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FVCML0208 10
Research Papers


DateAuthor(s)Title of PaperPaper No.
09/18 Paul Pelz, Steven Poelhekke

AbstractWe analyse the local effect of exogenous shocks to the value of mineral deposits at the district level in Indonesia using a panel of manufacturing plants. To the best of our knowledge, we are the first to model and estimate the effect of heterogeneity in natural resource extraction methods. We find that in areas where mineral extraction is relatively capital-intensive, mining booms cause virtually no upward pressure on manufacturing earnings per worker, and both producers of traded and local goods benefit from mining booms in terms of employment. In contrast, labour-intensive mining booms drive up local manufacturing wages such that producers of traded goods reduce employment. This source of heterogeneity helps to explain the mixed evidence for `Dutch disease' effects in the literature. In addition, we find no evidenc revenue sharing between sub-national districts leads to any spillovers.

Good mine, bad mine: Natural resource heterogeneity and Dutch disease in Indonesia

08/18 Rick van der Ploeg, Armon Rezai

AbstractA simple integrated assessment framework that gives rules for the optimal carbon price, transition to the carbon-free era and stranded carbon assets is presented, which highlights the ethical, economic, geophysical and political drivers of optimal climate policy. For the ethics we discuss the role of intergenerational inequality aversion and the discount rate, where we show the importance of lower discount rates for appraisal of longer run benefit and of policy makers using lower discount rates than private agents. The economics depends on the costs and rates of technical progress in production of fossil fuel, its substitute renewable energies and sequestration. The geophysics depends on the permanent and transient components of atmospheric carbon and the relatively fast temperature response, and we allow for positive feedbacks. The politics stems from international free-rider problems in absence of a global climate deal. We show how results change if different assumptions are made about each of the drivers of climate policy. Our main objective is to offer an easy back-on-the-envelope analysis, which can be used for teaching and communication with policy makers.

Simple Rules for Climate Policy and Integrated Assessment

07/18 Jacquelyn Pless, Arthur A. van Benthem

AbstractWe formalize pass-through over-shifting as a simple yet under-utilized test for market power. We apply this test in the market for solar energy. Speci cally, we estimate the pass-through of solar subsidies to solar system prices using rich micro-level transaction and subsidy data from California. Buyers of solar systems capture nearly the full subsidy, while there is more-than-complete pass-through to lessees. We conclude that solar markets are imperfectly competitive by ruling out alternative explanations for over-shifting, and reinforce this conclusion with a test of solar demand curvature. This procedure can serve to detect market power beyond the solar market.

Pass-Through as a Test for Market Power: An Application to Solar Subsidies


06/18 Anouk Rigterink

AbstractThis paper investigates the impact of an increase in the world price of a 'lootable', labour-intensive natural resource on the intensity of violent conflict. It suggests that such a price increase can have opposite effects at different geographical levels of analysis: a decrease in conflict intensity at the country level due to rising opportunity costs of rebellion, but an increase in conflict intensity in resource-rich sub-national regions, as returns to looting rise. The paper introduces a new measure of diamond propensity based on geological characteristics, which is arguably exogenous to conflict and can capture small-scale labour-intensive production better than existing measures. The stated effects are found for secondary diamonds, which are lootable and related to opportunity costs of fighting, but not for primary diamonds, which are neither.

Diamonds: Rebel's and Farmer's best friend

06/18 Thiemo Fetzer, Stephan Kyburz

AbstractCan institutionalized transfers of resource rents be a source of civil conflict? Are cohesive institutions better in managing distributive conflicts? We study these questions exploiting exogenous variation in revenue disbursements to local governments together with new data on local democratic institutions in Nigeria. We make three contributions. First, we document the existence of a strong link between rents and conflict far away from the location of the actual resource. Second, we show that distributive conflict is highly organized involving political militias and concentrated in the extent to which local governments are non-cohesive. Third, we show that democratic practice in form having elected local governments significantly weakens the causal link between rents and political violence. We document that elections (vis-a-vis appointments), by producing more cohesive institutions, vastly limit the extent to which distributional conflict between groups breaks out following shocks to the available rents. Throughout, we confirm these findings using individual level survey data.

Cohesive Institutions and Political Violence

05/18 Anja Tolonen

AbstractDoes industrial development change gender norms? This is the first paper to causally Anja Texplore the local effects of a continent-wide exogenous expansion of a modern industry on gender norms. The identification strategy relies on plausibly exogenous temporal and spatial variation in gold mining in Africa. The establishment of an industrial-scale mine changes local gender norms: justification of domestic violence decreases by 19%, women have better access to healthcare, and are 31% more likely to work in the service sector. The effects happen alongside rapid economic growth. The findings are robust to assumptions about trends, distance, and migration, and withstand a spatial randomization test. The results show that entrenched gender norms can change rapidly in the presence of economic development.

Endogenous Gender Norms: Evidence from Africa's Gold Mining Industry

04/18 Anja Tolonen

AbstractLocal industrial development has the potential to improve health and well-being, while also damaging health through exposure to harmful pollution. It is an empirical question which of these effects dominate. Exploiting the quasi-experimental expansion of African large-scale gold mining, I find that local infant mortality rates decrease by more than 50% alongside rapid economic growth. The instantaneous reduction is comparable to overall gains in infant survival rates in the study countries from 1970 to today. The results are robust to migration. Local industrial development—despite risk
of pollution—may be an effective tool to reduce infant mortality in developing countries.

Local Industrial Shocks and Infant Mortality

04/18 Rick van der Ploeg, Aart de Zeeuw

AbstractThe optimal reaction to a potential productivity shock as a consequence of climate tipping is to substantially tax carbon in order to curb the risk of tipping, but to adjust capital as well in order to smooth consumption when tipping occurs.  We also allow for conventional marginal climate damages and decompose th eoptimal carbon tax in two catastrophe compoentns and the conventional component. We distinguish constant and increasing marginal hazards. Moreover, the productivity catastrophe is compared with recoverable catastrophes and with a shick to the climate sensitivity. Finally, we allow for invetments in adaptation capital as an alternative to counter the potential adverse effects if climate tipping. Quantitatively, the results are in investigated with a calibrated model for the world economy.

Pricing Carbon and Adjusting Capital to Fend off Climate Catastrophes

04/18 Rick van der Ploeg, Armon Rezai

AbstractUnanticipated climate policy curbs the value of physical capital that is costly to adjust.  We illustrate this by showing that climate policy to keep peak global warming below 20C depresses the share prices of oil and gas majors and their market capitalisation, curbs exploration investments and oil and gas discoveries, boosts proven reserves left abandoned in the crist of the earth, cuts exploitation investment, and induces and earlier onset of the carbon-free era.  For a given carbon budget, an immediate carbon tax is the first-best response but delaying the carbon tax or a renewable energy subsidy to meet the same temperature target are preferred by shareholders because they introduce Green Paradox effects and protect the profitability of existing capital.

Climate Policy and Stranded Carbon Assets: A Financial Perspective

02/18 Ohad Raveh, Yacov Tsur

AbstractWe identify an adverse consequence of natural resource windfalls, which is particularly detrimental in advanced democracies. We construct a political economy model with endogenous public debt under exogenous resource windfall shocks, in which political myopia results from reelection prospects. Reelection-seeking politicians, while more accountable toward their electorate, are also more myopic. The latter effect gives rise to a budget deficit bias, with the ensuing debt buildup that is exacerbated by resource windfalls. We find that the positive effect of resource windfalls on debt increases as the restrictions on reelection get laxer. We test the model's predictions using a panel of U.S. states over the period 1963-2007. Our identifcation strategy rests on constitutionally-entrenched differences in gubernatorial term limits that provide plausibly exogenous cross-sectional and time variation in political time horizon, and geographically-based cross-state differences in natural endowments interacted with the international prices of oil and gas. The empirical findings corroborate the model's predictions. In particular, our baseline estimates indicate that a resource windfall of $1 induces an increase of approximately g14:7 in the public debt of states with no gubernatorial term limits.

Resource Windfalls and Public Debt: The Role of Political Myopia

01/18 Elizabeth Baldwin, Yongyang Cai, Karlygash Kuralbayeva

AbstractWe investigate how irreversibility in “dirty” and “clean” capital stocks affects optimal climate policy, from both theoretical and numerical perspectives. An increasing carbon tax will reduce investments in assets that pollute, and so reduce emissions in the short term: our “irreversibility effect”. As such the “Green Paradox” has a converse if we focus on demand side capital stock effects. We also show that the optimal subsidy increases with the deployment rate: our “acceleration effect”. Considering second-best settings, we show that, although carbon taxes achieve stringent targets more efficiently, in fact renewable subsidies deliver higher welfare when policy is more mild.

To Build or not to Build? Capital Stocks and Climate Policy


Ton S. van den Bremer & Rick van der Ploeg

AbstractA popular model of economy and lcimate change has logarithimic preferences and damages proportional to the carbon stick in which case the certainty-equivalent carbon price is optimal. We allow for different aversions to risk and intertemporal fluctuations, convex damages, uncertainties in economic growth, atmospheric carbon, climate sensitivity and damages, correclated risks, and distributions that are skewed in the longer run to capture climate feedbacks. We derive a non-certainty-equivalent rule for the carbon price, which incorporates precautionary, risk-insurance and risk-exposure, and climate beta effects to dela with future economic and climate risks. We interpret these effects with a calibrated DSGE model.

The Risk-Adjusted Carbon Price

11/17 Rick van der Ploeg, Armon Rezai

AbstractWith the election of President Trump, climate deniers moved from the fringes to the centre of global policy making and need to be addressed in policy-making. An agnostic approach to policy, based on Pascal’s wager, gives a key role to subjective prior probability beliefs about whether climate deniers are right. Policy makers that assign a 10% chance of climate deniers being correct set the global price on carbon to $19.1 per ton of emitted CO2 in 2020. Given that a non-denialist scientist making use of the DICE integrated assessment model sets the price at $21.1/tCO2, agnostics’ reflection of remaining scientific uncertainty leaves climate policy essentially unchanged. The robustness of an ambitious climate policy also follows from using the max-min or the min-max regret principle. Letting the coefficient of relative ambiguity aversion vary from zero corresponding to expected utility analysis to infinity corresponding to the max-min principle, it is possible to show how policy makers deal with fundamental climate model uncertainty when they are prepared to assign prior probabilities to different views of the world being correct. Allowing for a wide range of sensitivity exercises including damage uncertainty, it turns out that pricing carbon is the robust response under rising climate scepticism.

The Agnostic's Response to Climate Deniers: Price Carbon!

11/17 Rick van der Ploeg

AbstractA cap on global warming implies a tighter carbon budget which can be enforced with a credible second-best renewable energy subsidy designed to lock up fossil fuel and curb cumulative emissions.  Such a subsidy brings forward the end of the fossil fuel era, but accelerates fossil fuel extraction and global warming in the short run. A weaker fossil fuel oligopoly implies that anticipation of a given carbon budget induces fossil producers to deplete reserves more voraciously and accelerate global warming. This race to burn the last ton of carbon is more intensive for the feedback than open-loop Nash equilibrium, so that the Green Paradox effect of a renewable energy subsidy is stronger. There is an intermediate phase of limit pricing to keep renewable energy producers at bay, which becomes much more relevant when a cap on global warming is enforced. A stronger fossil fuel oligopoly lengthens the period of limit pricing and typically brings forward the carbon-free era. Finally, the mere risk of a cap on globalwarming being enforced at some unknown, future date makes fossil fuel extraction more voracious and accelerates global warming.

Race to Burn the Last Ton of Carbon and the Risk of Stranded Assets

11/17 Ohad Raveh, Yacov Tsur

AbstractCan economic growth increase public debt? Previous studies on the debt-growth nexus focused on the effects of debt on growth.  We present a new and opposite perspective by showing that growth can reinforce deficit spending. We construct a model of endogenous public debt driven by political myopia.  The model shows that economic growth induces short-sighted politicians to increase public debt and that this effect is mangified by the extent of political myopia. We test the model's predictions using a panel of US states over the period 1963-2007.  Our identification strategy rests on the constitutionally entrenched differences in gubernatorial terms limits that provide plausibly exogenous cross-state variation in political time horizon, and aggregate national TFP shocks that are exogenous to invdividual states.  Our more conservative estimates indicate that a one standard deviation positive TFP shock induces an increase of approximately $494 in real per capita public debt in politically myopic states. 

Political Myopia, Public Debt, and Economic Growth Revised Dec 17

11/17 Gerhard Toews, Pierre-Louis Vezina

AbstractThis paper examines the effect of giant oil and gas discoveries on foreign direct investment in developing economies. Across countries, we document a 58% increase in non-resource extraction FDI in the 2 years following a giant discovery, an event which is unpredictable due to the uncertainty of exploration. This effect is driven by a 30% increase in the number of projects and a 16% increase in targeted sectors. Mozambique's recent FDI boom provides a telling confirmation of this mechanism. Using project-level FDI data combined with multiple waves of household surveys and rm censuses we estimate that each FDI job results in 6.2 additional local jobs, linking the gas-driven FDI bonanza in Mozambique to widespread job creation.

Resource discoveries and FDI bonanzas: An illustration from Mozambique

10/17 Masahige Hamano, Wessel N Vermeulen

AbstractHow is a firm's ability to export affected by changes in domestic trade costs? In particular we focus on the interaction between firms and ports to answer how strongly exports from one port are affected by changes in the cost of exporting at neighbouring ports? To answer these questions we extend the standard trade model with heterogeneous firms to have a multiple port structure where exporting is subject to port specific local transportation costs and port specific fixed export costs as well as international bilateral trade costs. We derive a gravity equation with multiple ports and show that gravity distortion due to firm heterogeneity is conditional on port comparative advantage and resulting substitution of export across differentiated ports. We present evidence of the substitution effect using the 2011 Great East Japan Earthquake and following tsunami, which suggest that about 50% of the exports was substituted to other ports following the disaster.

Adapting to within-country export barriers: Evidence from the Japan 2011 Tsunami


Rick van der Ploeg, Armon Rezai

AbstractThe simple rule for the optimal global price of carbon is presented, which captures the geo-physical, economic, and ethical drivers of climate policy as well as the effect of uncertainty about future growth of consumption. There is also a discussion of the optimal carbon budget and the amount of unburnable carbon and stranded fossil fuel reserves and a back-on-the-envelope expression are given for calculating these. It is also shown how one can drive theend of hte carbon era and peak warming. This simple arithmetic for determining climate policy is meant to complement the simulations of large-scale integrated assessment model, and to give analytical understanding of the key determinants of climate policy. The simple rules perform very well in a full integrated assessment model. It is also shown how to take account of a 2oC upper limit on global warming. Steady increases in energy efficiency do not affect the optimal price of carbon, but postpones the carbon-free era somewhat and if technical progress in renewables and economic growth are strong leads to substantially lower cumulative emissions and lower peak global warming.

The Simple Arithmetic of Carbon Pricing and Stranded Assets Energy Efficiency, 11,3, 627-639 (2018).

09/17 Roland Hodler, Anna Bruederle

AbstractOil spills can lead to irreversible environmental degradation and pose hazards to human health.  We are the firt to study the casual effects of onshore oil spills on neonatal and infant mortality rates. We use spatial data from the Nigerian Oil Spill Monitor and the Demographic and Health Surveys, and rely on the comparison of siblings conceived before and after nearby oil spills.  We find that nearby oil spills doublethe neonatal mortality rate.  These effects are fairly uniforma across locations and sociao-economic backgrounds. We also provide some evidence for negative health effects of nearby oil spills on surviving children.

The effect of oil spills on infant mortality: Evidence from Nigeria

8/17 Rick van der Ploeg

AbstractCumulative emissions drive peak global warming and determine the safe carbon budget compatible with staying below 2oC or 1.5oC.  The safe carbon budget is lower if uncertainty about the transient climate response is high and risk tolerance low. Together with energy costs this budget determines the contrained welfare-maximizing carbon price and how quickly fossil fuel is replaced by renrewable energy and how much of it is abated. This price is the sum of a gradual damaged component familiar from the unconstrained optimal carbon price highlighted in economic studies and a Hotelling component for the additional price needed to ensure the safe carbon budget is never violated familiar from IAM studies. If policy makers ignore damages, as in the cost-minimizing temperature constraint literature, a more rapidly rising carbon price results. The alternative of adjusting dmaages iupwards to factor in the peak warming constraint leads initially to a higher carbon price which rises less rapidly.

