FDI.  Our evidence suggests that in the sectors natural resources extraction and refining, construction, retail, food processing, beverages and tobacco, and utilities, a less stringent environmental policy in the host country significantly attracts FDI.  What is important for these pollution haven effects is not only regulation but also enforcement of environmental policy.  In contrast to earlier results, it is not only footloose industries that display pollution haven effects, but also the traditional pollution-intensive industries.  But for the sectors machines, electronics and automotive and transportation and communication a more stringent and better enforced environmental policy attracts more FDI as this may help their reputation for sustainable management and CSR.  These sectors display green haven effects.  These findings have important implications for the sector distribution of FDI in destination countries.

Green Havens and Pollution Havens

AbstractThis paper takes stock of the economic performance of resource rich countries in the Middle East and North Africa (MENA) over the past forty years.  While those countries have maintained high levels of income per capita, they have performed poorly when going beyond the assessment based on standard income level measures.  Resource rich countries in MENA have experienced relatively low and non inclusive economic growth as well as high levels of macroeconomic volatility.  Important improvements in heath and education have taken place but the quality of the provision of public goods and services remains an important source of concerns.  Looking forward we argue that the success of economic reforms in MENA rests on the ability of those countries to invest boldly in building inclusive institutions as well as high levels of human capacity in public administrations.

Natural Resources, Volatility, and Inclusive Growth: Perspectives from the Middle East and North Africa

AbstractIntergenerational funds smooth expected consumption across generations in face of an oil windfall.  Precautionary buffers or liquidity funds cope with oil price volatility and are a politically more acceptable alternative to hedging.  The magnitude of these buffers depends on the volatility of oil prices, the degree of prudence, intergenerational inequality aversion and the GDP share of oil rents.  For a net creditor, asset return uncertainty depresses saving unless prudence is large and risk aversion small.  For a net debtor, oil price and asset return uncertainty depress borrowing below what is necessary for consumption smoothing. Uncertain returns on domestic investment offers an alternative explanation why capital scarce, developing countries are big savers and small investors.  Allowing for infinite horizons, our ballpark estimate of the optimal liquidity buffer for Ghana is very small relative to its intergenerational fund of 24 billion USD even for very high degrees of prudence, for Norway our rough estimate of the optimal liquidity fund is 156 billion USD (given relative prudence of 3) compared with 1.39 trillion USD for the intergenerational fund.  Iraq should build an intergenerational fund of 2.81 trillion USD; even for a very low coefficient of relative prudence (1.025) it accumulates an enormous liquidity fund of 1.92 trillion USD.  Given capital scarcity and inefficient adjustment of public capital, we argue that Ghana should be concerned about using its windfall for investment rather than hedging against oil price volatility.

How to Spend a Windfall: Dealing with volatility and capital scarcity

AbstractNatural resources account for 20% of world trade, and dominate the exports of many countries.  Policy is used to manipulate both international and domestic prices of resources, yet this policy is largely outside the disciplines of the WTO.  The instruments used include export taxes, price controls, production quotas, and domestic producer and consumer taxes (equivalent to trade taxes if no domestic production is possible).  We review the literature, and argue that the policy equilibrium is inefficient.  This inefficiency is exacerbated by market failure in long run contracts for exploration and development of natural resources.  Properly coordinated policy reforms offer an avenue to resource exporting and importing countries to overcome these inefficiences and obtain mutual gains.

International Trade in Natural Resources: Practice and policy

AbstractThe Dasgupta-Heal-Solow-Stiglitz model of capital accumulation and resource depletion poses the following sustainability problem;  is it feasible to sustain indefinitely a level of consumption that is bounded away from zero?  We provide a complete technological characterization of the sustainability problem in this model without reference to the time path.  As a byproduct we show general existence of a maximum optimal path under weaker conditions than those employed in previous work.  Our proofs yield new insights into the meaning and significance of Hartwick's reinvestment rule

Characterizing the Sustainability Problem in an Exhaustible Resource Model

AbstractThis paper documents the expanding economic linkages between low-income countries (LICs) and a narrow group of "Emerging Market leaders" that have become major players in international trade and financial flows.  VAR models show that these linkages have increased the share of growth volatility that can be attributed to foreign shocks in LICs.  Dynamic panel models further analyze the impact of LIC trade orientation and production structure on the sensitivity to foreign shocks.  The empirical results demonstrate that the elasticity of growth to trading partners' growth is high for the LICs in Asia, Latin America and the Caribbean, and Europe and Central Asia.  However, for commodity-exporting LICs in Sub-Saharan Africa and the Middle East, terms of trade shocks and demand from the emerging market leaders are the main channels of transmission of foreign shocks.

Spillovers to Low-Income Countries: Importance of Systemic Emerging Markets

AbstractWe look at the type of natural resource dependence and growth in developing countries.  Certain natural resources called point-source, such as oil and minerals, exhibit concentrated and capturable revenue patterns, while revenue flows from resources such as agriculture are more diffused.  Developing countries that export the former type of products are regarded prone to growth failure due to institutional failure.  We present an explicit model of growth collapse with micro-foundations in rent-seeking contests with increasing returns.  Our econometric analysis is among the few in this literature with a panel data dimension.  Point-source-type natural resource dependence does retard institutional development in both governance and democracy, which hampers growth.  The resource curse, however, is more general and not simply confined to mineral exporters.

Natural Resource Dependence and Economic Performance in the 1970-2000 Period

AbstractWe consider a nonrenewable resource game with one cartel and a set of fringe members.  We show that (i) the outcomes of teh closed-loop and the open-loop nonrenewable resource game with the fringe members as price takers (the cartel-fringe game à la Salant 1976) coincide (ii) when the number of fringe firms becomes arbitrarily large, the equilibrium outcome of the closed-loop Nash game does not coincide with the equilibrium outcome of the closed-loop cartel-fring game.  Thus, the outcome of the cartel-frint open-loop equilibrium can be supported as an outcome of a subgame perfect equilibrium.  However the interpretation of the cartel-fringe model, where from the outset the fringe is assumed to be price-taker, as a limit case of an asymmetric oligopoly with the agents playing Nash-Cournot, does not extend to the case where firms can use closed-loop strategies.

On Price Taking Behavior in a Nonrenewable Resource Cartel-Fringe Game

AbstractThis article explores the economic underpinnings of the Arab spring.  We locate the roots of the region's long-term economic failure in a statist model of development that is financed through external windfalls and rests on inefficient forms of intervention and redistribution.  We argue that the rising cost of repression and redistribution is calling into question the long-term sustainability of this development model.  A singular failure of the Arab world is that it has been unable to develop a private sector that is independent, competitive and integrated with global markets.  We argue that developing such a private sector is both a political as well as a regional challenge.  In so far as the private sector generates incomes that are independent of the rent streams controlled by the state and can pose a direct political challenge, it is viewed as a threat.  And, the Arab world's economic fragmentation into isolated geographic units further undermines the prospects for private sector develoment.  We explain this economc fragmentation as a manifestation of centralized and segmented administrative structures.  Revisiting the politics and geo-politics of regional trade, we argue that overcoming regional economic barriers constitutes the single most important collective action problem that the region has faced since the fall of the Ottoman Empire

The Economics of the Arab Spring

AbstractWe study the effect of civil conflict on social capital, focusing on the experience of Uganda during the last decade.  Using individual and county-level data, we document large causal effects on trust and ethnic identity on an exogenous outburst of ethnic conflicts in 2002-05.  We exploit two waves of survey data from Afrobarometer 2000 and 2008, including information on socioeconomic characteristics at the individual level, and geo-referenced measures of fighting events from ACLED.  Our identification strategy exploits variations in the intensity of fighting both in the spatial and cross-ethnic dimensions.  We find that more intense fighting decreases generalized trust and increases ethnic identity.  The effects are quantitatively large and robust to a number of control variables, alternative measures of violence, and different statistical techniques  involving ethnic and spatial fixed effects and instrumental variables.  We also document that the post-war effects of ethnic violence depend on the ethnic fractionalization.  Fighting has a negative effect on the economic situation in highly fractionalized counties, but has no effect in less fractionalized counties.  Our findings are consistent with the existence of a self-reinforcing process between conflicts and ethnic cleavages..