The Safe Carbon Budget, Climate Change, 147, 47-59 (2018). Revised Dec 17

8/17 Thomas McGregor

AbstractThis paper investigates the link between commodity price movements and risk premiums in resource-dependent, developing economies. I develop a stochastic general equilibrium model of a small open economy that receives a stream of resource revenues. The government sells bonds to foreign investors which it can renege on in the future, at some cost, whilst international investors form expectations on the likelihood of sovereign default. This delivers an endogenous risk premium which is inversely related to the price of oil. The model is able to explain a large proportion of the business cycle fluctuations in interest-rate spreads in resource dependent developing economies. It then ask how specific structural features of developing economies affect the relationship between commodity prices and the optimal price of sovereign debt, including: a higher dependence on natural resource revenues, impatient consumers and governments, a higher degree of risk-aversion, and a lower ability to substitute consumption inter-temporally. Including them in the model significantly improves the ability of the model to explain the key macroeconomic co-movements in a resource rich, developing economy context. Model simulations reveal an interesting policy insight. An endogenous risk premium that is driven by falling oil prices, provides an additional rationale for a volatility fund in which liquidity buffers are accumulated to manage debt repayments. These buffers should be larger the stronger the link between oil prices and the domestic economy is, the more impatient policymakers are and the more willing they are to substitute current for future consumption.

Pricing sovereign debt in resource rich economies

7/17 James Cust, David Mihalyi

AbstractOil discoveries can constitute a major positive and exogenous shock to economic activity, but the resource curse hypothesis would suggest they might also be detrimental to growth over the long run.  This paper utilizes a new methodology for estimating growth underperformance to examine the extent to which discoveries depress the growth of a country following a discovery and prior to production starting. The study finds casual evidence of  significant negative effect on short-run growth and growth relative to counter-factual forecast growth in countries with weak instututions; creating growth disappointments prior to private and public resource windfalls. This effect is termed the presource curse. For a giant oil or gas discovery, between 1988 to 2010, the study estimates an average growth disapppointment effect of 0.83 percentage points, measured as the average annual gap between forecast and actual growth over the five years following a discovery. Further, the estimated effect varies by the size of the discovery, increasing to a 1.77 percentage points gap in the case of a super giant discoveries.  The estimated effect is inversely related to the quality of political institutions, and driven by countries with lower institutional quality at the time of the discovery, consistent with the similar long-run results documented in the resource curse literature.  For countries with below-threshold institutional quality, the growth disappointment effect is larger, measured as 1.35 percentage points in annual terms.  There is no measured growth disappointment effect for countries with strong institutions. Using the synthetic control method we confirm our findings for a selection of countries above and below the institutional quality threshold.  The findings suggest that studies of the resource curse that focus only on the effects of resource exploitation or examine only long-run growth effects may overlook important short-run growth disappointments following discoveries, and the way countries respond to news shocks.

Evidence for a Presource Curse? Oil discoveries, Elevated Expectations, and Growth Disappointments

7/17 James Cust, Torfinn Harding, Pierre-Louis Vezina

Abstract Oil and gas extraction may lead to the Dutch disease, i.e. the crowding out of the manufacturing sector due to rising wages when labor is drawn to the expanding extraction and services sectors. In this paper we exploit the fact that oil and gas discoveries contain an element of chance as well as oil price fluctuations to capture random variation in oil and gas windfalls across Indonesia and identify their effects on manufacturing firms. We find that oil and gas windfalls cause wage growth but that the firm exit rate is unaffected. Firms’ output and labor productivity increase along with wages suggesting where firms are able to respond to booming local demand, and raise productivity in response to upward wage pressures, they can overcome the crowding-out effects from resource windfalls.

Dutch Disease Resistance; Evidence from Indonesian Firms

7/17 Bas Jacobs, Rick van der Ploeg

Abstract This paper analyses optimal corrective taxation and optimal income redistribution. The Pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages. Moreover, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods if preferences for commodities are not of the Gorman (1961) polar form. However, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax if preferences for commodities are of the Gorman polar form even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods. The often-used quasi-linear, CES and Stone-Geary utility functions all belong to the Gorman polar class. If pollution taxes are not optimized, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax if preferences are Gorman polar. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but optimal corrective taxes deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.

Should pollution taxes be targeted at income redistribution? Revised, Dec 2017

4/17 Niko Jaakkola & Rick van der Ploeg

AbstractGlobal warming can be curbed by pricing carbon emissions and thus substituting fossil fuel with renewable energy consumption. Breakthrough technologies (eg fusion energy) can reduce the cost of such policies. However, the chance of such a technology coming to market depends on investment.  We model breakthroughs as an irreversible tipping point in a multi-country world, with different degrees of international cooperation.  We show that international spill-over effects of R&D in carbon-free technologies lead to double free-riding, strategic over-pollution and underinvestment in green R&D, thus making climate change mitigation more difficult.  We also show how the demand structure determines whether carbon pricing and R&D policies are substitutes or complements.

Non-Cooperative and Cooperative Climate Policies with Anticipated Breakthrough Technology updated March 2018 Journal of Environmental Economics and Management (to appear)

3/17 Nemera Mamo, Sambit Bhattacharyya, Alexander Moradi & Rabah Arezki

AbstractWhat are the economic consequences of mining in Sub-Saharan Africa? Using a panel of 3,635 districts from 42 Sub-Saharan African countries for the period 1992 to 2012 we investigate the effects of mining on living standards measured by night-lights. Night-lights increase in mining districts when mineral production expands (intensive margin) but large effects approximately equivalent to 16% increase in GDP are mainly associated with new discoveries and new production (extensive margin)  We identify the effect by carefully choosing feasible but not yet mined districts as a control group.  In addition, we exploit giant and major mineral discoveries as exogenous new shocks.  In spite of the large within district effects, there is little evidence of significant spillovers to other districts reinforcing the enclave nature of mines in Africa.  Furthermore, the local effects disappear after mining activities come to an end which is consistent with the 'resource curse' view.

Intensive and Extensive Margins of Mining and Development: Evidence from Sub-Saharan Africa

3/17 Thorsten Beck & Steven Poelhekke

AbstractThe need to absorb windfalls gains and manage them appropriately has been discussed extensively by academics and policy makers alike.  We explore the role of the financial sector in intermediating these windfalls.  Controlling for the level of financial development, infllation, GDP growth and country fixed-effects, we find a relative decline in financial sector deposits in countries that experience an unexpected natural resource windfall as measured by shocks to exogenous world prices.  Moreover, we find a similar relative decline in lending, which is mostly due to the decrease in deposits.  The smaller role for the financial sector in intermediating resource booms is accompanied by a stronger role of governments in channeling resources into the economy, mostly through higher government consumption.

Follow the Money: Does the financial sector intermediate natural resource windfalls?

1/17 Armon Rezai & Rick van der Ploeg

AbstractTemperature responses and optimal climate policies depend crucially on the choice of a particular climate model. To illustrate, the temperature responses to given emission reduction paths implied by the cllimate modules of the well-known integrated assessments models DICE, FUND and PAGE are described and compared.  A dummy temperature module based on President Trump's climate sceptic view is added.  Using a simple growth model of the global economy, the sensitivity of the optimal carbon price, renewable energy subsidy and energy transition to each of these climate models is discussed. The paper then derives max-min, max-max and min-max regret policies to deal with this particular form of climate uncertainty and with climate scepticism. The max-min or min-max regret climate policies rely on a non-sceptic view of global warming and lead to a substantial and moderate amount of caution, respectively. The max-max leads to no climate policies in line with the view of climate sceptics.

Climate Policies Under Climate Model Uncertainty: Max-Min and Min-Max Regret  Energy Economics, 68, S1, 4-16, (2017).

1/17 Thomas McGregor

AbstractThe current debate about the optimal management of foreign exchange windfalls is highly relevant to low income countries such as Uganda, having recently discovered vast hydrocarbon reserves.  Using a Computable General Equilibrium (CGE) model for Uganda this paper analyses three broad policy options for the use of oil revenues, increasing i) private consumptions, ii) private investment, and iii) public infrastructure investment. The model allows for learning-by-doing in tradables, increasing returns to public infrastructure and the use of an Oil Fund held abroad. The fund allows government to smooth expenditure programs over the medium-term.  When public infrastructure is biased towards tradables, a smoth expenditure profile yields higher economic growth than high expenditure skewed to the present. The government's discount rate plays a key role in determining the optimal use and management of oil revenues. More impatient governments will be inclined to increase current expenditure at the cost of future generations' welfare and negative distributional implications for poor households.  Lower discount rates align the political incentives with respect to inter-temporal welfare and the long-run growth path of the economy.

Fiscal Options for Absorbing a Windfall of Natural Resource Revenues - A CGE Model of Oil Discovery in Uganda

11/16 James Cust & Qi Zhang

AbstractMeasurements using satellite data on nighttime lights are becoming increasingly widespread as a proxy method for evaluating economic activities, such as GDP or GDP growth. We critically examine the widely assumed linear relationship between changes in lights and GDP, identifying several key factors that undermine the usefulness of lights for examining changes in broad economic activity across time.  Our study focuses on power sector investments in Angola, where granular data on the type, size, and source of these investments allows us to generate precise estimates for the responsiveness of lights.  We find that the stable relationship between lights and GDP does not hold in this supply-constrained context, and instead increases in lights strongly co-vary, and at different rates, to different forms of investment. These findings have potentially wide-ranging implications for the interpretation of changes in lights as a proxy for economic activity. In particular, we note that countries where light data is being most widely relied upon - those developing countries with a paucity of accurate economic statistics - are often countries with the largest electricity supply deficit.

Growth, Nighttime Lights and Power Infrastructure Investment: Evidence from Angola

11/16 Qi Zhang

AbstractOpen competitive bidding with the contract awarded to the bidder offering the lowest price is commonly the recommended method for public procurement. However, the benefits of this form of bidding are subject to certain conditions, such as a good number of available bidders and no-post-contract adaptations. This paper qualtitatively evaluates the implications of the extent to which these conditions are satisfied for contract performance. It combines the performance ratings of the World Bank financed projects with the information on bidding for World Bank procurement contracts and uses natural resources as exogenous variations to show that in resource-rich countries, where the conditions are less likely to be satisfied, awarding the contract to the bidder with the lowest cost may not be the best procurement method in terms of contract performance. This is consistent with the evidence that World Bank financed projects performed better in non-resource-rich countries than in resource-rich countries over the lsat 40 years.  This may explain why since 2016 the World Bank has shifted the focus of bid evaluation from the lowest bid to bids that provide the best overall value for money, taking into account risk, quality, cost and other factos as needed.

Project Performance and Bid Evaluation: Evidence from World Bank procurement auctions

11/16 Fidel Perez-Sebastian & Ohad Raveh

AbstractIn economies with multi-level governments, why would a change in the fiscal rule of a government in one level lead to a fiscal response by a government in a different level? Previous explanations focus on the standard common-pool problem. In this paper we study a new potential channel: complementarities between the public goods supplied by the two governments. First, we illustrate its potential key role in determining the sign of the vertical reaction through a standard model of horizontal tax competition with vertical fiscal interactions. Second, we propose a novel strategy for identifying it, by considering an empirical design that confines the common-pool channel to specific locations. We implement this design through a quasi-natural experiment: the 1980 US Crude Oil Windfall Act, which increased federal tax collections from sale of crude oil, thereby affecting the tax base of oil rich states specifically. This latter feature enables attributing the vertical fiscal reactions of the remaining states to the complementarity channel. Folowing this strategy, via a difference-in-differences approach, we decompose the sources of the vertical fiscal reactions arising from this federal tax change and find that those attributed to the novel channel:  (1) point at complementarity, between state and federal publc goods; (ii) account for approximately 50% of the overall vertical fiscal response; (iii) are manifested primarily via corporate taxation.

What Drives Vertical Fiscal Interactions? Evidence from the 1980 Crude Oil Windfall Act.  Revised, February 2017

11/16 Fidel Perez-Sebastian & Ohad Raveh

AbstractCan abundance of natural resources affect legislators' voting behavior over federal tax policies? We construct a political economy model of a federalised economy with district heterogeneity in natural resource abundance. The model shows that representatives of natural resource rich districts are more (less) willing to vote in favor of federal tax increases (decreases).  This occurs because resource rich districts are less reponsive to federal tax changes due to the immobile nature of their natural resources. We test the modela's predictions using date on roll-call votes in the US House of Representatives over the major federal tax bills initiated during the period of 1945-2003, in conjunction with the presence of active gian oil fields in U.S Congressional districts. Our identification strategy rests on plausibly exogenous giant oil field discoveries and exploitation, and narrative-based aggregate federal tax shocks that are exogenous to individual Congressional districts and state indicators. Our results indicate that resource richness is approximately half as dominant as the main determinant, namely party affiliation, in driving legislators' voting behaviour over federal tax policies.

Federal Tax Policies, Congressional Voting, and Natural Resources. Revised April 2018

11/16 Ohad Raveh

AbstractCan monetary policy shocks induced redistribution across natural resource rich and poor economies within a unoin?  Resource-rich econmies are more capital intensive. A two-region monetary union DSGE model with an equalizing fiscal rule and heterogeneity in capital intensity shows that positive monetary shows that positive monetary policy shocks induce redistribution from the capital-scarce region to its capital-rich counterpart because investment contracts more strongly inthe latter. These patterns persist over the medium-term. We test the model's predictions using a panel of US states ove the period of 1969-2007. Our identification strategy rests on narrative-based monetary policy shocks that are exogenous to individual states, and geographically-based cross-state differences in natural endowments interacted with the interantional price of oil. The empirical results corroborate the theoretical predictions. We find that a contractionary monetary policy shich induced a relative drop (increase) in investments (federal transfers) in resource-rich states, over the course of the four years, due to differences in capital intensities. We estimate that approximately $2.4 billion is redistributed from the resource-poor to the resource-rich states, within the first year of the shock.

Monetary Policy, Natural Resources, and Redistribution, updated April 2018

9/16 Rabah Arezki, Rick van der Ploeg & Frederik Toscani

AbstractThis paper explores the effect market orientation on (known) natural wealth using a novel dataset of world-wide major hydrocarbon and mineral discoveries.  Consistent with the predictions of a two-region model, our empirical estimates based on a large panel of countries show that increased market orientation causes a significant increase in discoveries.  In a thought experiment whereby economies in Latin America and sub-Saharan Africa remained closed, they would have only achieved one quarter of the actual increase in discoveries they have experienced since the early 1990s.  Our results call into question the commonly held view that resource endowment is exogenous. 

The Shifting Natural Wealth of Nations: The role of market orientation. Revised, March 2017

9/16 Ton S. van den Bremer & Rick van der Ploeg

AbstractWe use a welfare-based intertemporal stochastic optimization model and historical data to estimate the size of the optimal intergenerational and liquidity funds and the corresponding resource dividend available to the government of the Canadian province Alberta.  To first-order of approximation, this dividend should be a constant fraction of total above- and below-ground wealth, complemented by additional precautionary savings at initial times to build up a small liquidity fund to cope with oil price volatility. The ongoing dividend equals approximately 30 per cent of government revenue and requires building assets of approximately 40 per cent of GDP in 2030, 100 per cent of GDP in 2050 and 165 per cent in 2100.  Finally, the effect of the recent plunge in oil prices on our estimates is examined.  Our recommendations are in stark contrast with historical and current government policy.

Saving Alberta's Resource Revenues: Role of intergenerational and liquidity funds.  Energy Policy, 99, 132-146, 2016

8/16 Rick van der Ploeg

AbstractPolicy prescriptions for managing natural resource windfalls are based on the permanent income hypothesis; none of the windfall is invested at home and saving in an intergenerational SWF is dictated by smoothing consumption across different generations.  Furthermore, with Dutch disease effects the optimal response is to intertemporally smooth the real exchange rate, smooth public and private consumption, and limit sharp fluctuations in the intersectoral allocation of production factors.  We show that these prescriptions need to be modified for the following reasons.  First, to cope with volatile commodity prices precautionary buffers should be put in a stabilisation fund. Second, with imperfect access to capital markets the windfall must be used to curb capital scarcity, invest domestically and bring consumptoin forward. Third, with real wage rigidity consumption must also be brought forward to mitigate transient unemployment. Fourth, the real exchange rate has to temporarily appreciate to signal the need to invest in the domestic economy to gradually improve the ability to absorb the extra spending from the windfall.  Fifth, with finite lives the timing of handing back the windfall to the private sector matters and consumption and the real exchange rate will be volatile. Finally, with nominal wage rigidity we show that a Taylor rule is a better short-run response to a crash in commodity prices than a nominal exchange rate peg.