Seeds of Distrust: Conflict in Uganda

AbstractThis paper extends the classical exhaustible-resource/stock-pollution model with the ireversibility of pollution decay.  Within this framework, we answer the question how the potential irreversibility of pollution affects the extraction path.  We investigate the conditions under which the economy will optimally adopt a reversible policy, and when it is optimal to enter the irreversible region.  In the case of irreversibility it may be optimal to leave a positive amount of resource in the ground forever.  As far as the optimal extraction/emission policy is concerned, several types of solutions may arise, including solutions where the economy stays at the threshold for a while.  Given that different programs may satisfy the first order conditions for optimality, we further investigate when each of these is optimal.  The analysis is illustrated by means of a numerical example.  To sum up, for any pollution level, we can identify a critical resource stock such that there exist multiple optima i.e. a reversible and an irreversible policy that yield exactly the same present value.  For any resource stock below this critical value, the optimal policy is reversible whereas with large enough resource, ireversible policies outperform reversible programs.  Finally, the comparison between irreversible policies reveals that is is never optimal for the economy to stay at the threshold for a while before entering the irreversible region.

Optimal Emission-Extraction Policy in a World of Scarcity and Irreversibility.

AbstractWe study tax competition when pollution matters. Most notably we present a dynamic setting, where the supply of capital is endogenous.  it is shown that tax competition may involve stricter environmental policy than the cooperative outcome.

Tax Competition Leading to Strict Environmental Policy. Forthcoming, International Tax & Public Finance.

 AbstractMany countries have failed to use natural resource wealth to promote growth and development.  They have been damaged by volatility of revenues, have failed to save a sufficiently high proportion of their resource revenues and failed to make high return investments to support diversification of their economies.  This paper explores the reasons for these failures and discusses policies to improve performance

Natural Resource Wealth: The challenge of managing a windfall.  Forthcoming, Annual Review of Economics

AbstractThis paper examines the effects that windfalls from international commodity price booms have on net foreign assets in a panel of 145 countries during the period 1970-2007.  The main finding is that windfalls from international commodity price booms lead to a significant increase in net foreign assets, but only in countries that are ethnically homogeneous.  In highly ethnically polarized countries, net foreign assets significantly decreased. To explain this asymmetry, the paper shows that in ethnically polarized countries commodity windfalls lead to large increases in government consumption expenditures and political corruption.  The paper's findings are consistent with theoretical models of the current account that have a built-in voracity effect.

Commodity Windfalls, Polarization, and New Foreign Assets: Panel data evidence on the voracity effect

AbstractI consider a non-renewable resource market where extraction costs are non-convex and market price is subject to stochastic shocks  While competitive equilibrium cannot exist if costs are non-convex and demand is deterministic, equilibrium can be supported in the context of stochastic demand.  The crucial distinction is that the noisy environment can create an incentive for firms to hold inventories.  Inventories allow firms to continue producing at a smooth pace at any instant when extraction ceases, e.g. when reserves are exhausted.  Accordingly, there are no abrupt changes in the expected price path, in contrast to the deterministic variant of the model.

On Equilibrium in Resource Markets with Scale Economies and Stochastic Prices

 AbstractThis paper studies the determinants of foreign land acquisition for large-scale agriculture.  To do so, gravity models are estimated using data on bilateral investment relationships, together with newly constructed indicators of agro-ecological suitability in areas with low population density as well as land rights security.  Results confirm the central role of agro-ecological potential as a pull factor.  In contrast to the literature on foreign investment in general, the quality of the busines climate is insignificant whereas weak land governance and tenure security for current users make countries more attractive for investors.  Implications for policy are discussed.

What Drives the Global Land Rush?

AbstractIn this paper, we explore the use of trade policy in addressing transboundary stock pollution problems such as acid rain and water pollution.  We show that a tariff determined by the current level of accumulated pollution can induce the time path of emission optimal for the downstream (polluted) country.  But if the upstream (polluting) country can lobby the downstream government to impose lower tariffs, distortions brought by corruption and foreign lobbying lead to a rise in the upstream country's social welfare, and to a decrese in social welfare in the downstream country.  Thus, the usefulness of trade policy as a tool for encouraging cooperation and internalizing transboundary externalities depends critically on the degree of governments' susceptibility to foreign political influence.

Trade, Transboundary, Pollution, and Foreign Lobbying

 AbstractThis paper studies the volatility of commodity prices on the basis of a large dataset of monthly prices observed in international trade data from the United States over the period 2002-2011.  The conventional wisdom in academia and policy circles is that primary commodity prices are more volatile than those of manufactured products, even though most of the existing evidence does not actually attempt to measure the volatility of prices of individual goods or commodities.  Rather the literature tends to focus on trends in the evolution and volatility of ratios of price indexes composed of multiple commodities and products.  This approach can be misleading  Indeed, the evidence presented in this paper suggests that on average prices of individual primary commodities may be less volatile than those of individual manufactured goods.

The Relative Volatility of Commodity Prices: A re-appraisal. Revised, December 2011

AbstractMuch African land currently has low productivity and has attracted investors purchasing (or leasing) land as a speculative option on higher future prices or productivity.  If land deals are to be beneficial they need to induce productivity enhancing investments.  Some of these will be publicly provided (infrastructure, agronomic knowledge), and some can only be provided by 'pioneer' investors who discover what works and who create demonstration effects.  Such pioneers can be rewarded (incentive compatibly) for the positive externalities they create by being granted options on large areas of land.  However, pioneers must be separated from speculators by screening and by requirements to work a fraction of the land.

 Land Deals in Africa: pioneers and speculators. Revised, October 2011

 AbstractHow to control and limit climate change caused by a growing use of fossil fuels are among the most pressing policy challenges facing the world today.  The green paradox argues that carbon taxes can exacerbate the global warming problem because firms have the incentive to bring forward the sale of fossil fuels.  This paper shows that when technological progress allows the extraction costs of fossil fuels to be reduced over time, and a positive R&D subsidy is paid, a growing carbon tax reveals a welfare maximizing policy.

Global Warming and Endogenouos Technological Change: Revisiting the Green Paradox. Forthcoming, Environmental and Resource Economics

 AbstractWe use new data to examine the effects of giant oilfield discoveries around the world since 1946.  On average, these discoveries increase per capita oil production and oil exports by up to 50 percent.  But these giant oilfield discoveries also have a dark side: they increase the incidence of internal armed conflict by about 5-8 percentage points.  This increased incidence of conflict due to giant oilfield discoveries is especially high for countries that had already experienced armed conflicts or coups in the decade prior to discovery.

Do Giant Oilfield Discoveries Fuel Internal Armed Conflicts?

 Abstract. A windfall in a developiong economy with capital scarcity and investment adjustment costs facing a temporary windfall should be used to give more consumption to poorer present generations and to speed up development by ramping up public investment and paying off debt taking due account of the increasing inefficiency as investment gets ramped up.  The optimal strategy requires negative genuine saving; the permanent income requires zero genuine saving.  The optimal real consumption increments are smaller once one allows for absorption constraints resulting from Dutch disease and sluggish adjustment of 'home-grown' public capital.

Bottlenecks in Ramping Up Public Investment. Forthcoming, International Tax and Public Finance

 AbstractAs poor countries deplete their natural resources, for increased consumption to be sustainable some of the revenues should be invested in othe public assets.  Further, since such countries typically have acute shortages of public capital, the finance from resource depletion is an opportunity for needed public investment.  Using a new global panel dataset on public capital and resource rents covering the period 1970-2005 we find that, contrary to these expectations, resource rents significantly and substantially reduce the public capital stock.  This is more direct evidence for a policy-based 'resource curse' than the conventional, indirect evidence from the relationships between resource endowments, growth and income.  The adverse effect on public capital is mitigated by good economic and political institutions and worsened by GDP volatility and ethnic fractionalization.  Rents from depleting resources have more adverse effects than those that are sustainable.  Our main results are robust to a variety of controls, and to instrumental variable estimation using commodity price and rainfall as instruments, Arellano-Bond GMM estimation, as well as across different samples and data frequencies.