Macro Policy Responses to Natural Resource Windfalls and the Crash in Commodity Prices Journal of International Money & Finance, forthcoming

8/16 Gerhard Toews & Pierre-Louis Vézina

AbstractThis paper examines the effect of large oil and gas discoveries on foreign direct investment in developing economies using a new project-level dataset.  We document a large increase in non-resource FDI in the 2 years following a giant discovery, an event which is unpredictable due to the uncertain nature of exploration.  We find that the FDI inflows increase by 73% and that this wave is drive by a 37% increase in the number of FDI projects as well as a 22% increase in source countries and a 17% increase in target sectors.  We interpret this FDI response as evidence for the news-driven business-cycle hypothesis within a developing country setting and highlight FDI bonanzas as an important development channel for resource rich economies.

Resource Discoveries and FDI Bonanzas. Revised, September 2016

6/16 Rick van der Ploeg & Armon Rezai

AbstractThe tractable general equilibrium model developed by Golosov et al (2014), GHKT for short, is modified to allow for stock-dependent fossil fuel extraction costs and partial exhaustion of fossil fuel reserves, a negative impact of global warming on growth, mean reversion in climate damages, steady labour-augmenting technical progress, specific green technical progress driven by learning by doing, population growth, and a direct effect of the stock of atmospheric carbon on instantaneous welfare.  We characterize the social optimum and derive simple rule for both the optimal carobn tax and the renewable energy subsidy, and charaterize the optimal amount of untapped fossil fuel.

Stranded Assets, the Social Cost of Carbon, and Directed Technical Change: Macroeconomic dynamics of optimal climate policy

5/16 Ralph De Haas & Steven Poelhekke

AbstractWe estimate the impact of local mining activity on the business constraints experienced by 22,150 firms across eight resource-rich countries.  We find that the presence of active mines deteriorates the business environment in the immediate vicinity (<20 km) of a firm but relaxes business constraints of more distant firms.  The negative local impact of mining is concentrated among firms in tradable sectors whose access to inputs and infrastructure becomes more constrained.  This deterioration of the local business environment adversely affects firm growth and is in line with a natural resource curse at the sub-national level.

Mining Matters; Natural Resource Extraction and Local Business Constraints

5/16 Torfinn Harding, Radoslaw (Radek) Stefanski & Gerhard Toews

AbstractWe estimate the effect of giant oil and gas discoveries on bilateral real exchange rates. The size and plausibly exogenous timing of such discoveries make them ideal for identifying the effects of an anticipated resource boom on prices.  We find that a giant discovery with the value of a country's GDP increases the real exchange rate by 14% within 10 years following the discovery.  The appreciation is nearly exclusively driven by an appreciation of the prices of non-tradable goods.  We show that these empirical results are qualitatively and quantitatively in line with a calibrated model with forward looking behavour and Dutch disease dynamics.

Boom Goes The Price: Giant resource discoveries and real exchange rate appreciation

4/16 Rabah Arezki & Amadou Sy

AbstractThis paper studies the appropriate financing structure of infrastructure investment in Africa. It starts with a description of recent initiatives to scale up infrastructure investment in Africa. The paper then uses insights from the literature on informed vs. arm's length debt to discuss the structure of infrastructure financing. Considering the differences in investors' preferences that Africa faces, the paper argues that continent's success to fill its greenfeild and hence risky infrastructure gap hinges upon a delicate balancing act between development banking and institution long-term investment. In a first phase, development banks which have both the flexibility and expertise should help finance the riskier phases of large greenfield infrastructure projects.  In a second phase, development banks should engage and offload their mature brownfield projects to pave the way for a viable engagement of long term institutional investors such as sovereign wealth funds.  In order to promote an Africa wide infrastructure bond markets where the latter could play a critical role, the enhancement of Africa's legal and reglatory framework should however start now.

Financing Africa's Infrastructure Deficit: From Development Banking to Long-Term Investing

4/16 Liana O Anderson, Samantha De Martino, Torfinn Harding, Karlygash Kuralbayeva & Andre Lima

AbstractTo reduce deforestation rates in the Amazon, Brazil established in the period 2004-2010 conservation zones covering an area 1.5 times the size of Germany. In the same period, Brazil experienced a large reduction in deforestation rates.  By combining satellite data on deforestation with data on the location and timing of the conservation zones, we provide spatial regression discontinuity estmates and difference-in-difference estimates indicating that the policy cannot explain the large reduction in deforestation rates.  The reason is that the zones are located in areas where agricultural produciton is likely to be unprofitable.  We also provide evidence that zones reduce deforestation if the incentives for municipalities to reduce deforestation are high.  We rationalize these finding with a spatial economics model of land use, with endogenous location of conservation zones and imperfect enforcement.  Our findings point to the need for other explanations than the conservation zones to explain the sharp decline in deforestation rates in the Brazilian Amazon since 2004.

The Effects of Land Use Regulation on Deforestation: Evidence from the Brazilian Amazon

4/16 Anthony J Venables & Samuel Wills

AbstractThe paper explores strategies for managing revenue from natural resources, focusing on the balance between domestic and foreign asset accumulation.  It suggests that domestic asset accumulation is the priority in developing countries, while there are three motives for accumulating foreign assets; inter-generational transfer, temporary 'parking' of funds, and stabilisation.  The paper argues that the first of these is inappropriate for low income countries.  The second is required if it is difficult to absorb extra spending in the domestic economy and takes time to build up domestic investment.  The third is important, and depends on the extent to which the economy has other ways of adjusting to shocks.

Resource Funds: Stabilizing, parking, and inter-generational transfer

2/16 Thomas McGregor & Samuel Wills

AbstractWe investigate whether the geographic determinants of growth extend to natural amenities.  We combine data on spatial and temporal variation in the quality of over 5000 surf breaks globally with data on local economic performance, proxied by night-time lights.  We document a strong association between natural amenity quality and local economic development. Economic activity grows faster near good surf breaks; following the discovery of new breaks, or the technology needed to ride them; and during El Niño events that generate high-quality waves. The effects are concentrated in nearby towns and emerging economies, and population changes are consistent with tourism..

Surfing a Wave of Economic Growth. Revised, March2017

1/16 Anthony J Venables

AbstractDeveloping economies have found it hard to use natural resource wealth to improve their economic performance.  Utilising resource endowments is a multi-stage economic and political problem that requires private investment to discover and extract the resource, fiscal regimes to capture revenue, judicious spending and investment decisions, and policies to manage volatility and mitigate adverse impacts on the rest of the economy.  Experience is mixed, with some successes (such as Botswana and Malaysia) and more failures.  This paper reviews the challenges that are faced in successfully managing resource wealth, the evidence on country performance, and the reasons for disappointing results.

Using Natural Resources for Development: Why has it proven so difficult?  Journal of Economic Perspectives, 30(1), 161-84, 2016.

1/16 Armon Rezai & Rick van der Ploeg

AbstractClimate change must deal with two market failures: global warming and learning by doing in renewable use.  The first-best policy consists of an aggressive renewables subsidy in the near term and a gradually rising and falling carbon tax.  Given that global carbon taxes remain elusive, policy makers have to use a second-best subsidy. With credible commitment, the second-best subsidy is set higher than the social benefit of learning to cut the transition time and peak warming close to first-best levels at the cost of higher fossil fuel use in the short run (weak Green Paradox). Without commitment the second-best subsidy is set to the social benefit of learning.  It generates smaller weak Green Paradox effects, but the transition to the carbon-free takes longer and cumulative carbon emissions are higher.  Under first-best and second best with pre-commitment peak warming is 2.1 - 2.3 degrees centigrade, under second best without commitment 3.5 degrees centigrade, and without any policy temperature 5.1 degrees centigrade above pre-industrial levels.  Not being able to commit yields a welfare loss of 95% of initial GDP compared to first best.  Being able to commit brings this figure down to 7%.

Second-Best Renewable Subsidies to De-Carbonize the Economy: Commitment and the Green Paradox. Environmental and Resource Economics, 1-26, 2016.

1/16 Rabah Arezki,  Thiemo Fetzer & Frank Pisch

AbstractThis paper provides novel empirical evidence of the effects of a plausibly exogenous change in relative factor prices on United States manufacturing production and trade. The shale gas revolution has led to (very) large and persistent differences in the price of natural gas between the United States and the rest of the world reflecting differences in endowment of difficult-to-trade natural gas.  Guided by economic theory, empirical tests on output, factor reallocation and internationa ltrade are conducted. Reuslts show that US manufacturing exports have grown by about 10 percent on account of their energy intensity since the onset of the shale revolution.  We also document that the US shale revolution is operating both at the intensive and extensive margins.

On the Comparative Advantage of U.S. Manufacturing: Evidence from the Shale Gas Revolution. Revised, July 2016

12/15 Rabah Arezki, Patrick Bolton, Sanjay Peters, Frederic Samama & Joseph Stiglitz

AbstractThis paper investigates the emerging global landscape for public-private co-investments in infrastructure.  The creation of the Asian Infrastructure Investment Bank and other so-called "infrastructure investment platforms" are an attempt to tap into the pool of both public and private long-term savings in order to channel the latter into much needed infrastructure projects.  This paper puts these new initiatives into perspective by critically reviewing the literature and experience with public private partnerships in infrastructure.  It concludes by identifyng the main challenges policy makers and other actors will need to confront going forward and to turn infrastructure into an asset class of its own.

From Global Savings Glut to Financing Infrastructure: The Advent of Investment Platforms

10/15 Brock Smith

AbstractThis paper evaluates the impact of major natural resource discoveries since 1950 on GDP per capita and its proximate causes.  Using panel fixed-effects estimation and resource discoveries in countries that were not previously resource-rich as a plausibly exogenous source of variation.  I find a positive effect on GDP per capita levels following reosurce exploitation that persists in the long term.  Results vary significantly between OECD and non-OECD treatment countries, with effects concentrated within the non OECD group.  I further test, GDP effects with synthetic control analysis on each individual treated country, yielding results consistent with the average effects found with the fixed-effects model.  Productivity, capital formation and education were also positively affected by resource discovery, while growth accounting analysis suggests productivity gains were a major distinguishing factor in GDP effects.

The Resource Curse Exorcised: Evidence from a Panel of Countries. Journal of Development Economics, 116, 57-73, 2015.

10/15 Brock Smith & Samuel Wills

Abstract Do oil booms reduce poverty and inequallity? To study this we propose a new measure of rural poverty: counting people that live in darkness at night.  We do this by combining high-resolution satellite data on night-time lights and population globally from 2000-2013.  This measure acurately identifies up to 83% of households as  above or below the poverty line when compared to over 600,000 surveys.  We find that both high oil prices and new discoveries increase illumination and GDP nationally, but promote inequality because the increases are limited to towns and cities with no evidence that they benefit the rural poor.

Left in the Dark? Oil and Rural Poverty, Revised, August 2017 Journal of Association of Environmental and Resource Economics

9/15 Thomas McGregor

AbstractThis paper uses a panel-VAR approach to estimate both the dynamic and structural macroeconomic response of resurce-rich, low-income countries to global commodity price shocks.  I use a Block recursive ordering, as well as a simple Choleski decomposition, to identify structural commodity price shocks for a set of developing countries.  The Block recursive identification strategy assumes ony that global macroeconomic conditions do not respond to individual low-income country conditions contemporaneously.  The results suggest that a one standard deviatoin increase in commodity prices raises per capita income in developing countries by 0.26% and government spending and investment by 4.4% and 12.4%. The effects are larger for less developed countries, economies with fixed exchange rate regimes and thos that are more depended on commodity exports.  Commodity price shocks also result in significant transformation of these economies, with the share of value-added in manufacturing contracting by 0.17-0.22 percentage points.  Whilst these effects may appear small, they represent the effect of exogenous commodity price shocks that are not due to changes in aggregate demand or global financial conditions.  This suggests that commodity price movements alone may be less important in explaining the volatility of low-income country growth than other explanations.  Taken together, these results present a more nuanced picture of the 'resource curse' in poor countries. Whilst per capital income levels are positively affected by resource booms, the potential for de-industrialisation does exist.  The channel through which this link operates appears to be the real exchange rate, with resource booms leading to appreciation pressures.  To illustrate the relevance of these results, I investigate the impact of the recent oil price collapse on the Nigerian economy.

Commodity Price Shocks, Growth and Structural Transformation in Low-Income Countries. Forthcoming,  Quarterly Review of Economics and Finance

9/15 Gry Østenstad & Wessel N Vermeulen

AbstractWe ask how a small open economy with heterogeneous firms responds to a resource windfall.  A resource windfall boosts demand but also affects wages such that production costs increase.  The result is a higher number of firms and renewed selection among firms: New firms at the lower end of the productivity continuum can produce for the domestic market, while only the most productive firms continue to export.  While the share of firms that sell traded varieties decreases, the average productivity of exporting firms increases.  The increase in the number of varieties caused by a larger number of firms and the inflow of additional imports implies that there is an increase in aggregate welfare over and above the direct windfall gain.  We provide analysis in a model with two types of labor.  The windfall causes a re-allocation of labor types and a change in relative wages, thereby implying different welfare outcomes for each type of labor and the possibility of rising inequality.

The Impact of Windfalls: Firm selection, trade and welfare. Revised, May 2016

9/15 Fernando M Aragón, Juan Pablo Rud &Gerhard Toews

AbstractThis paper examines the heterogenous effect of mining shocks on local employment, by gender.  Using the closure of coal mines in UK starting in mid 1980s, we find evidence of substitution of male for female workers in the manufacturing sector.  Mine closures increase number of male manufacturing workers but decrease, in absolute and relative terms, number of female manufacturing workers.  We document a similar, though smaller, effect in the service sector.  This substitution effect has been overlooked in the debate of local impacts of extractive industries, but it is likely to occur in the context of other male-dominated industries.  We also find that mine closures led to persistent reductions in population size and participation rates.

Mining Closure, Gender and Employment Re-allocations: The case of UK coal mines

9/15 Fidel Perez-Sebastian, Ohad Raveh & Yaniv Reingewertz

AbstractHow do state tax rates respond to federal tax shocks? This paper presents a novel mechanism of heterogeneous vertical tax externalities across levels of fiscal advantage, showing that tax increases can be expansionary - even without their reinvestment.  States rich in natural resources have a fiscal advantage in the inter-state competition over production factors which allows them to respond better to increases in federal taxes and consequently, attract capital from other parts of the nation.  We add heterogeneity in fiscal advantage levels to an otherwise standard model of vertical tax externalities and horizontal tax competition.  The model shows that, irrespective of federal redistribution, the contractionary effect of a federal tax increase can be overturned in states with high fiscal advantage, through an increase in their tax base.  Using the case of the US and narrative-based measured federal tax shocks a-la Romer and Romer (2010), we provide empirical evidence for the various aspects of this mechanism.  Specifically, our lower-bound estimates indicate that, controlling for federal transfers, a 1% increase in the GDP share of capital-related federal taxes at the beginning of a year increases the growth rate of the per capita tax base by approximately 1.6% in high fiscal advantage states at the end of it.

Heterogeneous Vertical Tax Externalities and Macroeconomic Effects of Federal Tax Changes: The Role of Fiscal Advantage. Revised, March, 2017

6/15 Rabah Arezki, Sambit Bhattacharyya & Nemera Mamo

AbstractThe empirical relationship between natural resources and conflict in Africa is not very well understood.  Using a novel geocoded dataset on resource discovery and conflict we are able to construct a quasi-natural experiment to explore the causal effect of (giant and major) oil and minerals discoveries on conflict in Africa at the grid level corresponding to a spatial resolution of 0.5 x 0.5 degree covering the period 1946 to 2008.  Contrary to conventional wisdom, we find no evidence of natural resources triggering conflict in Africa after controlling for grid-specific fixed factors and time varying common shocks. Resource discovery appears to have improved local income measured by nightlights which could be reducing the conflict likelihood.  We observe little or no heterogeneity in the relationship across resource type, size of discovery, pre and post conclusion of the cold war, and institutional quality.  The relationship remains unchanged at the regional and national levels.

Resource Discovery and Conflict in Africa: What do the data show?

6/15 Andrea Ferrero & Martin Seneca

AbstractHow should monetary policy respond to a commodity price shock in a resource-rich economy? As in the baseline New Keynesian model, the central bank of a small oil-exporting economy faces a trade-off between the stabilization of domestic inflation and an appropriately defined output gap.  But in our framework the output gap depends on oil technology, and the weight on output gap stabilization is increasing in the importance of the oil sector.  Given substantial spillovers to the rest of the economy, optimal policy calls for a reduction of the interest reate following a drop in the oil price.  In contrast, a central bank with a mandate to stabilize consumer price inflation would raise interest reates to limit the inflationary impact of an exchange rate depreciation.

Notes on the Underground: Monetary policy in resource-rich economies

4/15 Rick van der Ploeg

AbstractAcceleration of global warming resulting from a future carbon tax is large if the price elasticities of oil demand are large and that of oil supply is small.  The fall in the world interest rate weakens this weak Green Paradox effect, especially if intertemporal substitution is weak.  Still, social damages from greenhouse gases drop if the fall in oil supply and cumulative emissions is strong enough. If the current carbon tax is too low, the second-best future carbon tax is set below the first best to mitigate adverse Green Paradox effects.  Unilateral second-best optimal carbon taxes exceed the first-best taxes due to an import tariff component.  The intertemporal terms of trade effects of the future carbon tax increase current and future tariffs and those of the current tax lower the current tariff.  Finally, carbon leakage and globally altruistic and unilateral second-best optimal carbon taxes if non-Kyoto oil importers do not price carbon or price it too low are analysed in a three-country model of the global economy.

Second-Best Carbon Taxation in the Global Economy: The Green Paradox and carbon leakage revisited. Journal of Environmental Economics and Management,78, 85-105, 2016

3/15 James Cust & Steven Poelhekke

AbstractWhether it is fair to characterize natural resource wealth as a curse is still debated. Most of the evidence derives from cross-country analyses, providing cases both for and against a potential resource curse.  Scholars are icreasingly turning to within-country evidence to deepen our understanding of the potential drivers, and outcomes, of resourcewealth effects.  Moving away from cross-country studies offers new perspectives on the resource curse debate, and can help overcome concerns regarding endogeneity.  Therefore, scholars are leveraging dtasets which provide greater disaggregation of evconomic responses and exogenous identification of ipacts.  This paper surveys the literature of these studies of local and regional effects of natural resource extractoin.  We discuss data availabilit and quality, recent advances in methodological tools, and summarize the main findings of several areas of research.  These include the direct impact of natural resource production on local labor markets and welfare, the effects of government spending channels resulting from mining revenue, and regional spillovers.  finally, we take stock of the state of the literature and provide suggestions for future research.

The Local Economic Impacts of Natural Resource Extraction.  Annual Review of Resource Economics, 7, 251-68, 2015

3/15 Mark Kagan, Rick van der Ploeg & Cees Withagen

AbstractIndustria imports oil, produces final goods and wishes to mitigate global warming. Oilrabia exports oil and buys final goods from the other country.  Industria uses the carbon tax to impose an import tariff on oil and steal some of Oilrabia's scarcity rent.  Conversely, Oilrabia has mnopoly power and sets the oil price to steal some of Industria's climate rent.  We analyze the relative speeds of oil exraction and carbon accumulation under these strategic interactions for various production function specifications and compare these with the efficient and competitive outcomes.  We prove that for the class of HARA production functions the oil price is initially higher and subsequently lower in the open-loop Nash equilibrium than in the efficient outcome.  The oil extraction rate is thus initially too low and in later stages too high.  The HARA class includes linear, loglinear and semi-loglinear demand functions as special cases.  For non-HARA production functions Oilrabia may in the open-loop Nash equilibrium initially price oil lower than the efficient level, thus resulting in more oil extraction and climate damages.  We also contrast the open-loop Nash and efficient outcomes numerically with the feedback Nash outcomes.  We fnd that the optimal carbon tax path in the feedback Nash equilibrium is flatter than in the open-loop Nash equilibrium.  It turns out that for certain demand functions using the carbon tax as an import tariff may hurt consumers' welfare as the resulting user cost of oil is so high that the fall in welfare wipes out the gain from higher tariff revenues.

Battle for Climate and Scarcity Rents: Beyond the linear-quadratic case. Dynamic Games and Applications, 15(4), 493-522, 2015

1/15 Samuel Wills

AbstractThis paper studies how capital-scarce countries should manage volatile resource income.  Existing literature recommends that capital-scarce countries invest domestically, but that volatile resource income should be saved in a foreign sovereign wealth fund.  I reconcile these by combining a stochastic model of precautionary savings with a deterministic model of a capital-scarce resource exporter.  I show that capital-scarce countries should still establish a Volatility Fund, but it should be relatively smaller than in capital-abundant countries.  The fund should be built before anticipated windfalls, partially invested domestically, and used as a source of income rather than a buffer against temporary shocks.  To do so I develop a parsimonious framework that nests a variety of existing results as special cases, which are presented in seven principles.  The first three apply to capital-abundant countries: i) Smooth consumption using a Future Generations Fund: ii) Build a Volatility Fund quickly, then leave it alone: and iii) Invest to stabilise the real exchange rate.  The remaining four apply to capital-scarce countries: iv) Finance consumption and investment with oil: v) Use a temporary Parking Fund to improve absorption: vi) Invest part of the Volatility Fund domestically: and vii) Support private investment.

Leave the Volatility Fund Alone: Principles for Managing Oil Wealth Revised December 2017 (Previously working paper titled Seven Principles for Managing Resource Wealth)

Journal of Macroeconomics

1/15 Rabah Arezki, Valerie A Ramey & Liugang Sheng

AbstractThis paper explores the effect of news shocks on the current account and other macroeconomic variables using worldwide giant oil discoveries as a directly observable measure of news shocks about future output-the delay between a discovery and production is on average 4 to 6 years.  We first present a two-sector small open economy model in order to predict the responses of macroeconomic agregates to news of an oil discovery.  We then estimate the effects of giant oil discoveries on a large panel of countries.  Our empirical estimates are consistent with the predictions of the model.  After an oil discovery, the current account and saving rate decline for the first 5 years and then rise sharply during the ensuing years.  Investment rises robustly soon after the news arrives, while GDP does not increase until after 5 years. Employment rates fall slightly for a sustained period of time.

News Shocks in Open Economies: Evidence from Giant Oil Discoveries. The Quarterly Journal of Economics, 13 November 2016.

1/15 Gerhard Toews & Alexander Naumov

AbstractWe propose a simple structural model of the upstream sector in the oil industry to study the determinants of costs with a focus on its relationship with the price of oil.  We the use the real oil price, data on global drilling activity and costs of drilling to estimate a three-dimensional VAR model.  We use short run restrictions to decompose the variation in the data into three structural shocks.  We estimate the dynamic effects of these shocks on drilling activity, costs of drilling and the real price of oil.  Our main results suggest that (i) a 10% increase (decrease) in the oil price increases (decreases) global drilling activity by 4% and costs of drilling by 2% with a lag of 4 and 6 quarters respectively a year;  (ii) positive shocks to drilling activity affect the oil price negatively; (iii) shocks to costs of drilling activity and costs of drilling do not have a permanent effect on the price of oil.

The Relationship Between Oil Price and Costs in the Oil and Gas Industry

1/15 Michel Beine, Serge Coulombe & Wessel Vermeulen

AbstractThis paper evaluates whether immigration can mitigate the Dutch disease effects associated with booms in natural resource sectors.  We derive predicted changes in the size of the non-tradable sector from a small general-equilibrium model á la Obstfeld-Rogoff.  Using data for Canadian provinces, we find evidence that aggregate immigration mitigates the increase in the size of the non-tradable sector in booming reigons. The mitigation effect is due mostly to interprovincial migration and temporary foreign workers.  There is no evidence of such an effect for permanent international immigration.  Interprovincial migration also results in a spreading effect of Dutch disease from booming to non-booming provinces.

Dutch Disease and the Mitigation Effect of Migration:  Evidence from Canadian Provinces.   Economic Journal, 125(589), 1574-1615, 2015.

1/15 Armon Rezai & Rick van der Ploeg

AbstractWe derive a simple rule for a nearly optimal carbon tax that can be implemented and tested in a decentralized market economy.  Our simple rule depends on the effect of the pure rate of time preference, growth and intergenerational inequality aversion and basic parameters of the carbon cycle, but also on any adverse effects of global warming on economic growth and mean reversion in climate damages.  The performance of the simple rule is excellent and yields only tiny welfare losses compared with the true welfare optimum under a wide range of perturbations including some extreme runs designed to severely road-test the rule.  Our IAM allows for scarce fossil fuel and endogenous energy transitions and generates cumulative carbon emissions and stranded assets which are also well predicted by our rule.

Intergenerational Inequality Aversion, Growth and the Role of Damages: Occam's rule for the global carbon tax.  Journal of the Association for Environmental & Resource Economists, 3, 2, 499-522, 2016

12/14 Rick van der Ploeg & Aart de Zeeuw

AbstractThe optimal response to a potential productivity shock which becomes more imminent with global warming is to have carbon taxes to curb the risk of a calamity and to accumulate precautionary capital to facilitate smoothing of consumption.  This paper investigates how differences between regions in terms of their vulnerability to climate change and their stage of development affect the cooperative and non-cooperative  responses to this aspect of climate change.  It is shown that the cooperative response to these stochastic tipping points requires converging carbon taxes for developing and developed regions.  The non-cooperative response leads to a bit more precautionary saving and diverging carbon taxes.  We illustrate the various outcomes with a simple stylized North-South model of global economy.

Non-Cooperative and Cooperative Responses to Climate Catastrophes in the Global Economy: A North-South Perspective.  Environmental and Resource Economics, 65(3), 519-40, 2016.

11/14 Jean-François Carpantier & Wessel Vermeulen

AbstractThis paper tests the theoretically founded hypothesis that the surge of SWF establishments is determined by three main factors: 1) the existence of natural resources profits, 2) the government structure and 3) the ability to invest usefully in the domestic economy. We test this hypothesis on a sample of 20 countries that established an SWF in the period 1998-2008 by comparing them to the roughly 100 countries that did not set up a fund in the same period.  We find evidence for all three factors.  The results suggest that SWFs tend to be established in countries that run an autocratic regime and have difficulties finding suitable opportunities for domestic investments.  We do not find the net foreign asset position of a country to be similarly related to the explanatory variables, indicating that the establishment of an SWF is distinct from a national accounting result.  We argue that our results indicate that it is relevant to study how an SWF interacts with the domestic economy and governmet policy.

Emergence of Sovereign Wealth Funds

11/14 Alexander James

AbstractA surprising feature of resource-rich economies is slow growth.  It is often argued that natural-resource productions impedes development by creating market or institutional failures.  This paper establishes an alternative explanation - a slow-growing resource sector.  A declining resource sector is disproportionately reflected in resource-dependent countries.  Additionally, there is a little evidence that resource dependence impedes growth in non-resource sectors.  More generally, this paper illustrates the importance of considering industry composition in cross-country growth regressions.

The Resource Curse: A statistical mirage?   Journal of Development Economics, 114, 2015, 55-63

10/14 Antoine Bommier, Lucas Bretschger & François Le Grand

AbstractThe paper proves the existence of equilibrium in nonrenewable resource markets when extraction costs are non-convex and resource storage is possible.  Inventories flatten the consumption path and eliminate price jumps at the end of the extraction period.  Market equilibrium becomes then possible, contradicting the previous claims from Eswaran, Lewis and Heaps (1983).  We distinguish between two types of solutions, one with immediate and one with delayed build-up of inventories.  For both cases we do not only characterize potential optimal paths but also show that equilibria actually exist under fairly general conditions.  It is found that optimum resource extraction involves increasing quantities over a period of time.  What is generally interpreted as an indicator of increasing resource abundance is thus perfectly compatible with constant resource stocks.

Existence of Equilibria in Exhaustible Resource Markets with Economies of Scale and Inventories. Economic Theory, 63(3), 687-721, 2017.

10/14 Lucas Bretschger & Alexandra Vinogradova

AbstractClimate physics predicts that the intensity of natural disasters will increase in the future due to climate change.  One of the biggest challenges for economic modeling is the inherent uncertainty of climate events, which crucially affects cnsumption, investment, and abatement decisions.  We present a stochastic model of a growing economy where natural disasters are multiple and random, with damages driven by the economy's polluting activity.  We provide a closed-form solution and show that the optimal path is characterized by a constant growth rate of consumption and the capital stock until a shock arrives, triggering a downward jump in both variables.  Optimum mitigation policy consists of spending a constant fraction of output on emissions abatement.  This fraction is an increasing function of the arrival rate, polluting intensity of output, and the damage intensity of emissions.  A sharp response of the optimum growth rate and the abatement share to changes in the arrival rate and the damage intensity justifies more stringent climate policies as compared to the expectation-based scenario.  We subseqently extend the baseline model by adding climate-induced fluctuations around the growth trend and stock-pollution effects, demonstrating robustness of our results.  In a quantitative assessment of our model we show that the optimal abatement expenditure at the global level may represent 0.9% of output, which is equivalent to a tax of $72 per ton carbon

Growth and Mitigation Policies with Uncertain Climate Damage

10/14 Lucas Bretschger & Christos Karydas

AbstractWe study the effects of greenhouse gas emissions on optimum growth and climate policy by using an endogenous growth model with polluting non-renewable resources.  Climate change harms the capital stock.  Our main contribution is to introduce and extensively explore the naturally determined time lag between greenhouse gas emission and the damages due to climate change, which proves to be crucial for the transition of the economy towards its steady state.  The social optimum and the optimal abatement policies are fully characterized.  The inclusion of a green technology delays optimal resource extraction.  The optimal tax rate on emissions is proportional to output. Poor understanding of the emissions diffusion process leads to suboptimal carbon taxes and suboptimal growth and resource extraction.

Optimum Growth and Carbon Policies with Lags in the Climate System

10/14 Lucas Bretschger & Lin Zhang

AbstractThere is widespread concern that an international agreement on stringent climate policies will not be reached because it would imply too high costs for fast growing economies like China.  To quantify these costs we develop a general equilibrium model with fully endogenous growth.  The framework includes disaggregated industrial and energy sectors, endogenous innovation, and sector-specific investments.  We find that the implementation of Chinese government carbon policies until 2020 causes a welfare reduction of 0.3 percent.  For the long run up to 2050 we show that welfare costs of internationally coordinated emission reduction targets lie between 3 and 8 percent.  Assuming faster energy technology development, stronger induced innovation and rising energy prices in the reference case reduces welfare losses significantly.  We argue that increased urbanization raises the costs of carbon policies due to altered consumption patterns.

Carbon Policy in a High-Growth Economy:  The case of China. Resource and EnergyEconomics, 47, 1-19, 2017.

8/14 Fidel Perez-Sebastian & Ohad Raveh

AbstractPrevious studies imply that a positive regional fiscal shock, such as a resource boom, strengthens the desire for separation.  In this paper we present a new and opposite perspective.  We construct a model of endogenous fiscal decentralization that builds on two key notions: a trade-off between risk sharing and heterogeneity, and a positive association between resource booms and risk.  The model shows that a resource windfall causes the nation to centralize as a mechanism to either share risk and/or prevent local capture, depending on the relative bargaining powerof the central and regional governments.  We provide cross country empirical evidence for the main hypotheses, finding that resources booms: (i) decrease the level of fiscal decentralization with no U-shaped pattersn,  (ii) cause the former due to risk sharing incentives primarily when regional governments are relatively strong, and (iii) have no effect on political decentralization.

Natural Resources, Decentralization, and Risk Sharing: Can resource booms unify nations? Journal of Development Economics, 121, 2016, 38-55.

7/14 Nicolas Berman, Mathieu Couttenier, Dominic Rohner & Mathias Thoenig

AbstractThis paper studies empirically the impact of mining on conflicts in Africa.  Using novel data, we combine geo-referenced information over the 1997-2010 period on the location and characteristics of violent events and mining extraction of 27 minerals.  Working with a grid covering all African countries at a spatial resolution of 0.5 x 0.5 degree, we find a sizeable impact of mining activity on the probability/intensity of conflict at the local level.  This is both true for low-level violence (riots, protests) as well as for organised violence (battles).  Our main identificaiton strategy exploits exogenous variations in the minerals' world prices; however the results are robust to various alternative strategies, both in the cross-section and panel dimensions.  Our estimates suggest that the historical rise in mineral prices observed over the period has contributed to up to 21 percent of the average country-level violence in Africa.  The second part of the paper investigates whether minerals, by increasing the financial capacities of fighting groups, contribute to diffuse violence over time and space therefore affecting the intensity and duration of wars.  We find direct evidence that appropriation of a mining area by a group increases the probability that this group perpetrates future violence elsewhere.  This is consistent with "feasibility" theories of conflict.  We also find that secessionist insurgencies are more likely in mining areas, which is in line with recent theories of secessionist conflict.