Public Capital in Resource Rich Economies: Is there a Curse?

 AbstractWe study optimal oil extraction strategy and the value of an oil field using a multiple real option approach.  Extracting a barrel of oil is similar to exercising a call option and optimal strategies lead to deferring production when oil prices are low and when volatility is high.  We show that, in theory, the net present value ofa country's oil rserves is increased significantly (by 100 percent, in the most extreme case) if productin decisions are made conditional on oil prices.  We also show that the marginal value of additional capacity is higher for cuntries with bigger resources and longer productions horizons.  We apply the model to Brazil and U.A.E. in order to pin down two points of the global supply curve.

Optimal Oil Extraction as a Multiple Real Option

 AbstractThe paper examines implications of inflation persistence for business cycle dynamics following terms of trade shock in a small oil producing economy, under inflation targeting and exchange rate targeting regimes. It is shown that due to the 'Walters critique' effect, the country's adjustment paths are slow and cyclical if there is a significant backward-looking element in the inflation dynamics and the exchange rate is fixed.  It is also shown that cyclical adjustment paths are moderated if there is a high proportion of forward-looking price setters in the economy, so that when the Phillips curve becomes completely forward-looking cyclicality in adjustment paths disappears and the response of the real exchange rate becomes hump-shaped.  In contrast, with an independent monetary policy, irrespective of the degree of inflation persistence, flexible exchange rate allows to escape severe cycles, which results in a smoth response of the real exchange rate.

Inflation Persistence and Exchange Rate Regime: Implications for dynamic adjustment to shocks in a small open economy. Journal of Macroeconomics, 2011, 33, 2, 193-205.

 AbstractThis paper develops a model in which supply of a non-renewable resource can adjust through two margins: the rate of depletion and the rate of field opening.  Faster depletion of existing fields means that less of the resource can ultimately be extracted, and optimal depletion of open fields follows a (modified) Hotelling rule.  Opening a new field involves sinking a capital cost, and the timing of field opening is chosen to maximize the present value of the field.  Output dynamics depend on both depletion and field opening, and suppy responses to price changes are studied. In contrast to Hotelling, the long run equilibrium rate of growth of prices is independent of the rate of interest, depending instead on characteristics of demand and geologically determined supply.

Depletion and Development: Natural resource supply with endogenous field opening

AbstractIn this article, we revisit Lipset's law (Lipset 1959), which posits a positive and significant relationship between income and democracy. Using dynamic panel data estimation techniques that account for short-run cross-country heterogeneity in the relationship between income and democracy and that correct for potential cross-section error dependence, we overturn the literature's recent set of findings of the absence of any significant relationship btween income and democracy and in a surprising manner:  We find a significant and negative relationship between income and democracy: higher/lower incomes per capita hinder/trigger democratization. We attribute this result to the nature of the tax base.  Decomposing overall income per capita into its resource and non-resource components, we find that the coefficient on the latter is positive and significant while that on the former is significant but negative.  In the Sub-Saharan Africa (SSA) portion of the sample where the relationship runs from political institutions - i.e. democracy - economic performance - i.e. income, democracy is found to positively and significantly affect income per capita, which slowly converge to its long-run value as predicted by current democracy levels: SSA countries may thus be currently too democratic to what their income levels suggest.

Income and Democracy: Lipset's Law inverted

 AbstractThis paper investigates the optimal fiscal policy adjustment to adverse terms of trade shocks by commodity-producing countries within a general equilibrium model, which allows for explicit distinction between public investment and government consumption.  As the private sector has limited room for maneuver in correcting the shock itself, the public sector is used to isolate the economy from external fluctuations.  The ability of fiscal policy to shield the economy from external shocks critically depends on instruments available to government.  In the presence of international capital market imperfections, the shock is absorbed primarily through a combination of reduced expenditure and higher taxes.  Cuts in expenditure are carried out mostly through cuts in public investment, with the change in the level of public investment being about ten times larger than the change in government consumption.  Public investment is thus the main shock absorber in this situation and is highly pro-cyclical.  In the absence of distortions on the international capital markets, government shifts from domestic sources to external sources to absorb the shock and resorts to increased external borrowing to finance the shortfall in revenues.  In this case, responses of both public investment and government consumption are more smoothed and less pro-cyclical, whereas tax rate falls.

Fiscal Policy Adjustment to Shocks in Commodity-Producing Countries

 Abstract Financial development and financial literacy in developing countries are commonly identified as important conditions for attaining higher rates of investment and economic growth.  It has also been argued that migrants' remittances stimulate financial development in the receiving economy, contributing indirectly to economic growth.  Past research has been based almost exclusively on the macro-level relationship between remittances and financial depth.  To explore this relationship further, we combine macroeconomic analysis using a cross-country panel dataset with micro-level analysis of households' uses of financial sector services.  From the macroeconomic analysis we find evidence of a negative relationship between remittances and financial deepening in developing countries, once we control for the countries' legal origin.  At the microeconomic level we use household survey data from a recent study of migrants remittances in two transition economies, resource rich and relatively more financially developed Azerbaijan, and Kyrgyzstan, to test the relationship between remittances and financial literacy among remittance-receiving households.  While we find some supportive evidence, albeit weak, for Kyrgyzstan, in Azerbaijan, the relatively more financially-developed economy, we uncover a strong perverse relationship.  Remittances appear to deter the use of formal banking services.  Possible reasons are explored and areas for further investigation identified.

Migrants' Remittances and Financial Development: Macro-and Micro-level Evidence of a Perverse Relationship

Abstract We construct a dynamic theory of civil conflict hinging on inter-ethnic trust and trade. The model economy is inhabitated by two ethnic groups.  Inter-ethnic trade requires imperfectly observed bilateral investments and one group has to form beliefs on the average propensity to trade off the other group.  Since conflict disrupts trade, the onset of a conflict signals that the aggressor has a low propensity to trade.  Agents observe the history of conflicts and update their beliefs over time, transmitting them to the next generation.  The theory bears a set of testable predictions.  First, war is a stochastic process whose frequency depends on the state of endogenous beliefs.  Second, the probability of future conflicts increases after each conflict episode.  Third, "accidental" conflicts that do not reflect economic fundamentals can lead to a permanent breakdown of trust, plunging a society into a vicious cycle of recurrent conflicts (a war trap).  The incidence of conflict can be reduced by policies abating cultural barriers, fostering inter-ethnic trade and human capital, and shifting beliefs.  Coercive peace policies such as peacekeeping forces or externally imposed regime changes have instead no persistent effects.

War Signals: A theory of Trade, Trust and Conflict

AbstractThe literature on remittances and growth has thus far established a positive link between remittances and overall economic growth in recipient countries.  We identify the main transmission channel through which remittances seem to exert their growth-enhancing effects:  the 'export-led growth' channel, using a methodology that exploits both cross-country and within-country cross-industry variation, and correcting for the endogeneity of remittances by constructing a set of external instruments.  We find that remittancs are conducive to the relative growth of exporting industries within the manufacturing sector of recipient economies, contrary to what standard Dutch disease theory suggests.  In doing so, we control for the potential complementarity effect between migrant networks and international trade. 

Remittances: Dutch disease or export-led growth?

Abstract  Our main message is that it is optimal to use less coal and more oil once one takes account of coal being a backstop which emits much more CO2 than oil. The way of achieving this is to have a steeply rising carbon tax during the initial oil-only phase, a less-steeply rising carbon tax during the intermediate phase where oil and coal are used alongside each other and the following coal-only phase, and a flat carbon tax during the final renewables-only phase.  The "laissez-faire" outcome uses coal forever or starts with oil until it is no longer cost-effective to do so and then switches to coal.  We also analyze the effects on the optimal transition times and carbon tax of a carbon-free, albeit expensive backstop (solar or wind energy). Subsidizing renewables to just below the cost of coal does not affect the oil-only phase.  The gain in green welfare dominates the welfare cost of the subsidy if the subsidy gap is small and the global warming challenge is acute.  Without a carbon tax a prohibitive coal tax leads to less oil left in situ and substantially delays introduction of renewables, but curbs global warming substantially as coal is never used. Finally, we characterize under general conditions what the optimal sequencing oil and coal looks like. 

Too Much Coal, Too Little Oil. Forthcoming, Journal of Public Economics

Abstract Optimal climate policy is studied in a Ramsey growth model with exhaustible oil reserves, an infinitely elastic supply of renewables, stock-dependent oil extraction costs and convex climate damages.  We concentrate on economies with an initial capital stock below that of the steady state of the carbon-free economy and the initial cost of oil (extraction cost plus scarcity rent and social cost of carbon) below that of renewables.  There are then two regimes.  If the oil stock is small, the social optimum path consists of an initial oil-only phase followed by a renewables-only phase.  With a lower cost of renewables or a lower discount rate, more oil is left in situ and renewables are phased in more quickly.  The optimal carbon tax rises along its development path during the oil-only phase, but the rise flattens off as less accessible carbon tax induces more oil to be left in situ and a quicker phasing in of renewables, but oil is depleted more rapidly (Green Paradox).  The net effect on global warming is thus ambiguous.  The second regime occurs if the initial oil stock is large.  The social optimum then consists of an initial oil-only phase followed with a final oil-renewables phase.  This regime also converges to the steady state of the carbon-free economy.  The paper also gives a full characterization of all the other regimes that can occur if the initial capital stock is above its steady state or renewables have an initial cost advantage.

Growth, Renewables and the Optimal Carbon Tax. Revised, November 2011

Abstract  Macro cross-country data and micro US county data indicate that resource rich regions have small and productive manufacturing sectors and large and unproductive non-manufacturing sectors.  We suggest a process of specialization to explain these facts.  Windfall revenue induces labor to move from the (traded) manufacturing sector to the (non-traded) non-manufacturing sector.  A self selection of workers takes place. Only those most skilled in manufacturing sector work remain in manufacturing.  Workers that move to non-manufacturing however, will be less skilled at non-manufacturing sector work than those who were already employed there.  Resource induced structural transformation thus results in higher productivity in manufacturing and lower productivity in non-manufacturing.  We construct and calibrate a two sector, open economy model of self-selection and show that exogenous cross-country variation in natural resource endowments is large enough to explain the direction and magnitude of sectoral employment and productivity difference between resource rich and resource poor regions.  The model implies that low aggregate productivity found in some resource rich countries is not caused by a resource induced decline of a relatively productive manufacturing sector.  Rather, the higher manufacturing producvity in those countries is a consequence of manufacturing's smaller size

Windfalls, Structural Transformation and Specialization

Abstract We theoretically and empirically examine the relationship between natural resource revenues and financial development. In the theoretical part, we present a politico-economic model in which contract enforcement is low and decreasing in resource revenues when political institutions are poor, but high otherwise. As poor contract enforcement leads to low financial development, the model predicts that resource revenues hinder financial development in countries with poor political institutions, but not in countries with comparatively better political institutions. We test our theoretical predictions systematically using panel data covering the period 1970 to 2005 and 133 countries. Our estimates confirm our theoretical predictions. Our main results hold when we control country fixed effects, time varying common shocks, income and various additional covariates. They are also robust to alternative estimation techniques, various alternative measures of financial development and political institutions, as well as across different samples and data frequencies. We present further evidence using panel data covering the period 1870 to 1940 and 31 countries.

Do Natural Resource Revenues Hinder Financial Development? The Role of Political Institutions

Abstract The response of an economy to a windfall of foreign exchange (be it aid or natural resource revenues) is often constrained by absorptive capacity. We provide a micro-founded analysis of absorption constraints, based on the idea that expanding the economy's capital stock (in aggregate or sectorally) requires non-traded inputs, the supply of which is constrained by the initial capital stock.  Given this constraint, the economy will manifest 'Dutch disease' symptoms, although many of them are temporary.  On impact there is a sharp appreciation of the real exchange rate, which will then depreciate back to its equilibrium level.  In contrast to the permanent income hypothesis, real consumption jumps part of the way to its new long-run level, and then continues to rise.  Depending on the capital-intensity of the investments needed for the adjustment, the economy may run a current account deficit or surplus in early years.

Absorbing a Windfall of Foreign Exchange: Dutch disease dynamics

Steven Poelhekke &

Rick van der Ploeg

Abstract A new and extensive panel of outward non-resource and resource FDI is used to investigate the effect of natural resources on the different components of FDI.  Our main findings are as follows:  First, for those countries which were not a resource producer before, a resource discovery causes non-resource FDI to fall by 16% in the short run and by 68% in the long run.  Second, for those countries which were already a resource producer, a doubling of resource rents induces a 12.4% fall in non-resource FDI.  Third, on average, the contraction in non-resource FDI outweighs the boom in resource FDI.  Aggregate FDI falls by 4% if the resource bonanza is doubled.  Finally, these negative effects on non-resource FDI are amplified through the positive spatial lags in non-resource FDI.  We also find that resource FDI is vertical whereas non-resource FDI is of the export-fragmentation variety.  Our main findings are robust to different measures of resource reserves and the oil price and to allowing for sample selection bias.

Do Natural Resources Attract Non-Resource FDI?  Forthcoming, The Review of Economics and Statistics

Abstract We examine how natural resource location, rent sharing and fighting capacities of different groups matter for ethnic conflict.  A new type of bargaining failure due to multiple types of potential conflicts (and hence multiple threat points) is identified.  The theory predicts conflict to be more likely when the geographical distribution of natural resources is uneven and when a minority group has better chances to win a secessionist rather than a centrist conflict.  For sharing rents, resource proportionality is salient in avoiding secessions and strength proportionality in avoiding centrist civil wars.  We present empirical evidence that is consistent with the model.

Natural Resource Distribution and Multiple Forms of Civil War

AbstractWe analyse optimal carbon taxes, optimal redistribution within and between non-overlapping generations, and optimal spending levels on climate abatement and adaptation. A positive probability of unexpected large increases in CO2 emissions results in a lower discount rate for global warming damages. More prudent governments set higher carbon taxes and spend more on abatement and sacrifice intra-generational for inter-generational redistribution. As long as households spend a constant fraction of their income on polluting goods, the carbon tax is not used for redistribution and is set at the modified Pigouvian rate, which is higher than the Pigouvian rate if governments are prudent. However, the carbon tax is set below the modified Pigouvian rate if poor households spend relatively more on polluting goods than rich households (Stone-Geary preferences). Policy simulations give insights into the effects of changes in the probability of climate disaster, degrees of intra- and inter-generational inequality aversion, ease of substitution between clean and dirty goods, elasticity of labour supply, productivity of abatement and adaptation, population growth and economic growth on the rates of discount, inequality, global warming and social welfare.

Precautionary Climate Change Policies and Optimal Redistribution

AbstractWhat part of the high oil price can be explained by structural transformation in China and India? Will continued structural transformation in these countries result in a permanently higher oil price? To address these questions I identify an inverted-U shaped relationship in the data between aggregate oil intensity and the extent of structural transformation - countries in the middle stages of transition spend the highest fraction of their income on oil. I construct and calibrate a multi-sector, multi-country, general equilibrium growth model that accounts for this fact by generating an endogenously falling aggregate elasticity of substitution between oil and non-oil inputs. The model is used to measure and isolate the impact of changing sectoral composition in China and India on world oil demand and the oil price in the OECD. Structural transformation in China and India accounts for 26% of the oil price increase in the OECD between 1970 and 2007. However, the impact of structural transformation is temporary. Continued structural transformation induces falling oil intensity and an easing of the upward pressure on the oil price. Since a standard one sector growth model misses this non-linearity, to understand the impact of growth on the oil price, it is necessary to take a more disaggregated view than is standard in macroeconomics.

Structural Transformation and the Oil Price. Revised, September 2011.