This Mine is Mine! How minerals fuel conflicts in Africa

7/14 Alexander James & Brock Smith

AbstractOver the past decade, the production of shale oil and gas significantly increased in the United States.  This paper uniquely examines how this energy boom has affected regional crime rates throughout the United States.  There is evidence that, as a result of the ongoing shale-energy boom, shale-rich counties experienced faster growth in rates of both property and violent crimes including rape, assault, murder, robbery, burglary, larceny and grandtheft auto.  These results are particularly robust for rates of assault, and less so for other types of crimes.  Policy makers should anticipate these effects and invest in public infrastructure accordingly.

There Will Be Blood: Crime Rates in Shale-Rich US Counties. Journal of Environmental Economics and Management, 84, 125-52, 2017.

7/14 Pierre-Louis Vézina

AbstractCountries restrict the export of natural resources to lower domestic prices, stimulate downstream industries, earn rents on international markets, or on environmental grounds.  This paper provides empirical evidence of evasion of such export barriers. Using tools from the illicit trade literature, I show that exports of minerals, metals, or wood products are more likely to be missing from the exporter's statistics if they face export barriers such as prohibitions or taxes.  Furthermore, I show that this relationship is significantly higher in countries with high levels of corruption and bribes at customs.  The results have implications for the design of trade policies and environmental protection

Illegal Trade in Natural Resources: Evidence from Missing Exports. International Economics, 142, 152-60, 2015.

5/14 Thorvaldur Gylfason & Gylfi Zoega

AbstractAbundant natural resources brought Iceland a systemically overvalued currency, with adverse effects on the secondary tradable sector.  During 2003-08 another national treasure, the sovereign's AAA rating, was used to attract foreign capital, elevating the real exchange rate even further.  The financial collapse in 2008 left the country with a large foreign debt without the possibility of rollovers in international capital markets.  This offset some of the effect of the natural resources on the real exchange rate:  in effect, this was the Dutch disease in reverse as witnessed, in particular, by a massive increase in the number of tourists in recent years.

The Dutch Disease in Reverse:  Iceland's Natural Experiment

5/14 Anna Grodecka & Karlygash Kuralbayeva

AbstractWhat is the optimal instrument design and choice for a regulator attempting to control emissions by private agents in face of uncertainty arising from business cycles? In applying Weitzman's result (Prices vc quantities. Review of Economic Studies, 41 (1974), 477-491) to the problem of greenhouse gas emissions, the price-quantity literature has shown that, under uncertainty about abatement costs, price instruments (carbon taxes) are preferred to quantity restrictions (caps on emission), since the damages from climate change are relatively flat.  On the other hand, another recent piece of academic literature has highlighted the importance of adjusting carbon taxes to business cycle fluctuations in a procyclical manner.  In this paper, we analyze the optimal design and the relative performance of price versus quantity instruments in the face of uncertainty stemming from business cycles.  Our theoretical framework is a general equilibrium real business cycle model with a climate change externality and distortionary fiscal policy.  First, we find that in an infinitely flexible control environment, the carbon tax fluctuates very little and is approximately constant, whilst emissions fluctuate a great deal in response to a productivity shock.  Second, we find that a fixed price instrument is advantageous over a fixed quantity instrument due to the cyclical behavior of abatement costs, which tend to increase during expansions and decline during economic downturns.  Our results suggest that the carbon tax is approximately constant over business cycles due to "flat" damages in the short-run and thus procyclical behavior as suggested by other studies cannot be justified merely on the grounds of targeting the climate externality.

Prices vs Quantities Debate: Climate policy and the role of business cycles

5/14 Saraly Andrade de Sá & Julien Daubanes

AbstractDemand for oil is very price inelastic.  Facing such demand, an extractive cartel induces the highest price that does not destroy its demand unlike the conventional Hotelling analysis: the cartel tolerates ordinary substitutes to its oil but deters high-potential ones. Limit-pricing equilibria of non-renewable-resource markets sharply differ from usual Hotelling outcomes.  Resource taxes have no effect on current extraction; extraction may only be reduced by supporting its ordinary substitutes. The carbon tax applies to oil and also penalizes its ordinary (carbon) substitutes, inducing the cartel to increase current oil production.  The carbon tax further affects ultimately-abandoned oil reserves ambiguously.

Limit-Pricing and the In(Effectiveness) of the Carbon Tax.  Journal of Public Economics, 139, 28-39, 2016.

4/14 Sjak Smulders, Michael Toman & Cees Withagen

AbstractThe relatively new and still amorphous concept of "Green Growth" can be understood as a call for balancing longer-term investments in sustaining environmental wealth with nearer-term income growth to reduce poverty.  We draw on a large body of economic theory available for providing insights on such balancing of income growth and environmental sustainability.  We show that there is no a priori assurance of substantial positive spillovers from environmental policies to income growth, or for a monotonic transition to a "green steady state" along an optimal path.  The greenness of an optimal growth path can depend heavily on initial conditions, with a variety of different adjustments occurring concurrently along an optimal path.  Factor-augmenting technical change targeting at offsetting resource depletion is critical to sustaining long-term growth within natural limits on the availability of natural resources and environment services.

Growth Theory and "Green Growth" Oxford Review of Economic Policy, 30, 2014, 423-446

4/14 Radoslaw Stefanski

Abstract I develop a unique database of international fossil-fuel subsidies by examining country-specific patterns in carbon emission-to-GDP ratios, known as emission-intensities.  For most but not all countries, intensities tend to be hump-shaped with income.  I construct a model of structural-transformation that generates this hump-shaped intensity and then show that deviations from this pattern must be driven by distortions to sectoral-productivity and/or fossil-fuel prices.  Finally, I use the calibrated model to measure these distortions for 170 countries for 1980-2010.  This methodology reveals that fossil-fuel price-distortions are large, increasing and often hidden.  Furthermore, they are major contributors to higher carbon-emissions and lower GDP.

Dirty Little Secrets: Inferring Fossil-Fuel Subsidies from Patterns in Emission Intensities

3/14 Brock Smith

AbstractThis paper examines the impact of the oil price boom in the 1970s and the subsequent bust on non-oil economic activity in oil-dependent countries. During the boom, manufacturing exports an dvalue added increased significantly relative to non-oil dependent countries, along with wages, employment and capital formation.  These measures decreased, though to a lesser and more gradual extent, during the bust and subsequent period of low prices,  displaying a positive relationship with oil prices.  However, exports of agricultural products sharply decreased during the boom.  Imports of all types of goods displayed strong pro-cyclicality with respect to oil prices.  The results suggest that increased local demand and investment spillovers induced by the oil revenue windfall resulted in increased manufacturing activity.

Dutch Disease and the Oil and Boom and Bust. Revised, March 2015

2/14 Paul Collier & Anthony J Venables

Abstract Climate policy requires that much of the world's reserves of fossil fuels remain unburned.  This paper makes the case for implementating this directly through policy to close the global coal industry.  Coal is singled out because of its high emissions intensity, low rents per unit value, local environmental costs and sheer scale.  Direct supply policy -  the sequenced closure of coal mines - may lead to less policy leakage (across countries and time) than other policies based on demand or price management.  It also has the advantage of involving relatively few players and leading to clear-cut and observable outcomes. Appropriately sequenced closure of the world coal industry could, we suggest, create the moral force needed to mobilize collective international action.

Closing Coal: Economic and Moral Incentives.  Oxford Review of Economic Policy, 30, 492-512, 2014.

1/14 Alexander Lippert

AbstractDo local populations benefit from resource booms? How strong are market linkages between the mining sector and the regional economy? This paper exploits exogenous variation in mine-level production volumes generated by the recent copper boom in Zambia to shed light on these questions.  Using a novel dataset, I find robust evidence that an increase in local copper production improves living standards in the surroundings of the mines even for households not directly employed in the mining sector:  a 10% increase in constituency-level copper output is associated with a 2% increase in real household expenditure;  positive effects on housing conditions, consumer durable ownership and child health are of similar magnitude.  The positive spill-overs extend to the rural hinterland of mining cities, neighboring constituencies, and the constituencies on the copper transportation route.  Additionally, I identify boom-induced changes in the demand for services and agricultural products as key channels through which the urban and rural populations benefit from the mine expansions.  Since the boom failed to generate fiscal revenues, these effects can be interpreted as the result of the mines' backward linkages.  Taken together, these findings highlight the welfare potential of local procurement policies in resource rich developing countries.

Spill-Overs of a Resource Boom: Evidence from Zambian Copper Mines

1/14 Gerard van der Meijden, Rick van der Ploeg & Cees Withagen

AbstractA rapidly rising carbon tax leads to faster extraction of fossil fuels and accelerates global warming.  We analyze how general equilibrium effects operating through the international capital market affect this Green Paradox.  In a two-region, two-period world with identical homothetic preferences and without investment, the global interest rate falls and the Green Paradox weakens.  With investment or a relatively more impatient oil-importing region, the Green Paradox may be strengthened because the future oil demand function shifts downward or because the interest rate rises.  If the oil-importing region is very much more patient than the oil-exporting region, the Green Paradox may be reversed but the effects are tiny.  With exploration and endogenous initial oil reserves, a future carbon tax lowers cumulative oil extraction in partial equilibrium.  If the boost to current oil extraction is weakened, strengthened or reversed in general equilibrium, so is the fall in cumullative extraction.  A partial and general equilibrium welfare analysis of a future carbon tax, both for full and partial exhaustion, is given.  The effects of stock-dependent extraction costs are separately discussed in an appendix.

International Capital Markets, Oil Producers and the Green Paradox. European Economic Review, 76, 275-297, 2015.

12/13 Ton van den Bremer, Rick van der Ploeg & Samuel Wills

AbstractOne of the most important developments in international finance and resource economics in the past twenty years is the rapid and widespread emergence of the $6 trillion sovereign wealth fund industry. Oil exporters typically ignore below-ground assets when allocating  these funds, and ignore above-ground assets when extracting oil.  We present a unified framework for considering both.  Subsoil oil should alter a fund's portfolio through additional leverage and hedging.  First-best spending should be a share of total wealth, and any unhedgeable volatility must be managed by precautionary savings.  If oil prices are pro-cyclical, oil should be extracted faster than the Hotelling rule to generate a risk premium on oil wealth.  Finally, we discuss how our analysis could improve the management of Norway's fund in practice.

The Elephant in the Ground:  Managing oil and sovereign wealth. European Economic Review, 82, 113-131, 2016

12/13 Rick van der Ploeg

AbstractThe principles of how best to manage the various components of national wealth are outlined, where the permanent income hypothesis, the Hotelling rule and the Hartwick rule play a prominent role.  As far as managing natural resource wealth is concerned, a case is made to use an intergenerational sovereign wealth fund to smooth consumption across generations, a liquidity fund for the precautionary buffers to deal with commodity price volatility, and an investment fund to park part of the windfall until the country is ready to absorb extra spending on domestic investment.  Capital scarcity implies that a positive part of the windfall should be spent on domestic investment.  The conclusions highlight the political economy problems that will have to be tackled with these normative proposals for managing wealth.

Guidelines for Exploiting Natural Resource Wealth. Oxford Review of Economic Policy, 30, 1, 145-169, 2014.

11/13 James Cust & Torfinn Harding

AbstractWe provide evidence that institutions strongly influence where oil and gas exploration takes place.   To identify the effect of institutions, we utilise a global data set on the location of exploration wells and national borders. This allows for a regression of discontinuity design, with the key assumption that the position of borders was determined independently of geology.  To break potential simultaneity between borders, institutions and activities in the oil sector, we utilise a historical sequence of drilling occurring after the formation of borders and institutions.  At borders, exploratin companies choose to drill on the side with better institutional quality 58% of the time.  The results are consistent with the view that institutions shape exploration companies' incentives to invest drilling as well as host countries' supply of drilling opportunities.  It follows that the observed distribution of natural capital across countries is endogenous with respect to institutions.

Institutions and the Location of Oil Exploration.  Revised, Februray 2017

10/13 Alexander James

AbstractAn analytical framework predicts that, in response to an exogenous increase in resource-based government revenue, a benevolent government will partially substitute away from taxing income, increase spending and save.  Forty-two years of US state-level data are consistent with this theory.  Specifically, a baseline fixed effects model predicts that a 1% point increase in resource revenue results in a .20% point decrease in non-resource revenue, a .50% point increase in spending and a .30% point increase in savings.  These results are generally robust to alternative model specifications and the instrumentation of resource-based government revenue. Interaction effects reveal some asymmetry in the fiscal response to revenue shocks according to state political leanings.

US State Fiscal Policy and Natural Resources.  American Economic Journal: Economic Policy, 7(3), 238-57, 2015.

10/13 Karlygash Kuralbayeva

AbstractI build an equilibrium search and matching model of an economy with an informal sector and rural-urban migration to analyze the effects of budget-neutral green tax policy (raising pollution taxes, while cutting payroll taxes) on the labor market.  The key results of the paper suggest that when general public spending varies endogenously in response to tax reform and higher energy taxes can reduce the income from self-employed work in the informal sector, green tax policy can produce a triple dividend: a cleaner environment, lower unemployment rate and higher after-tax income of the private sector. This is due to the ability of the government, by employing public spending as an additional poicy instrument, to reduce the overall tax burden when an increase in energy tax rates does not exceed some threshold level.  Thus governments should employ several instruments if they are concerned with labor market implications of green tax policies..

Effects of Carbon Taxes in an Economy with Large Informal Sector and Rural-Urban Migration

10/13 Rabah Arezki, Kaddour Hadri, Prakash Loungani & Rao Rao

AbstractIn this paper, we re-examine two important aspects of the dynamics of relative primary commodity prices, namely the secular trend and the short run volatility.  To do so, we employ 25 series, some of them starting as far back as 1650 and powerful panel data stationarity tests that allow for endogenous multiple structural breaks.  Results show that all the series are stationary after allowing for endogeneous multiple breaks.  Test results on the Prebisch-Singer hypothesis, which states that relative commodity prices follow a downward secular trend, are mixed but with a majority of series showing negative trends.  We also make a first attempt at identifying the potential drivers of the structural breaks.  We end by investigating the dynamics of the volatility of the 25 relative primary commodity prices also allowing for endogenous multiple breaks.  We describe the often time-varying volatility in commodity prices and show that it has increased in recent years.

Testing the Prebisch-Singer Hypothesis Since 1650: Evidence from panel techniques that allow for multiple breaks.  Journal of International Money and Finance, 42, 2014, 208-223

9 /13 Armon Rezai & Rick van der Ploeg

Abstract Keeping climate change within limits requires that most of the available carbon-based energy sources need to be abandoned underground.  We study how fast and how much this transition to carbon-free energy needs to occur within a welfare-maximizing Ramsey growth model of climate change.  Our model also addresses the market failure in the development of clean energy which leads to an under-provision of renewable energy, delays the transition time to the carbon-free era, and reduces the amount of dirty fuels locked up in situ. Optimal policy requires an aggressive renewables subsidy in the near term and a gadually rising carbon tax which falls in long run.  We also study the transition timing and the performance of recently proposed policy rules for the carbon tax.

Abandoning Fossil Fuel: How fast and how much? Revised, November 2016

9/13 Rick van der Ploeg

AbstractOptimal climate policy should act in a precautionary fashion with tipping points that occur at some future random moment. The optimal carbon tax should include an additional component on top of the conventional present discounted value of marginal global warming damages.  This component increases with the sensitivity of the hazard to temperature or the stock of atmospheric carbon.  If the hazard of a catastrophe is constant, no correction is needed of the usual Pigouvian tax.  The results are applied to a tipping point resulting from an abrupt and irreversible release of greenhouse gases from the ocean floors and surface of the earth, which set in motion a positive feedback loop.  Convex enough hazard flunctions cause overshooting of the carbon tax, but a linear hazard function gives rise to undershooting. A more convex hazard function and a high discount rate speed up adjustment.

Abrupt Positive Feedback and the Social Cost of Carbon. European Economic Review, 67, 2014, 28-41.