Abstract Brock and Taylor (2010) argue that the Environmental Kuznets Curve (EKC) - a hump shaped relationship between emissions and income per capita - is driven by falling GDP growth rates associated with Solow type convergence.  I test the importance of their mechanism as a driver of emissions by performing a "pollution accounting" exercise that decomposes emissions data into pollution intensity and GDP growth effects.  The 'Green Solow' framework assumes that emission intensities decline at a constant rate and hence that all changes in emissions growth rates are driven by changes in GDP growth rates.  Yet, in the data, emission intensitites are hump shaped for a wide range of countries and pollutants, implying declining emission intensity growth rates.  Furthermore, this decline in emission intensity growth rates is up to an order of magnitude larger than changes in GDP growth rates.  The Green Solow model - which assigns all the weight to changing GDP growth and ignores changes in emission intensity growth in its explanation of emissions - cannot be the right way to think about emissions profiles of countries.  Models that aim to explain the EKC, must - first and foremost - explain the hump shape intensity curve and hence falling intensity growth rates.  I suggest a simple model of structural transformation as one possible mechanism capable of generating both a hump shaped EKC curve and a hump shaped emission intensity curve.

On the Mechanics of the 'Green Solow Model'.

AbstractThere have been important studies of overall income inequality and of poverty in South Africa. In this paper, we approach the subject from a different direction: the extent and evolution of top incomes. We present estimates of the shares in total income of groups such as the top 1per cent and the top 0.1 per cent, covering, with gaps, more than a hundred years. In order to explain the observed dynamics, here we consider - in a preliminary way - three factors: the transfer of political authority, racial discrimination, and the rich mineral resources. The estimates of top income shares for recent years bear out the picture of South Africa as a highly unequal country.

Colonial Rule, Apartheid and Natural Resources: Top Incomes in South Africa 1903-2005

Joan Esteban, Massimo Morelli & Dominic Rohner

AbstractSince World War II there have been about fifty episodes of large-scale mass killings of civilians and massive forced displacements. They were usually meticulously planned and independent of military goals. We provide a model where conflict onset, conflict intensity and the decision to commit mass killings are all endogenous, with two main goals: (1) to identify the key variables and situations that make mass killings more likely to occur; and (2) to distinguish conditions under which mass killings and military conflict intensity reinforce each other from situations where they are substitute modes of strategic violence.We predict that mass killings are most likely in societies with large natural resources, significant proportionality constraints for rent sharing, low productivity and low state capacity. Further, massacres are more likely in a civil than in an interstate war, as in the latter group sizes matter less for future rents.In non polarized societies there are asymmetric equilibria with only the larger group wanting to engage in massacres. In such settings the smaller group compensates for this by fighting harder in the first place. In this case we can talk of mass killings and fighting efforts to be substitutes. In contrast, in polarized societies either both or none of the groups can be ready to do mass killings in case of victory. Under the "shadow of mass killings" groups fight harder. Hence, in this case massacres and fighting are complements.We also present novel empirical results on the role of natural resources in mass killings and on what kinds of ethnic groups are most likely to be victimized in massacres and forced resettlements, using group level panel data.

Strategic Mass Killings

AbstractCountries with substantial revenues from renewable resources face a complex range of revenue management issues. What is the optimal time profile of consumption from the revenue, and how much should be saved? Should saving be invested in foreign funds or in the domestic economy? How does government policy influence the private sector, where sustainable growth in the domestic economy must ultimately be generated? This paper develops the issues in a simple two-period model, and argues that analysis must go well beyond the simple permanent income approach sometimes recommended.

Resource Rents: When to spend and how to save.  International Tax and Public Finance, 2010, 17, 340-56.

AbstractThis paper examines how Kazakhstan handled key decisions in resource management during the 2000-2008 period and whether resource revenues were harnessed for sustained growth. We found that the hydrocarbon sector served as an engine of strong economic growth in the country by boosting domestic demand and propelling growth in such non-tradable sectors as construction and financial sector. In addition, our analysis suggests that prudent macroeconomic policies had been pursued by the government with more than two-thirds of oil revenues being saved in the Oil Fund. Notwithstanding sound macroeconomic policies, the private sector remained under-regulated and took excessive risks by over-borrowing abroad, which led to consumption boom. The government lacked policies aimed at discouraging excessive risk taking behavior of the private sector, which greatly jeopardized the sustainability of Kazakhstan's growth potential and the government's prudence. We refer to this phenomenon as a Ricardian curse of the resource windfall.

Ricardian Curse of the Resource Boom: The Case of Kazakhstan 2000-2008

Abstract We build a theoretical framework that allows for endogenous natural resource exploitation (i.e. speed, ownership, and investments). While depletion is spread in a balanced Hotelling fashion during peace, the presence of conflict creates incentives for rapacious extraction, as this lowers the stakes of future contest.  This voracious extraction depresses total oil revenue, especially if world oil demand is relatively elastic and the government's weapon advantage is weak.  Some of these political distortions can be overcome by bribing rebels or by government investment in weapons.  The shadow of conflict can also make less efficient nationalized oil extraction more attractive than private extraction, as insecure property rights create a holdup problem for the private firm and lead to a lower license fee.  Furthermore, the government fights less intensely than the rebels under private exploitation, which leads to more government turnover.  Without credible commitment to future fighting efforts, private oil depletion is ony lucrative if the government's non-oil office rents are large and weaponry powerful, which guarantees the government a stronger grip on office and makes the holdup problem less severe.

War and Natural Resource Exploitation. Revised, April 2012

AbstractAustralia has experienced frequent and large commodity export price shocks like Third World commodity exporters, but this price volatility has had much more modest impact on economic performance. Why? This paper explores Australian terms of trade volatility since 1901. It identifies two major price shock episodes before the recent mining-led boom and bust. It assesses their relative magnitude, their de-industrialization and distributional impact during the booms, and their labour market and policy responses throughout. Australia has indeed responded differently to volatile commodity prices than have other commodity exporters.

Commodity Price Shocks and the Australian Economy since Federation. Australian Economic History Review, 2011, 51, 2, 151-178.

AbstractCountries abundant in natural resources face the dilemma of how to manage this source of revenues. The recent boom in commodity prices put this issue at the top of the agenda in natural resource rich economies. Chile, for instance, is the largest copper producer in the world, supplying 43% of world copper exports. In 2007, the state-owned corporation, CODELCO, produced one third of total Chilean copper output and the revenues from its copper exports accounted for 16% of total fiscal revenues. In the past few years, the government has been under political pressure to distribute more of these revenues across different groups.  Some of the questions that arise naturally are: How is the Chilean government managing this boom in copper revenues? What has been the effect of this windfall over total investment and current government spending? How have soaring prices affected the non-copper sectors? How have the fiscal rule and the stabilization fund for copper helped to manage these revenues? What was the role played by the political economy in the Chilean case? What role does the private sector play? What are some of the threats and challenges to the present and future governments associated to the fiscal expansion experienced in the last two years? This paper focuses on these issues and derives some policy lessons for managing natural resource revenues.

Managing Natural Resources Revenue: The Case of Chile

AbstractWe analyze the long-term dynamics of an economy in which sectors are heterogeneous with respect to the intensity of natural resource use.  It is shown that heterogeneity induces technical change to be biased towards resource-intensive sectors.  Along the balanced growth path, the sectoral structure of the economy is constant as the higher resource dependency in resource-intensive sectors is compensated by enhanced research activities.  Resource taxes have no impact on dynamcis except when the tax rate varies over time.  Research subsidies and the sectoral provision of productivity-enhancing public goods raise growth and provide an effective tool for structural pollicy.

The Implications of Heterogeneous Resource Intensities on Technical Change and Growth. Canadian Journal of Economics, 2010, 43, 4, 1173-1197

 AbstractOil has been a curse for Cameroon, one of the potentially richest countries in Sub-Saharan Africa. While the
discovery of oil in 1977 and initial prudent management accentuated hopes, Cameroon has become an example of growth collapse. GDP contracted by 5% on average per year, a combined 27% over the 8-year period, dropping per capita income in 1993 to half of its 1986 level. In 2007, Cameroon was still poorer than in 1985. Using recently available datasets on oil production, the World Bank's Adjusted Savings data, and building on recent literature (Cossé 2006), this paper estimates the oil rent effectively captured by Cameroon since 1977 and analyzes factors explaining the aggregate savings and spending decisions from the oil rent that led to such poor development outcomes. The paper finds that Cameroon may have captured a sizeable portion of its oil rent - around 67%. However, only about 46% of total oil revenues accruing to the government between 1977 and 2006 may have been transferred to the budget. The remaining 54% are not properly accounted for. The paper argues that poor governance is the culprit. The decision to "save" Cameroon's oil revenues abroad proves to have been sub-optimal given the lack of a transparent and accountable framework to manage them and the poor governance record of the country.The lack of transparency and accountability in oil revenues management has translated into a failure to engage in medium to long term development planning for the country. Donors have been pushing for improved governance and transparency in the oil sector for the past 20 years without significant success. The EITI, while a good initiative, is also in high risk of  capture. The paper suggests changes in the incentives structure to reduce collusion and improve governance.

Governance and Oil Revenues in Cameroon

AbstractThe paper considers an economy which is constrained by natural resource use and driven by knowledge accumulation. Resources are essential inputs in all the sectors. It is shown that population growth and poor input substitution are not detrimental but, on the contrary, even necessary for obtaining a sustainable consumption level. We find a new type of Hartwick rule defining the condi-tions for a constant innovation rate. The rule does not apply to capital but to labour growth, the crucial input in research. Furthermore, it relates to the sec-toral structure of the economy and to demographic transition. The results con-tinue to hold with a backstop technology and are extended for the case of minimum resource constraints.

Population Growth and Natural Resource Scarcity: long-run development under seemingly unfavourable conditions.

AbstractThis paper examines the macroeconomic management of Zambia's natural resource endowment over the past century. We describe how the state has adopted different strategies to secure a share of the rents from copper mining, how these strategies have affected incentives for exploration and production and how the associated macroeconomic policy regimes have shaped the value and distribution of the natural resource rents. We focus principally on the shift from public back to private ownership and control of the sector that took place at the end of the 1990s and on how the terms of the privatization affected the impact of the commodity price boom of 2003-08 on the domestic economy. We suggest that while the state and people of Zambia captured a nugatory share of the rents accruing from this boom, high levels of investment in the sector, combined with recent reforms to the mining taxation regime and in the conduct of macroeconomic policy have left Zambia better-placed to benefit from future growth in the copper sector.

Harnessing Resource Revenues for Prosperity in Zambia

Abstract In the absence of a CO2 tax, the anticipation of a cheaper renewable backstop increases current emissions of CO2.  Since the date at which renewables are phased in is brought forward and more generally future emissions of CO2 will decrease, the effect on global warming is unclear.  Green welfare falls if the backstop is relatively expensive and full exhaustion of fossil fuels is optimal, but not if the backstop is sufficiently cheap relative to the cost of extracting the last drop of fossil fuels plus marginal global warming damages as then it is attractive to leave fossil fuels unexploited and thus limit CO2 emissions.  We establish these results by analyzing depletion of non-renewable fossil fuels followed by a switch to a clean renewable backstop, paying attention to timing of the switch and the amount of fossil fuels remaining unexploited.  We also discuss the potential for limit pricing when the non-renewable resource is owned by a monopolist.  Finally, we show that if backstops are already used and more backstops become economically viable as the price of fossil fuels rises, a lower cost of the backstop will either postpone fossil fuel exhaustion or leave more fossil fuel in situ, thus boosting green welfare.  However, if a market economy does not internalize global warming externalities and renewables have not kicked in yet, full exhaustion of fossil fuel will occur in finite time and a backstop subsidy always curbs green welfare.

Is There Really A Green Paradox? Forthcoming, Journal of Environmental Economics and Management

Abstract The paper develops a theoretical model with di¤erent channels through which energy a¤ects economic growth. The conditions for a crowding out of capital accumulation by intensive energy use are derived. In the empirical part, stimations using a system with .ve simultaneous equations for a sample of 37 developed countries with .ve-year average panel data over the period 1975-2004 are presented. It is shown that in the long run rising energy prices are not a threat to development. On the contrary, we and conditions under which decreasing energy input induces investments in physical and knowledge capital. A ten percent increase in energy prices is found to raise the growth rate by 0.4 percentage points.

Energy Prices, Growth, and the Channels in Between: theory and evidence.

AbstractBrunnschweiler and Bulte (2008) provide cross-country evidence that the resource curse is a "red herring" once one corrects for endogeneity of resource exports and allows resource abundance affect growth. Their results show that resource exports are no longer significant while the value of subsoil assets has a significant positive effect on growth. But the World Bank measure of subsoil assets is proportional to current rents, and thus is also endogenous. Furthermore, their results suffer from an unfortunate data mishap, omitted variables bias, weakness of the instruments, violation of exclusion restrictions and misspecification error. Correcting for these issues and instrumenting resource exports with values of proven reserves at the beginning of the sample period, there is no evidence for the resource curse either and subsoil assets are no longer significant. However, the same evidence suggests that resource exports or rents boost growth in stable countries, but also make especially already volatile countries more volatile and thus indirectly worsen growth prospects. Ignoring the volatility channel may lead one to erroneously conclude that there is no effect of resources on growth.

The Pungent Smell of "Red Herrings": subsoil assets, rents, volatility and the resource curse.   Journal of Environmental Economics and Management, 2010, 60, 1,44-55

Abstract This paper investigates the scope for international rules to address market failures in trade in natural resources and the associated internationla transactions of prospecting and investment in resource exploitation.  We argue that several market failures are likely to have substantial costs.  However, due to the distinctive reatures of natural resources, the market failures are particular to them.  The ad hoc approaches which have attempted to address them to date leave scope for a more systematic and comprehensive approach by the WTO, but the distinctive features of natural resources imply that this could not simply be an application of the rules appropriate for other forms of trade.

International Rules for Trade in Natural Resources.  Journal of Globalization and Development: 2010, 1, Iss.1, Article 8

Abstract This paper provides an overview of the relationships between natural resources, governance, and economic performance.  The relationships run in both directions, with resources potentially altering the quality of governance, and governance being particularly important for resource poor countries. Both these relationships have threshold effects; if governance quality is above some level then natural resources can lead to further improvement, while below the threshold further deterioration may take place.  Theoretical and empirical work is reviewed, the interactions between the relationships discussed, and policy implications outlined.

Natural Resources and State Fragility

Abstract This paper examines the effect of natural resources on the level of democracy in a set of countries. The main model is a fixed effects regression model, where the focus is on within-country variation over time. The effect of different resources is investigated, namely the effect of oil, diamonds and agriculture. Furthermore, a distinction is made between two broad types of resources, diffuse and point resources, to explore whether the effect on democracy is similar or different. Criticism in existing literature on the presence of the resource curse is taken into account. Production data on natural resources is used and not the common variable ‘resource exports-over-GDP', the latter being flawed. A possible endogeneity problem is taken into account, as well as the persistence of democracy over time. I find evidence for a resource curse of oil on democracy. It is present in different model specifications, such as models with either fixed effects or a lagged dependent variable. There only seems to be very weak evidence for a negative effect of point resources on democracy, compared to the effect of diffuse resources. It is argued that this might be due to the geographic concentration of these types of resources, which enables governments and elite groups to capture resource rents.

The Effect of Oil and Diamonds on Democracy: is there really a resource curse?

Abstract This paper examines the impact of oil on economic growth in transition economies of the former Soviet Union and Central and Eastern Europe.  I use oil production and reserves data in a series of panel estimations to show that oil has had positive growth effects between 1990-2006, although they appear to be diminishing for very large producers.  These positive effects are confirmed when I consider different oil ownership structures.  Oil has however had a negative effect on human capital formation, and corruption and democracy levels.  Additionally, I find that privatisation levels have had positive growth effects, while privatisation speed has had negative effects on growth.