8/13 Samuel Wills

AbstractThis paper studies how monetary policy should respond to an oil discovery.  Oil discoveries provide news that the natural level of output will increase in the future.  Anticipated increases in natural output lower the natural real interest rate.  Optimal monetary policy must accommodate these changes, and is well-approximated by a Taylor rule that responds to the natural rate of interest.  Failure to accommodate these changes, as in a peg or naive Taylor rule, can cause forward-looking inflation and  recession.  To illustrate this I incorporate a government, oil and news into a standard DSGE model of a small open economy that permits an anlytical solution for optimal policy.  I then use the model to present a novel explanation for UK stagflation in the 1980s after North Sea Oil began production.

Optimal Monetary Responses to News of an Oil Discovery. Revised, April 2018

8/13 Rabah Arezki, Klau Deininger & Harris Selod

AbstractWe review evidence regarding the size and evolution of the "land rush" in the wake of the 2007-2008 boom in agricultural commodity prices and study determinants of foreign land acquisition for large-scale agricultural investment.  Using data on bilateral investment relationships to estimate gravity models of transnational land-intensive investment confirms the central role of agro-ecological potential as a pull factor for contrasts with standard literature insofar as quality of the destination country's business climate is insignificant and weak tenure security is associated with increased interest for investors to acquire land in that country.  Policy implications are discussed.

What Drives the Global "Land Rush"?.  World Bank Economic Review, 29(2), 207-33, 2015.

8/13 Rick van der Ploeg

AbstractA classroom model of global warming, fossil fuel depletion and the optimal carbon tax is formulated and calibrated.  It features iso-elastic fossil fuel demand, ,stock-dependent fossil fuel extraction costs, an exogenous interest rate and no decay of the atmospheric stock of carbon.  The optimal carbon tax reduces emissions from burning fossil fuel, both in the short and medium run.  Furthermore, it brings forward the date that renewables take over from fossil fuel and encourages the market to keep more fossil fuel locked up.  A renewables subsidy induces faster fossil fuel extraction and thus accelerates global warming during the fossil fuel phase, but brings forward the carbon-free era, locks up more fossil fuel reserves and thus ultimately curbs cumulative carbon emissions and global warming. For relatively large subsidies social welfare is more likely to fall as the economic costs rises more than proportionally with the size of the subsidy.  Our calibration suggests that such subsidies are not a good second-best climate policy

Untapped Fossil Fuel and the Green Paradox: A classroom calibration of the optimal carbon tax.  Environmental Economics and Economic Policy, 27(2), 2015, 185-210.

7/13 Rick van der Ploeg & Aart de Zeeuw

AbstractThe optimal reaction to a climate tipping point which becomes more imminent with global warming is to be precautionary in accumulating additional capital to curb the adverse effects of the calamity and to price carbon to make catastrophic change less imminent.  However, if the mean lag for impact of the catastrophe is long enough, the additional saving response will be smaller and can turn negative.  We also decompose the optimal carbon price into its catastrophe components and a conventional marginal damages component, and show the separate effects of relative intergenerational inequality aversion and relative risk aversion using Duffie-Epstein preferences.  Focusing on a productivity catastrophe, we calibrate our model and show how sensitive the policy responses are to the degrees of intergenerational inequality aversion and risk aversion, the trend rate of economic growth, the hazard rates, and how long it takes for the catastrophe to have its full impact.

Climate Tipping and Economic Growth: Precautionary Capital and the Price of Carbon. Revised, March 2017 Journal of European Economic Association, forthcoming

7/13 Sambit Bhattacharyya & Jeffrey G Williamson

AbstractThis paper studies the distributional impact of commodity price shocks over both the short and very long run.  Using a GARCH model, we find that Australia experienced more volatility than many commodity exporting developing countries over the periods 1865-1940 and 1960-2007.  A single equation error correction model suggests that commodity price shocks increase the income share of the top 1. 0.05 and 0.01 percents in the short run.  The very top end of the income distribution benefits from commodity booms disproportionately more than the rest of the society  The short run effect is mainly driven by wool and mining and not agricultural commodities.  A sustained increase in the prce of renewables (wool) reduces inequality whereas the same for non-renewable resources (minerals) increases inequality. We expect that the initial distribution of land and mineral resources explains the asymmetric result.

Distribution Impact of Commodity Price Shocks: Australia over a century. Review of Income and Wealth, 62(2), 223-44, 2016.

7/13 Rick van der Ploeg & Cees Withagen

AbstractThis article examines the possible adverse effects of well-intended climate policies.  A weak Green Paradox arises if the announcement of a future carbon tax or a sufficiently fast rising carbon tax encourages fossil fuel owners to extract reserves more aggressively, thus exacerbating global warming.  We argue that such policies may also encourage more fossil fuel to be locked in the crust of the earth, which can offset the adverse effects of the weak Green Paradox.  We show that a subsidy on clean renewables has similar weak Green Paradox effects.  Neither the weak nor the strong Green Paradox occurs for the first-best Pigouvian carbon tax.  We also pay attention to dirty backstops, spatial carbon leakage and green innovation..

Global Warming and the Green Paradox: A review of adverse effects of climate policies. Review of Environmental Economics and Policy, 9, 2, 2015, 285-303

6/13 David von Below & Pierre-Louis Vézina

AbstractThis paper examines the trade and trade-induced welfare effects of high oil prices.  Using a gravity model of trade we find that the distance elasticity of trade significantly increases with the oil price.  This suggests that high oil prices make trade less global.  We estimate that an increase in the oil price from $100 to $200 would have the similar effect as imposing a world-wide import tariff between 4% and 9%, depending on the distance between countries.  In turn, such higher trade costs would lower welfare by 1.8% in the average non-oil-exporting country

The Trade Consequences of Pricey Oil. IMF Economic Review, 2016.

6/13 Andreas Kotsadam & Anja Tolonen

AbstractWe use the rapid expansion of mining in Sub-Saharan Africa to analyse local structural shifts and the role of gender.  We match 109 openings and 84 closings of industrial mines to survey data for 800,000 individuals and exploit the spatial-temporal variation.  With mine opening, women living within 20 km of a mine switch from self-employment in agriculture to working in services or they leave the work force.  Men switch from agriculture to skilled manual labor.  Effects are stronger in years of high world prices.  Mining creates local boom-bust economies in Africa, with permanent effects on women's labor market participation.

African Mining, Gender, and Local Employment. World Deelopment, 83, 325-39, 2016.

6/13 Jacobus Cilliers

Abstract In this paper, I develop a general equilibrium model of violence to explain observed variation in coercive practices in conflict zones.  Armed groups own land in the resource sector and allocate military resources between conflict and coercion, which assigns de facto ownership over land and labour respectively.  If find that coercion is higher if labour is scarce relative to land, if production is labour-intensive, or if one group is dominant relative to others. Furthermore, the impact of the price of the commodity depends on the distribution of military strength: coercion increases with price if one group is dominant, but this effect is potentially reversed if military power is highly decentralised. These results are consistent with historic cases of the rise in serfdom in 16th century Russia, different coercive regimes in the rubber plantations in Amazonia and the Congo Free State 19th century, and also variation in coercion during the Sierra Leonean Civil War and in the eastern provinces of the Democratic Republic of Congo. Results of the model have implications for both trade and military policy. Trade policy aimed at reducing domestic commodity prices could actually lead to an increase in coercion. Similarly, a cease-fire agreement between armed groups can be interpreted as a form of collusion, as military resources are redirected from conflict to coercion.

Coercion, Conflict, and Commodities

5/13 Fidel Perez-Sebastian & Ohad Raveh

AbstractNatural resource abundance is a blessing for some countries, but a curse for others.  We show that differences across countries in the degree of fiscal decentralization can contribute to this divergent outcome.  Usng a large panel of countries, covering several decades and various fiscal decentralization and natural resource measures, we provide eimpirical support for the novel hypothesis.  We also study a model that combines political and market mechanisms, under a unified framework, to illustrate how natural resource booms may create negative effects in fiscally decentralized nations. 

The Natural Resource Curse and Fiscal Decentralization. American Journal of Agricultural Economics, 98(1), 2016, 212-230

5/13 Sweder van Wijnbergen & Tim Willems

AbstractClimate skeptics typically argue that the possibility that global warming is exogenous, implies that we should not take additional action towards reducing emissions until we know what drives warming.  This paper however shows that even climate skeptics have an incentive to reduce emissions: such a directional change generates information on the causes of global warming.  Since the optimal policy depends upon these causes, they are valuable to know.  Although increasing emissions would also generate information, that option is inferior due to its irreversibility.  We show that optimality can even imply that climate skeptics should actually argue for lower emissions than believers.

Optimal Learning on Climate Change: Why climate skeptics should reduce emissions. Journal of Environmental Economics and management, 70, 2015, 17-33

4/13 Rick van der Ploeg

AbstractThe Green Paradox states that a gradually more ambitious climate policy such as a renewables subsidy or an anticipated carbon tax induces fossil fuel owners to extract more rapidly and accelerate global warming.  However, if extraction becomes more costly as reserves are depleted, such policies also shorten the fossil fuel era, induce more fossil fuel to be left in the earth and thus curb cumulative carbon emissions.  This is relevant as global warming depends primarily on cumulative emissions.  There is no Green Paradox for a specific carbon tax that rises at less than the market rate of interest.  Since this is the case for the growth of the optimal carbon tax, the Green Paradox is a temporary second-best phenomenon.  There is also a Green Paradox if there is a chance of breakthrough in renewables technology occurring at some random future date.  However, there will also be less investment in opening up fossil fuel deposits and thus cumulative carbon emission will be curbed.

Cumulative Carbon Emissions and the Green Paradox.  Annual Review of Resource Economics, 5, 2013, 281-300.

4/13 Gerhard Toews

AbstractWe use the exogenous variation in oil prices to study the negative effect of income aspirations on households' satisfaction with income.  To evaluate the effect we use data on reported satisfaction with income from Kazakhstan's Household Budget Survey - a quarterly, unbalanced panel of households covering the period 2001-2005.  Our results suggest that a 20% increase in the oil price decreased households' satisfaction with income by half a standard deviation within a year.  We argue that the drop in satisfaction is due to peoples' inflated expectations.  This result highlights the importance of managing expectations in a rapidly changing economic environment.

Inflated Expectations and Natural Resource Booms: Evidence from Kazakhstan. Revised, January 2015

3/13 Thomas Michielsen

Abstract Anticipated climate policies are ineffective when fossil fuel owners respond by shifting supply intertemporally (the green paradox). This mechanism relies crucially on the exhaustibility of fossil fuels.  We analyze the effect of anticipated climate policies on emissions in a simple model with two fossil fuels:  one scarce and dirty (e.g. oil), the other abundant and dirtier (e.g. coal).  We derive conditions for a 'green orthodox': anticipated climate policies may reduce current emissions.  Calibrations suggest that intertemporal carbon leakage (from -22% to 13%) is a relatively minor concern.

Brown Backstops Versus the Green Paradox. Journal of Environmental Economics and Management, 68, 1, 2014, 87-110

3/13 Roberto Bonfatti & Steven Poelhekke

AbstractMine-related transport infrastructure specializes in connecting mines to the coast, and not so much to neighboring countries.  this is most clearly seen in developing countries, whose transport infrastructure was originally designed to facilitate the export of natural resources in colonial times.  We provide first econometric evidence that mine-to-coast transport infrastructure matters for the pattern of trade of developing countries, and can help explaining their low level of reigonal integration.  The main idea is that, to the extent that it can be used not just to export natural resources but also to trade other commodities, this infrastructure may bias a country's structure of transport costs in favor of overseas trade, and to the detriment of regional trade.  We investigate this potential bias in the context of a gravity model of trade.  Our main findings are that coastal countries with more mines import less than average from their neighbors, and this effect is stronger when the mines are located in such a way that the related infrastructure has  stronger potential to affect trade costs.  Consistently with the idea that this effect is due to mine-to-coast infrastructure, landlocked countries with more mines import less than average from their non-transit neighbors, but more than average from their transit neighbors.  Furthermore, this effect is specific to mines and not to oil and gas fields, arguably because pipelines cannot possibly be used to trade other commodities.  We discuss the potential welfare implications of our results, and relate these to the debate on the economic legacy of colonialism for developing countries..

From Mine to Coast: Transport infrastructure and the direction of trade in developing countries. Journal of Development Economics, 127,91-108, 2017.

2/13 Elissaios Papyrakis & Ohad Raveh

AbstractWhile there has been extensive research on the Dutch Disease (DD) very little attention, if any, has been devoted to the regional mechanisms through which it may manifest itself.  This is the first empirical attempt to research a 'regional DD' by looking at the local and spatial impacts of resource windfalls across Canadian provinces and territories.  We construct a new panel dataset to examine separately the key DD channels; namely, the Spending Effect (SE) and the Resource Movement Effect (RME).  Our analysis reveals that the standard DD mechanisms are also relevant at the regoinal level; specifically, we find that: (a) Resource windfalls are associated with higher inflation and a labor (capital) shift from (to) non-primary tradable sectors. (b) Resource windfalls in neighboring regions are associated with a capital (labor) shift from (to) non-primary tradable sectors in the source region. (c) The (spatial) DD explains (51%) 20% of the adverse effects of resource windfalls (in neighboring regions) on region-specific non-mineral international exports (in the source region), and does not significantly affect domestic ones.

An Empirical Analysis of a Regional Dutch Disease: The case of Canada. Environmental and Resource Economics, 58(2), 2014, 179-198.

1/13 Firew B Woldeyes

AbstractThe paper studies long-run effects of shocks to resource rents on the economy using a structural vector error correction model for 37 developing countries.  First, the long-run relations involving resource rents and the economy differ for resource importers and exporters.  Second, there is an indirect effect from resource rents to output through public capital accumulation for resource exporters.  Third, although resource rents have a positive long-run impact on output, good public investment management is erquired for resource rents to improve non-resource output

Long-Run Effects fo Resource Rents in Developing Countries: The role of public investment management

1/13 Charles F Mason

AbstractAs addressing climate change becomes a high priority it seems likely that there will be a surge in interest in deploying nuclear power.  Other fuel bases are too dirty (coal), too expensive (oil, natural gas) or too speculative (solar, wind) to completely supply the energy needs of the global economy.  To the extent that the global society does in fact choose to expand nuclear power there will be a need for additional production.  That increase in demand for nuclear power will inevitably lead to an increase in demand for uranium.  While some of the increased demand for uranium will be satisfied by expanding production from existing deposits, there will undoubtedly be pressure to find and develop new deposits, perhaps quite rapidly.  Looking forward, it is important that policies be put in place that encourage an optimal allocation of future resources towards exploration. In particular, I argue there is a valid concern that privately optimal levels of industrial activitiy will fail to fully capture all potential social gains; these sub-optimal exploration levels are linked to a departure between the private and social values of exploration information.

Uranium and Nuclear Power: The role of exploration information in framing public policy. Resource and Energy Economics, 36(1), 2014, 49-63.

1/13 Torfinn Harding & Anthony J Venables

AbstractForeign exchange windfalls such as those from natural resource revenues change non-resource exports, imports, and the capital account.  We study the balance between these responses and show that the response to $1 of resource revenue is, for our preferred estimates, to decrease non-resource exports by 74 cents and increases imports by 23 cents, implying a negligible effect on foreign saving.  The negative per $1 impact on exports is larger for manufactures than for other sectors, and particularly large for internationally mobile manufacturing sectors.  While standard Dutch disease analysis points to contraction of the tradable sector as a whole, division into non-resource exports and imports is important if, as suggested by much development literature, a higher share of exports to GDP is associated with faster growth.  The large negative impact of resources on these exports points to the difficulty resource rich economies face in diversifying their exports.

The Implications of Natural Resource Exports for Non-Resource Trade.  IMF Economic Review, 64(2), 268-302, 2016.

12/12 William Seitz

AbstractIn this paper, I use an event study approach to investigate the claim that conflict minerals legislation in the USA led to a ban on some mining exports from the Democratic Republic of the Congo (DRC), and that the passage of US regulation caused a ban on both production and trade by regulators in the DRC several months later.  I also consider the assertion that conflict minerals legislation imposed severe costs for companies that report to the Securities and Exchange Commission in the US. I find that returns for some comapnies traded on US stock exchanges were sensitive to changes in production in the DRC after the proposed legislation became law in the US. This either suggests that some financial market participants did not expect an immediate full embargo on newly-regulated Congolese mining and trading activities, or that market participants did not expect trade to be halted indefinitely. Reactions to a DRC-imposed ban on production were statistically significant; indicating that additional reductions in trade were not fully anticipated by financial market participants after regulations became law in the US. I also find that among metal and gold mining companies traded on the US exchanges, returns were abnormally high when conflict mineral legislation became more probable.  Electronic communication manufacturing firms, which as a group were a target for many supporters of conflict mineral regulations, experienced no systematically abnormal returns corresponding to important dates in the US legislative process that I consider, but experienced abnormally positive returns coinciding with the ban on mining in the eastern DRC.