Oil and Growth in Transition Countries

Abstract We use variation in oil output among Brazilian municipalities to investigate the effects of resource windfalls.  We find muted effects of oil through market channels: offshore oil has no effect on municipal non-oil GDP or its composition, while onshore oil has only modest effects on non-oil GDP composition.  However, oil abundance causes municipal revenues and reported spending on a range of budgetary items to icrease, mainly as a result of royalties paid by Petrobras.  Nevertheless survey-based measures of social transfers, public good provision, infrastructure, and household income increase less (if at all) than one might expect given the increase in reported spending.  To explain why oil windfalls contribute little to local living standards, we use data from the Brazilian media and federal police to document that very large oil output increases alleged instances of illegal activities associated with mayors.

Do Oil Windfalls Improve Living Standards? Evidence from Brazil

AbstractOfficial forecasts for oil revenues and the burden of pensioners are used to estimate forward-looking fiscal policy rules for Norway and compared with permanent-income and bird-in-hand rules.  The results suggest that fiscal rasions have been partial forward-looking with respect to the rising pension bill, but backward-looking with respect to hydrocarbon revenues.  Although one cannot reject solvency of the government using transitional tests, simulation of the estimated rules suggests that the cost of a rapidly graying population are insufficiently taken into account  Currently net assets equal GDP, but they will be evaporated by 2060 unless fiscal polilcy becomes more prudent or the pension system is reformed.

Official Forecasts and Management of Oil Windfalls.  Revised, December 2011

AbstractIn most of the developing world, sustained growth is a precarious achievement.  The longstanding volatility of output in sub-Saharan Africa and Latin America is well known, and in the 1990s, instability extended even to some of the strong performers of East Asia.  The sources of volatility remain somewhat obscure, however.  There is little consensus among economists on the sources of output fluctuations even in developed countries, and since poorer countries appear to show a much wider range of volatility patterns, the intellectual challenge is a formidable one.

Literature on the causes and consequences of volatility is growing by the day, however.  Some of the leading explanations for output volatility include the role played by macroeconomic distortions, low levels of financial sector development and weak political institutions.  Popular accounts of volatility in developing countries are based around the role of terms of trade fluctuations.  The story is deceptively simple.  Growth in a typical developing country may be more volatile by virtue of its specialization in primary commodities.  Since primary commodity prices are more volatile in global mmarkets, developing countries are more susceptible to terms of trade fluctuations - and, thereby - greater output volatility.

But this is an incomplete description of growth instability in developing countries.  It begs the questions: why do poor economies tend to specialize in a narrow range of commodities.  From the perspective of small open economies, changes in world prices can be considered as exogenous. But the effect of a given price change will depend on a country's trade structure.  And this is clearly endogenous in the long run.

Why do some countries remain locked in primary commodity exporting, while others diversify their export structures and achieve greater specialization in manufactured exports? This paper argues that a country's geographical characteristics can be an important determinant of its trade structure.  In particular, it highlights the adverse effects of remoteness for export patterns and exposure to growth shocks resulting in high levels of volatility.  Focusing on structural causes of volatility, this paper concludes that there is considerable empirical support for geography-based explanations for volatility.  The effect of geography on volatility surves even after controlling for other determinants of volatility traditionally considered in the literature.  The analysis in this paper is based on a forthcoming article in the Journal of Development Economics (see Malik and Temple (2009); an earlier more detailed working paper version is Malik and Temple (2006)).

Geography and Trade Structure: Implications for Volatility

AbstractWe introduce learning into a Hotelling model of a non-renewable resource market.  By combining learning and scarcity we add significantly to the dynamics implied by learning and substantially enhance the volatility of commodity prices.  In our learning model we show how a self confirming equilibrium exists but is not constant over time.  As scarcity increases the SCE shifts from a non-cooperative rational expectations equilibrium to a cooperative rational expectations outcome.  As a result prices trend at a rate faster than the rate of time preference.  We show the existence of escape dynamics which generate substantial volatility in commodity prices despite the fact the model is subject only to i.i.d shocks.  The shifting SCE significantly alters escape dynamics with the time to escape shortening and the magnitude of dynamics reducing as scarcity rises.  In terms of the Hotelling model, a shifting SCE and variable escape dynamics introduces greater volatility at low frequencies and substantially larger cyclical volatility.  These price fluctuations show sharp upward breaks in price and non-linear, non-stationary and asymmetric price fluctuations.  We show these results are robust to a range of extensions, including extractions costs, stochastic shifts in demand and learning assumptions closer to rational expectations.

Learning and Price Volatility in Duopoly Models of Resource Depletion

AbstractThe volatility of unanticipated output growth in income per capita is detrimental to long-run development, controlling for initial income per capita, population growth, human capital, investment, openness and natural resource dependence.  This effect is significant and robust over a wide range of specifications.  We unravel the effects of volatility by opening the black box and conditioning the variance of growth shocks on several country characteristics.  Natural resource dependence, physical and institutional barriers to trade and associated policy shocks increase volatility sharply and harm growth through this indirect channel.  The robust indirect effect of natural resources through volatility trumps any direct effects on economic development, even if natural resource dependence is measured net of extraction costs.  Financial development appears to mitigate the harmful causes of volatility.  Our panel data estimation confirms our cross-country results, but we also offer evidence that well developed financial systems amplify the effect of short-term terms-of-trade volatility on macroeconomic volatility.

The Volatility Curse and Financial Development: Revisiting the Paradox of Plenty

AbstractWe hypothesize that natural resources raise income inequality in ethnically polarized societies, but reduce income inequality in ethnically homogenous societies; and we present empirical evidence in support of this hypothesis.

Natural Resources and Income Inequality: The Role of Ethnic Divisions. Economics Letters, 2010, 107, 3, 360-363.

AbstractWhat are the effects of regional integration and other trade policy measures in regions such as Central Asia or the Great Lakes Region of Africa where countries are remote with poor access to the outside world and where foreign exchange earnings come largely from natural resource based exports?  We show that if countries have unequal natural resource endowments, then the gains from non-preferential trade liberalisation accrue largely to the more resource rich economies, while the opposite is true for regional integration.  Regional integration is a powerful way to spread the benefits of resource wealth more widely, but may also be an obstacle to external trade liberalisation.

Economic Integration in Remote Resource Rich Regions. Revised, August 2009

AbstractThe effects of stochastic oil demand on optimal oil extractions paths and tax, spending and government debt policies are analyzed when the oil demand schedule is linear and preferences quadratic.  Without prudence, optimal oil extraction is governed by the Hotelling rule and optimal budgetary policies by the tax and consumption smoothing principle.  Volatile oil demand brings forward oil extraction and induces a bigger government surplus.  With prudence, the government depletes oil reserves even more aggressively and engages in additional precautionary saving financed by postponing spending and bringing taxes forward, especially if it has substantial monopoly power on the oil market, gives high priority to the public spending target and is very prudent, and future oil demand has high variance.  Uncertain economic prospects induce even higher precautionary saving and, if non-oil revenue shocks and oil revenue shocks are positively correlated, even more aggressive oil extraction.  In contrast, prudent governments deliberately underestimate oil reserves which induce less aggressive oil depletion and less government saving, but less so if uncertainty about reserves and oil demand are positively correlated.

Aggressive Oil Extraction and Precautionary Saving: Coping with Volatility. Journal of Public Economics, 2010, 94, 5-6, 421-433.

AbstractWe study how natural resources can feed corruption and how this effect depends on the quality of the democratic institutions. Our game-theoretic model predicts that resource rents lead to an increase in corruption if the quality of the democratic institutions is relatively poor, but not otherwise. We use panel data covering the period 1980 to 2004 and 124 countries to test this theoretical prediction. Our estimates confirm that the relationship between resource rents and corruption depends on the quality of the democratic institutions. Our main results hold when we control for the effects of income, time varying common shocks, regional fixed effects and various additional covariates. They are also robust to the use of various alternative measures of natural resources, corruption and the quality of the democratic institutions, and across different samples. These findings imply that democratization might be a powerful tool to reduce corruption in resource-rich countries.

Natural Resources, Democracy and Corruption. European Economic Review, 2010, 54, 608-621.