Trade Restrictions and Conflict Commodities: Market reactions to regulations on conflict minerals from the Democratic Republic of the Congo

12/12 Roland Hodler

Abstract The Arab Spring has led to very different outcomes across the Arab world.  I present a highly stylized model of the Arab Spring to better understand these differences.  In this model, dictators from the ethnic or religious majority group concede power if their country is oil-poor, but can stay in power by bribing the people if their country is oil-rich.  Dictators from the minority group often rely on other members of their group to repress protests and to fight the majority group if necessary.  These predictions are consistent with observed outcomes in Egypt, Libya, Saudi Arabia, Syria, Tunisia, and elsewhere..

The Political Economics of the Arab Spring

12/12 Ohad Raveh

Abstract Do reduced costs of factor mobility mitigate Dutch Disease effects, to the extent that they are reversed? The case of federations provides an indication they do.  We observe Resource Blessing effects at the federal-state level (within federations) yet rather Resource Curse ones at the federal level (between federations), and argue the difference in outcomes stems from the difference in factor mobility costs.  Through a two-region tax competition model we show that with sufficiently low factor mobility costs a resource-boom triggers an Alberta Effect - where resource abundant regions exploit the fiscal advantage, provided by resource rents, to compete more aggressively in the inter-regional competition over capital, and as a result attract vast amounts of capital - that mitigates, and possibly reverses, Dutch Disease symptoms, so that Resource Curse effects do not apply.  Thus, this paper emphasizes the significance of the mitigating role of factor mobility in Dutch Disease theory, and presents a novel mechanism (Alberta Effect) through which this mitigation, and possible reversion, process occurs.  The paper concludes with empirical evidence for the main implications of the model.

Dutch Disease, Factor Mobility, and the Alberta Effect: The case of federations.  Canadian Journal of Economics, 46(4), 1317-1350, 2013.

10/12 Niko Jaakkola

AbstractI explain the recent peak and subsequent collapse in oil prices by strategic interaction between a limit-pricing oil cartel and an importer producing substitutes to oil, with production costs falling with R&D investment.  The model is consistent with reported narratives of the oil price collapse.  Applied to climate policy and the develpoment of clean substitutes, the model predicts equilibrium carbon taxes are below the Pigovian level, but put the monopolist out of business once oil loses its social value. Without taxes, the importer uses an expensive crash R&D programme instead.  'Green' R&D and carbon pricing are thus complements, not substitutes. 

Putting OPEC Out of Business. Revised, October 2017

10/12 Niko Jaakkola

AbstractMitigating climate change by carbon capture and storage (CCS) will require vast infrastructure investments.  These investments include pipeline networks for transporting carbon dioxide (CO2) from industrial sites ('sources') to the storage sites ('sinks'). This paper considers the decentralised formation of trunk-line networks when geological storage space is exhaustible and demand is increasing.  Monopolistic control of an exhaustible resource may lead to overinvestment and/or excessively early investment, as these allow the monopolist to increase her market power.  The model is applied to CCS pipeline network formation in northwestern Europe.  The features identified above are found to play a minor role.  Should storage capacity be effectively inexhaustible, underinvestment due to the inability of the monopolist to capture the entire social surplus is likely to have substantial welfare impacts. Multilateral bargaining to coordinate international CCS policies is particularly important if storage capacity is plentiful.

Monopolistic Sequestration of European Carbon Emissions

9/12 Rick van der Ploeg

AbstractThe political economy of natural resource extraction is analysed in three different contexts.  First, if an incumbent faces a threat of being removed once and for all by a rival faction, extraction becomes more voracious, especially if the rebel faction shares rents much more than the incumbent.  Second, perennial political conflict cycles are more inefficient if cohesiveness of the constitution or the partisan in-office bias is large and political instability is high.  Third, resource wars are more intense if the political system is less cohesive, there is a partisan in-office bias of the incumbent, oil reserves are high, the wage is low, governments can be less frequently removed from office, and fighting technology has less decreasing returns to scale.  Resource depletion in such wars is more rapacious if there is more government instability, the political system is less cohesive, and the partisan in-office bias is smaller.

Political Economy of Dynamic Resource Wars.  Revised, July 2016

Journal of Environmental Economics and Management, forthcoming

9/12 Karlygash Kuralbayeva & Samuel Malone

AbstractFat-tailed commodity price innovations are well-documented in the literature and long recognized as disruptive for consumers and producers, yet little is known about what factors drive such extreme events.  Utilizing a wide range of factors from the economics and finance literature and quantile regression techniques, we shed light on this issue.  Our models explain more variation in extreme than in median price innovations.  Common global financial and demand factors account for a greater proportion of extreme daily spot price variations than do commodity-specific factors such as basis and open interest.  Financialization of commodity markets, via significant and increasing co-variation of extreme spot price innovations with US equity market and trade-weighted US dollar returns, appears to be a major driver of extreme events in the 2000-2009 period.

The Determinants of Extreme Commodity Prices

9/12 Raphael Espinoza

AbstractPublic investment and subsidies are typically inefficient but in the GCC these are crucial engines of growth.  Subsidies are also used to redistribute oil windfalls in the regions, and the problem of a government that wants to 'distribute' oil money is a problem fully symmetric to the one analyzed by Ramsey (1927) of optimal taxation.  The second-best policy (when lump-sum transfers are not available) is to use subsidies across a wide range of goods (as opposed to the focus on energy chosen by the GCC).  In addition, the 'inverse' Ramsey model implies that commodities for which demand is least elastic to prices should be subsidized at higher rates.  This suggests subsidizing basic needs at higher rates, in particular food, healthcare and education.  In addition, when subsidies are very large, they create additional distortions because households prefer to queue for subsidies (e.g. public service jobs, subsidized mortgages in Saudi Arabia) rather than participate in private markets.  As an example, we draw a model where recruitment of public servants can induce a large disincentive to take private sector positions and compute the conditions under which the disincentive is so strong that overall employment is actually decreased as public servants are being hired

Government Spending, Subsidies and Economic Efficiency in the GCC

9/12 Raphael Espinoza

AbstractGDP growth in the GCC has been cosiderably igher than in advanced economies or other oil exporters since 1986.  The paper shows that the GCC countries have swiftly accumulated large stocks of physical capital but the population increase and the shift away from oil meant that capital intensity actually decreased or remained roughtly constant.  On the other hand, the efforts that have been made to improve human capital would have had positive effects on grwoth, though educational attainment remains below what is achieved by countries with similar levels of income.  A growth accounting exercise suggests as a result that the development of Bahrain and Saudi Arabia was hampered by declining TFP, while TFP growth in Qatar and the UAE would have been low.  One potential explanation is that the kind of capital that has been accumulated in the region (aircraft, computer equipment, electrical equipment) is not fully productive because the labor force is not educated enough.  The paper also discusses the lessons from the empirical growth literature for the GCC.  The poor quality of institutions and the large size of government consumption, both of which are possible symptoms of a resource curse, could explain the disappointing TFP growth.

Factor Accumulation and the Determinants of TFP in the GCC

9/12 Armon Rezai, Rick van der Ploeg & Cees Withagen

AbstractIn a calibrated integrated assessment model of Ramsey growth and climate change in the global economy we investigate the differential impact of additive and multiplicative global warming damages for both a socially optimal and business-as-usual scenario. Fossil fuel is available at a cost which rises as reserves diminish and a carbon-free backstop supplied at a decreasing cost.  If damages are not proportional to aggregate production and the economy is along a development path, the optimal carbon tax is smaller.  The economy switches later from fossil fuel to the carbon-free backstop and leaves less fossil fuel in situ.  By adjusting climate policy in this way there is very little difference on the paths for global consumption, output and capital, and thus very little difference for social welfare despite the higher temperatures.  For all specificatoins the optimal carbon tax is not a fixed proportion of world GDP but must follow a hump shape.

Economic Growth and the Social Cost of Carbon: Additive Versus Multiplicative Damages. Revised, February 2014

8/12 Nikolay Aleksandrov, Raphael Espinoza & Lajos Gyurko

AbstractWe study the optimal oil extraction strategy and the value of an oil field using a multiple real option approach.  The numerical method is flexible enough to solve a model with several state variables, to discuss the effect of risk aversion, and to take into account uncertainty in the size of reserves.  Optimal extraction in the baseline model is found to be volatile.  If the oil producer is risk averse, production is more stable, but spare capacity is much higher than what is typically observed.  We show that decisions are very sensitive to expectations on the eqilibrium oil price using a mean reverting model of the oil price where the equilibrium price is also a random variable.  Oil production was cut during the 2008-09 crisis, and we find that the cut in production was larger for OPEC, for countries facing a lower discount rate, as predicted by the model, and for countries with government finances less dependent on oil revenues.  However, the net present value of a country's oil reserves would be increased significantly (by 100 percent, in the most extreme case) if production was cut completely when prices fall below the country's threshold price.  if several producers were to adopt such strategies, world oil prices would be higher but more stable.

Optimal Oil Production and the World Supply of Oil.  Journal of Economic Dynamics and Control, 37(7), 1248-1263, 2013.

8/12 Rick van der Ploeg

AbstractWe show how a monopolistic owner of oil rserves responds to a carbon-free substitute becoming available at some uncertain point in the future if demand is isoelastic and variable extraction costs are zero but upfront exploration investment costs have to be made.  Not the arrival of this substitute matters for efficiency, but the uncertainty about the timing of this substitute coming on stream.  Before the carbon-free substitute comes on stream, oil reserves are depleted too rapidly; as soon as the substitute has arrived, the oil depletion rate drops and the oil price jumps up by a discrete amount. Subsidizing green R&D to speed up the introduction of breakthrough renewables leads to more rapid oil extraction before the breakthrough, but more oil is left in situ as exploration investment will be lower. The latter offsets the Green Paradox.

Breakthrough Renewables and the Green Paradox  FinanzArchiv, forthcoming

6/12 Mark Henstridge & John Page

AbstractThis paper seeks to de-mystify the opportunities and challenges of oil in Uganda:  not much oil revenue will arrive for at least a decade; it will then climb to 3-9 percent of GDP for about 20 years.  it will not transform Uganda, but can be beneficial or disruptive.  To manage a modest boom, policy needs to focus on growth and competitevenes now.  Careful choices on spending and the quality of public investment are essential.  Institutional and regulatory reform, infrastructure, skills and specialist knowledge can strenghten the investment climate.  A strategy for economic diversification focused on agriculture, 'investing to invest', and connecting to the coast is also needed.

Managing a Modest Boom: Oil revenues in Uganda

5/12 Paul Collier & Anthony J Venables

AbstractAfrica is well endowed with potential for hydro and solar power, but its other endowments - shortages of capital, skills and governance capacity - make most of the green options relatively expensive, while its abundance of hydro-carbons makes fossil fuels relatively cheap. Current power shortages make expansion of power capacity a priority.  Africa's endowments, and the consequent scarcities and relative prices, are not immutable and can be changed to bring opportunity costs in Africa closer to those in the rest of the world.  The international community can support by increasing Africa's supply of the scarce factors of capital, skills, and governance

Greening Africa? Technologies, endowments and the latecomer effect. Energy Economics, 34, S75-S84, 2012.

5/12 Paul Segal

AbstractThis paper analyses the effect of a resource discovery on an open economy with endogenous directed technical change.  Technical progress depends on entrepreneurs who produce (or adopt) technology, and endogenously choose which sector to operate in.  The static effect of a resource discovery is de-industrialization and a rise in non-resource factor incomes, as in standard tade theory.  Dynamically, the "brain drain" of entrepreneurs into the resource sector may exacerbate the de-industrialization over time, but if the discovery is not sufficiently large then it leads to temporarily lower growth in non-resource factor incomes, which are lower in the long run than without the discovery.  In this case non-resource owners are made worse off by the discovery.  Second best trade or investment policies that direct entrepreneurs away from the resource sector may be used to raise long-run non-resource income, at a cost to GDP.

Natural Resource Wealth and Directed Technical Change

5/12 Steven Poelhekke & Rick van der Ploeg

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.  The World Economy, 38(7), 1159-1178, 2015

5/12 Rabah Arezki & Mustapha K. Nabli

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. Published in Commodity Price Volatility and Inclusive Growth in Low Income Countries. ed Rabah Arezki, Catherine Pattillo, Marc Quintyn & Min Zhu (Washington: International Monetary Fund) 2013.

4/12 Ton S. van den Bremer & Rick van der Ploeg

AbstractThree funds are necessary to manage an oil windfall: intergenerational, liquidity and investment funds. The optimal liquidity fund is bigger if the windfall lasts longer and oil price volatility, prudence and the GDP share of oil rents are high and productivity growth is low.  We apply our theory to the windfalls of Norway, Iraq and Ghana.  The optimal size of Ghana's liquidity fund is tiny even with high prudence.  Norway's liquidity fund is bigger than Ghana's.  Iraq's liquidity fund is colossal relative to its intergenerational fund.  Only with capital scarcity, part fo the the wndfall should be used for investing to invest.  We illustrate how this can speed up the process of devleopment in Ghana despite domestic absorption constraints.

Managing and Harnessing Volatile Oil Windfalls  IMF Economic Review, 61, 1, 131-167, 2013.

3/12 Michele Ruta & Anthony J Venables

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 Annual Review of Resource Economics, 4, 331-52, 2012.

3/12 Tapan Mitra, Geir B Asheim, Wolfgang Buchholz & Cees Withagen

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. Journal of Economic Theory, 148(5), 2164-2182, 2013.

2/12 Era Dabla-Norris, Raphael Espinoza & Sarwat Jahan

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 Applied Economis, 1-19, 18 July 2015.

2/12 George Mavrotas, Syed Mansoob Murshed & Sebastian Torres

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. Review of Development Economics,  15, (1), 124-138, 2011.

12/11 Hassan Benchekroun & Cees Withagen

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.  Games and Economic Behaviour, 76,(2), 355-374, 2012.

12/11 Adeel Malik & Bassem Awadallah

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, World Development, 45, 296-313, 2013.

12/11 Dominic Rohner, Mathias Thoenig & Fabrizio Zilibotti

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. Journal of Economics Growth,  18(3),  217-252, 2013.

12/11 Fabien Prieur, Mabel Tidball & Cees Withagen

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. Resource & Energy Economics, 35(4), 637-658, 2013.

12/11 Cees Withagen & Alex Halsema

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. International Tax & Public Finance, 20(3), 434-449, 2013.

11/11 Rick van der Ploeg & Anthony J Venables

 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.   Annual Review of Economics, 4, 315-37, 2012.

11/11 Rabah Arezki & Markus Brückner

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. Journal of International Economics,  86 (2), 318-326, 2012.

11/11 Charles F Mason

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. Journal of Environmental Economics and Management,  64(3),  288-300, 2012.

11/11 Rabah Arezki, Klaus Deininger & Harris Selod

 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? World Bank Economic Review, 29(2), 207-33, 2015.

11/11 Victoria I Mumanskaya, Charles F Mason & Edward B Barbier

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

11/11 Rabah Arezki, Daniel Lederman & Hongyan Zhao

 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.  American Journal of Agricultural Economics, 96(3), 939-51, 2014.

10/11 Paul Collier & Anthony J Venables

AbstractMuch African land currently has low productivity and has attracted investors leasing land as a speculative option on higher future prices or productivity.  To be beneficial land deals 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  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. Journal of Globalization & Development, 3(1), Article 3, 2013.

10/11 Luca Spinesi

 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.  Environmental and Resource Economics, 51, 545-559, 2012.

10/11 Yu-Hsiang Lei & Guy Michaels

 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? Journal of Development Economics, 110, 139-157, 2014.

10/11 Rick van der Ploeg

 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.  International Tax and Public Finance, 19(4), 509-538, 2012.

9/11 Sambit Bhattacharyya & Paul Collier

 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? Oxford Economic Papers, 66(1), 1-24, 2014.

9/11 Nikolay Aleksandrov & Raphael Espinoza

 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

6/11 Karlygash Kuralbayeva

 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,  33(2), 193-205, 2011.