AbstractIn this paper I compute implementable fiscal rules for a small open economy whose treasury is dependent on oil revenues and whose oil sector is shrinking. I model production in the oil and non oil sector and I analyze the effects of implementing different sustainable fiscal rules in the context of a deteriorating oil sector. I assess the policy's performance in terms of conditional and unconditional welfare. I show that rules that finance government purchases with structural revenue are preferred only if government purchases do not enter the utility function. Otherwise, when government purchases are complements with private consumption, depletion makes rules that finance government purchases with current revenue more attractive. Furthermore, the lower the sustainable level of oil extraction, the harder it is to reject a rule that finances government purchases with current oil revenue.

AbstractFor a country fractionalized in competing factions, each owning part of the stock of natural exhaustible resources, or with insecure property rights, we analyze how resources are transformed into productive capital to sustain consumption. We allow property rights to improve as the country transforms natural resources into capital. The ensuing power struggle about the control of resources is solved as a non-cooperative differential game. Prices of resources and depletion increase faster than suggested by the Hotelling rule, especially with many competing factions and less secure property rights. As a result, the country substitutes away from resources to capital too rapidly and invests more than predicted by the Hartwick rule. The theory suggests that power struggle boosts output but depresses aggregate consumption and welfare, especially in highly fractionalized countries with less secure property rights. Also, adjusted net saving estimates calculated by the World Bank using market prices over-estimate welfare-based measures of genuine saving. Since our theory suggests that genuine saving is zero while empirically they are negative in resource-rich, fractionalized countries, we suggest ways of resolving this puzzle.

Rapacious Resource Depletion, Excessive Investment and Insecure Property Rights: A Puzzle. Environmental & Resource Economics, 2011,48,1,105-128.

Abstract Resource-rich countries have tended to be autocratic and also have tended to use their resource wealth badly. The neoconservative agenda of promoting democratization in resource-rich countries thus offers the hopeful prospect of a better use of their economic opportunities. This paper examines whether the effect of democracy on economic performance is distinctive in resource-rich societies. We show that a priori the sign of the effect is ambiguous: resource rents could either enhance or undermine the economic consequences of democracy. We therefore investigate the issue empirically. We first build a new data set on country-specific resource rents, annually for the period 1970-2001. Using a global panel data set we find that in developing countries the combination of high natural resource rents and open democratic systems has been growth-reducing. Checks and balances offset this adverse effect. Thus, resource-rich economies need a distinctive form of democracy with particularly strong checks and balances. Unfortunately this is rare: checks and balances are public goods and so are liable to be undersupplied in new democracies. Over time they are eroded by resource rents.

Testing the Neocon Agenda: Democracy in resource-rich societies. European Economic Review, 2009, 53, 3, 293-308.

AbstractThis paper provides an analytic review of the upstream aspects of the exploitation of natural resources: the assignment of ownership rights, taxation, the discovery process, extraction, renewability, and clean-up. It sets these issues within the principal-agent framework. It proposes that the present common system whereby governments sell extraction rights prior to discovery through signature bonuses is likely to be socially costly, since the sale of rights occurs at a stage where irreducible risks generate a severe discount. It also proposes that the present common system whereby governments sell extraction rights by means of negotiated deals might disadvantage governments relative to more transparent and competitive systems such as auctions. While the paper is primarily analytic, it also briefly reviews African experience, suggesting that both high
commodity prices and the low value of discovered assets per hectare imply major opportunities.

Managing the Exploitation of Natural Assets: Lessons for low income countries. Forthcoming, 'Naural Resources and Development' Ed. G.Mavrotas

AbstractA windfall of natural resource revenue (or foreign aid) faces government with choices of how to manage public debt, investment, and the distribution of funds for consumption, particularly if the windfall is both anticipated and temporary. Standard policy advice follows the permanent income hypothesis in suggesting a sustained in increase in consumption supported by interest on accumulated foreign assets (a Sovereign Wealth Fund) once resource revenues are exhausted. However, this strategy is not optimal for capital-scarce developing economies. Incremental consumption should be skewed towards present generations, relative to those in the far future. Savings should be directed to accumulation of domestic private and public capital rather than foreign assets. Optimal policy depends on instruments available to government. We study cases where the government can make lump-sum transfers to consumers; where such transfers are impossible so optimal policy involves cutting distortionary taxation in order to raise investment and wages; and where Ricardian consumers can borrow against future revenues so government only has indirect control of consumption.

Harnessing Windfall Revenues : Optimal policies for resource-rich developing economies.  Economic Journal, 2011, 121, 1-31.

AbstractCountries that are reliant upon commodity exports periodically face large adverse price shocks. Given past volatility, the present high world prices for commodities may
be a precursor to such shocks. Unsurprisingly, adverse price shocks reduce the growth of constant-price GDP and we analyze which structural policies help to minimize these losses. Structural policies are incentives and regulations that are maintained for long periods, contrasting with policy responses to shocks, the analysis of which has dominated the literature. We show that structural policies have large effects. In particular, policies which enable flexibility in labour markets and which ease the entry and exit of firms, are particularly well-suited to shock-prone commodity exporters. We show that these gains are systematically unrealized. Indeed, we find a political economy paradox that the larger are the gains from good structural policy, the worse are the policies actually adopted. We account for this paradox in terms of the lack of responsiveness to the needs of the economy that resource rents induce.

Structural Policies for Shock-Prone Commodity Exporters. Oxford Economic Papers, 2009, 61, 4, 703-726

AbstractAre natural resources a "curse" or a "blessing"? The empirical evidence suggests either outcome is possible. The paper surveys a variety of hypotheses and supporting evidence for why some countries benefit and others lose from the presence of natural resources. These include that a resource bonanza induces appreciation of the real exchange rate, de-industrialization and bad growth prospects, and that these adverse effects are more severe in volatile countries with bad institutions and lack of rule of law, corruption, presidential democracies, and underdeveloped financial systems. Another hypothesis is that a resource boom reinforces rent grabbing and civil conflict especially if institutions are bad, induces corruption especially in non-democratic countries, and keeps in place bad policies. Finally, resource rich developing economies seem unable to successfully convert their depleting exhaustible resources into other productive assets. The survey also offers some welfare-based fiscal rules for harnessing resource windfalls in developed and developing economies.

Natural Resources: Curse or Blessing? Journal of Economic Literature, 2011, 49, 2, 366-420

AbstractWe provide cross-country evidence that rejects the traditional interpretation of the natural resource curse. First, growth depends negatively on volatility of unanticipated output growth independent of initial income, investment, human capital, trade openness, natural resource dependence and population growth. Second, the direct positive effect of resources on growth is swamped by the indirect negative effect through volatility. Third, with well developed financial sectors, the resource curse is less pronounced. Fourth, landlocked countries with ethnic tensions have higher volatility and lower growth. Fifth, restrictions on the current account raise volatility and depress growth whereas capital account restrictions lower volatility and boost growth. Our key message is thus that volatility is a quintessential feature of the resource curse.

Volatility and the Natural Resource Curse. Oxford Economic Papers, 2009, 61,4, 727-760

AbstractMost evidence for the resource curse comes from cross-country growth regressions suffers from a bias originating from the high and ever-evolving volatility in commodity prices. This paper addresses these issues by providing new cross-country empirical evidence for the effect of resources in income per capita. Natural resource dependence (resource exports) has a significant negative effect on income per capita, especially in countries with bad rule of law or bad policies, but these results weaken substantially once we allow for endogeneity. However, the more exogenous measure of resource abundance (stock of natural capital) has a significant negative effect on income per capita even after controlling for geography, rule of law and de facto or de jure trade openness. Furthermore, this effect is more severe for countries that have little de jure trade openness. These results are robust to using alternative measures of institutional quality (expropriation and corruption instead of rule of law). group compensates for this by Fighting harder in the First place. In this case we can talk of mass killings and Fighting e¤orts to be substitutes. In contrast, in polarized societies either both or none of the groups can be ready to do mass killings in case of victory. Under the "shadow of mass killings" groups fight harder. Hence, in this case massacres and fighting are complements.
We also present novel empirical results on the role of natural resources in mass killings and on what kinds of ethnic groups are most likely to be victimized in massacres and forced resettlements, using group level panel
data.

Do Natural Resources Depress Income Per Capita?  Review of Development Economics, 2011,15, 3, 504-521.