6/11 Anthony J Venables

 AbstractSupply of a non-renewable resource adjusts through two margins: the rate at which new fields are opened, and the rate of depletion of open fields.  The paper combines these margins in a model in which there is a continuum of fields with varying capital costs. Opening a new field involves sinking a capital cost, and the date of opening is chosen to maximize the present value of the field.  Depletion of each open field follows a Hotelling rule, modified by the fact that faster depletion reduces the amoount that can ultimately be extracted.  The paper studies the equilibrium paths of output and price.  Under specific but reasonable assumptions on demand and the cost distribution of deposits it is found that the rate of growth of price is constant and independent of the rate of interest, depending instead on characteristics of demand and geology.

Depletion and Development: Natural resource supply with endogenous field opening. Journal of the Association of Environmental and Resource Economists, 1(3), 313-336, 2014.

6/11 Ghada Fayad, Robert H Bates & Anke Hoeffler

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

6/11 Karlygash Kuralbayeva

 Abstract Empirically, the cyclical pattern of fiscal policy differs between developed and developing countries, with in particular much greater pro-cyclicality and volatility of public investment in developing countries.  In this paper I provide a theoretical explanation for the observed differences by analayzing optimal fiscal policy under different degrees of access to world capital markets.  If the supply of foreign capital is elastic, as in a developed country, then it is optimal to adjust to an adverse external shock by borrowing from abroad to finance public expenditure and cutting taxes to smooth private consumption.  If the supply of foreign capital is inelastic, however, as in a developing country, the optimal adjustment policy is to reduce public investment (by much more than public consumption) and to raise consumption taxes.

Optimal Fiscal Policy and Different Degrees of Access to International Capital Markets. Journal of Development Economics, 103, 336-352, 2013.

4/11 Richard P.C. Brown, Fabrizio Carmignani & Ghada Fayad

 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. World Economy, 36(5), 636-660, 2013.

3/11 Dominic Rohner, Mathias Thoenig & Fabrizio Zilibotti

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. Review of Economic Studies, 80, 1114-1147, 2013.

2/11 Ghada Fayad

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?

1/11 Rick van der Ploeg & Cees Withagen

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. Journal of Public Economics, 96,  62-77, 2012.

12/10 Rick van der Ploeg & Cees Withagen

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.  Four regimes can occur.  If the social cost of oil is less than that of renewables, there are two regimes starting with oil. The first one occurs if the oil stock is not too small and not too large and the initial capital stock is below its steady state in which case it is optimal to follow the oil-only phase with a renewables-only phase.  The second regime occurs if the initial oil stock is large enough.  It is then optimal to follow an oil-only phase with an oil-renewables phase.  If it is optimal to start with renewables, a third and fourth regime emerge.  The third one occurs if the initial oil lstock takes on an intermediate value and the capital stock exceeds its steady-state value.  It is then optimal to start with renewables and end with a phase where oil is used alongside renewables.  The fourth regime occurs if the initial oil stock is low enough.  Renewables are then used throughout.  We also offer some policy simulations for the first and second regime, which illustrate that with a lower discount rate more oil is left in situ and renewables are phased in more quickly.  In the first regime the optimal carbon tax rises during the oil-only phase, but in the second regime the optimal carbon tax can fall.  Subsidizing renewables (without a carbon tax) induces more oil to be left in situ and a quicker phasing in of renewables, but oil is depleted more rapidly initially.  The net effect on global warming is ambiguous.

Growth, Renewables and the Optimal Carbon Tax.  International Economic Review, 55(1), 283-311, 2014.

12/10 Karlygash Kuralbayeva & Radoslaw Stefanski

Abstract  Macro cross-country data and micro US county data indicate that resource rich regions have small but relatively 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. Journal of International Economics. Journal of International Economics, 90(2), 273-301, 2013.

12/10 Sambit Bhattacharyya & Roland Hodler

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. Proceedings of the German Development Economics Conference, Berlin 2011.

10/10 Rick van der Ploeg & Anthony J Venables

Abstract The permanent income rule is seldom the optimal response to a windfall of foreign exchange, such as that from a resource discovery.  Absorptive capacity constraints require domestic investment, and investment in structures requires non-traded inputs the supply of which is constrained by the initial capital stock.  This, particularly when combined with intra-sectoral capital immobility, delays adjustment and creates short run 'Dutch disease' symptoms as the real exchange rate sharply appreciates and overshoots its long run value.  Optimal revenue management rquires investing in the domestic non-traded goods sector and a slow build up of consumption.  Accumulation of foreign assets adjusts to accommodate the time-paths of domestic consumption and investment.

Absorbing a Windfall of Foreign Exchange: Dutch disease dynamics.  Journal of Development Economics, 103, 229-243, 2013.


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?   The Review of Economics and Statistics, 95, 3, 1047-1065, 2013.

8/10 Massimo Morelli & Dominic Rohner

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

7/10 Bas Jacobs & Rick van der Ploeg

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

7/10 Radoslaw Stefanski

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 issues 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. Review of Economic Dynamics, 17(3), 458-504, 2014.

7/10 Radoslaw Stefanski

Abstract Brock and Taylor (2010) argue that the Environmental Kuznets Curve (EKC) is driven by falling GDP growth rates associated with a Solow type convergence. I test the importance of their mechanism 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 intensities are hump-shaped, implying declining emission intensity growth rates. Furthermore, this decline is up to an order of magnitude larger than changes in GDP growth. By assigning all the weight to GDP growth, the Green Solow model misses the largest driver of emissions. Models aiming to explain the EKC, should thus focus on explaining hump-shaped emission intensities and consequently falling emission intensity growth rates.

On the Mechanics of the 'Green Solow Model'. Revised, February 2013

6/10 Facundo Alvaredo & Anthony B Atkinson

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. Journal of Political Economy, 123(5), 1087-132, 2015.

5/10 Anthony J Venables

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, 17, 340-56, 2010.

3/10 Akram Esanov & Karlygash Kuralbayeva

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.  In P.Collier and A.J. Venables (eds), 2011, 'Plundered Nations? Successes and failures in natural resource extraction', Palgrave Macmillan.

3/10 Rick van der Ploeg & Dominic Rohner

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. European Economic Review, 56, 8, 1714-1729, 2012.

2/10 Sambit Bhattacharyya & Jeffrey G Williamson

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, 51, 2, 151-178, 2011.

2/10 J. Rodrigo Fuentes

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.  In P.Collier and A.J. Venables (eds), 2011, 'Plundered Nations? Successes and failures in natural resource extraction', Palgrave Macmillan.

2/10 Karen Pittel & Lucas Bretschger

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, 43, 4, 1173-1197, 2010.

2/10 Bernard Gauthier & Albert Zeufack

 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.  In P.Collier and A.J. Venables (eds), 2011, 'Plundered Nations? Successes and failures in natural resource extraction', Palgrave Macmillan.

2/10 Lucas Bretschger

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. Scandinavian Journal of Economics, 115(3),  722-755, 2013.

2/10 Christopher Adam & Anthony M Simpasa

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. In P.Collier and A.J. Venables (eds), 2011, 'Plundered Nations? Successes and failures in natural resource extraction', Palgrave Macmillan.

2/10 Rick van der Ploeg & Cees Withagen

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?Journal of Environmental Economics and Management, 64,3,342-363, 2012.

2/10 Lucas Bretschger

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. Resource and Energy Economics, 39, 29-52, 2015.

1/10 Rick van der Ploeg & Steven Poelhekke

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, 60, 1, 44-55, 2010.

11/09 Paul Collier & Anthony J Venables

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 ResourcesJournal of Globalization and Development,  1, Iss.1, Article 8, 2010.

11/09 Paul Collier & Anthony J Venables

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

11/09 Charlotte Werger

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?

11/09 Christa Brunnschweiler

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

11/09 Francesco Caselli & Guy Michaels

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. American Economic Journal: Applied Economics, 5(1), 208-238, 2013.

10/09 Torfinn Harding & Rick van der Ploeg

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 reactions have been partial forward-looking with respect to the rising pension bill, but backward-looking with respect to oil and gas revenues.  Our measure of permanent oil income derived from official forecasts performs better than the one derived from a time-series model of oil income.  Solvency of the government finances might be an issue with the fiscal rules estimated from historical data. Simulation suggests that declining oil and gas revenue and the costs of a rapidly graying population will substantially deteriorate the net governemtn asset position by 2060 unless fiscal policy becomes more prudent or current pension and fiscal reforms are successful.

Official Forecasts and Management of Oil Windfalls.   International Tax and Public Finance,  20, 827-866, 2013.

07/09 Adeel Malik

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

07/09 Martin Ellison & Andrew Scott

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. Journal of Monetary Economics, 60(7), 806-820, 2013.

06/09 Rick van der Ploeg & Steven Poelhekke

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

06/09 Ruikang Marcus Fum & Roland Hodler

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, 107, 3,  360-363, 2010.

04/09 Anthony J Venables

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. in R. Barro and J.W. Lee (eds), 2011, 'Costs and Benefits of Economic Integration in Asia', OUP.

04/09 Rick van der Ploeg

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,  94, 5-6,  421-433, 2010.

Sambit Bhattacharyya &
Roland Hodler

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,  54, 608-621, 2010.

01/09 Anamaria Pieschacon

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.

Christa N Brunnschweiler
& Erwin H Bulte
AbstractIn this paper we examine the claim that natural resources invite civil conflict, and challenge the main stylized facts in this literature. We find that the conventional measure of resource dependence is endogenous with respect to conflict, and that instrumenting for dependence implies that it is no longer significant in conflict regressions. Instead, it appears that conflict increases dependence on resource extraction (as a default sector). Moreover, resource abundance is associated with a reduced probability of the onset of war. These results are robust to a range of specifications and, considering the conflict channel, we conclude there is no reason to regard resources as a general curse to peace and development.

Natural Resources and Violent Conflict: Resource abundance, dependence and the onset of civil wars. Oxford Economic Papers,  61, 4, 651-674, 2009. 
Christa N Brunnschweiler
& Erwin H Bulte
01/09 Rick van der Ploeg

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, 48,1, 105-128, 2011.

01/09 Paul Collier, Rick van der Ploeg, Michael Spence & Anthony J Venables

AbstractThis paper addresses the efficient management of natural resource revenues in capitalscarce developing economies. We depart from usual prescriptions based on the permanent income hypothesis and argue that capital-scarce countries should prioritise domestic investment. Since revenue streams are highly volatile governments should protect consumption from shocks by increasing it only cautiously. Volatility in domestic investment can be moderated by a buffer of international liquidity, but it is also important to structure investment processes to be able to cope efficiently with substantial fluctuations. To date, most of the resource-rich countries of Africa have not had investment rates commensurate with their rate of resource extraction.

Managing Resource Revenues in Developing EconomiesIMF Staff Papers,  57(1),  84-118, 2010.

11/08 Paul Collier & Benedikt Goderis
AbstractWhereas empirical evidence on the effect of higher commodity prices on the long-run growth of commodity exporters is ambiguous, time series analyses using vector autoregressive (VAR) models have found that commodity booms raise income in the short run.  In this paper we adopt panel error correction methodology to analyze global data for 1963 to 2008 to disentangle the short and long run effects of iternational commodity prices on output per capita.  Our results show that commodity booms have unconditional positive short-term effects on output, but non-agricultural booms in countries with poor governance have adverse long-term effects which dominate the short-run gains.  Our findings have important implications for non-agricultural commodity exporters with poor governance, especially in light of the recent wave of resource discoveries in low-income countries.
Commodity Prices and Growth: An empirical investigation. European Economic Review, 56(6), 1241-1260, 2012.
11/08 Paul Collier & Anke Hoeffler

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,  53, 3, 293-308, 2009.

11/08 Paul Collier & Anthony J Venables

AbstractThis paper explores the choices faced by developing country governments that have received substantial revenues from natural resources. The economic principles
underlying the choices between consumption, domestic investment, and the accumulation of foreign assets are analysed. The priority should be to use revenues to promote growth and investment in the domestic economy and thereby put consumption on a rapid growth path, although absorptive capacity may constrain the scope for doing this in the short run. Foreign asset accumulation should be used primarily to smooth volatility, rather than to build up a long-term sovereign wealth fund. Trade-offs between private and public spending channels are examined from both an economic and political economy standpoint.

Managing Resource Revenues: Lessons for low income countries

11/08 Paul Collier & Anthony J Venables

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 'Natural Resources and Development' Ed. G.Mavrotas

10/08 Rick van der Ploeg

AbstractWe investigate the Hartwick rule for saving of a nation necessary to sustain a constant level of private consumption for a small open economy with an exhaustible stock of natural resources. The amount by which a country saves and invests less than the marginal resource rents equals the expected capital gains on reserves of natural resources plus the expected increase in interest income on net foreign assets plus the expected fall in the cost of resource extraction due to expected improvements in extraction technology. Effectively, depletion is then postponed until better times. This suggests that it is not necessarily sub-optimal for resource- rich countries to have negative genuine saving. However, in countries with different groups with imperfectly defined property rights on natural resources, political distortions induce faster resource depletion than suggested by the Hotelling rule. Fractionalised societies with imperfect property rights build up more foreign assets than their marginal resource rents, but in the long run accumulate less foreign assets than homogenous societies. Hence, such societies end up with lower sustainable consumption and are worse off, especially if seepage is strong, the number of rival groups is large and the country does not enjoy much monopoly power on the resource market. Genuine saving is zero in such societies. However, World Bank genuine saving figures based on market rather than accounting prices will be negative, albeit less so in more fractionalised societies with less secure property rights.

Why Do Many Resource-Rich Countries Have Negative Genuine Saving? Anticipation of better times or rapacious rent seeking. Resource and Energy Economics, 32,  28-44, 2010.

08/08 Rick van der Ploeg & Anthony J Venables

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 economiesEconomic Journal,  121, 1-31, 2011.

08/08 Benedikt Goderis & Samuel Malone

AbstractWe develop a theory, in the context of a two-sector growth model in which learning-by-doing drives growth, to explain the time path of income inequality following natural resource booms in resource rich countries. Under the condition of a relatively unskilled labor intensive nontraded sector, inequality falls immediately after a boom, and then increases steadily over time until the initial impact of the boom disappears. Using data for 90 countries between 1965 and 1999, we find evidence in support of the theory, especially for oil and mineral booms. We also find that uncertainty about future commodity prices increases long-run inequality.

Natural Resource Booms and Inequality: Theory and evidence. Scandinavian Journal of Economics,  113, 388-417, 2011.

08/08 Paul Collier & Benedikt Goderis

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,  61, 4, 703-726, 2009.

08/08 Paul Collier & Benedikt Goderis

AbstractThis paper investigates the role of aid in mitigating the adverse effects of commodity export price shocks on growth in commodity-dependent countries. Using a large cross-country dataset, we find that negative shocks matter for short-term growth, while the ex ante risk of shocks does not seem to matter. We also find that both the level of aid and the flexibility of the exchange rate substantially lower the adverse growth effect of shocks. While the mitigating effect of aid is significant in both countries with pegs and countries with floats, the effect seems to be smaller for the latter, suggesting that aid and exchange rate flexibility are partly substitutes. We investigate whether aid has historically been targeted at shock-prone countries, but find no evidence that this is the case. This suggests that donors could increase aid effectiveness by redirecting aid towards countries with a high incidence of commodity export price shocks.

Does Aid Mitigate External Shocks?  Review of Development Economics, 13, 429-451, 2009.

03/08 Rick van der Ploeg

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,  49(2), 366-420, 2011.

03/08 Paul Collier & Anthony J Venables

AbstractWhere imports are financed predominantly by rents from resource extraction or aid, the revenue generated by tariffs is illusory. Revenue earned by the tariff is offset by a reduction in the real value of aid and resource rents. Revenue is however moved between accounts in the government budget which, in the case of aid, may reduce the burden of donor conditionality. We demonstrate this proposition for a simple central case and show that the result is not overturned by generalisations around this case. We argue that trade policy formulation in such economies should recognise the illusory nature of tariff revenues.

Illusory Revenues: Import tariffs in resource-rich and aid-rich economies. Journal of Development Economics,  94,  202-16, 2011.

02/08 Steven Poelhekke & Rick van der Ploeg

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,  61,4,  727-760, 2009. 

02/08 Rick van der Ploeg

AbstractWe analyze a power struggle about the control of natural resources where competing factions in society have a private stock of financial assets and a common stock of natural resources with inadequately defined private property rights. We solve a dynamic common-pool problem and obtain political economy variants of the Hotelling rule for resource depletion and the Hartwick saving rule necessary to sustain constant consumption in an economy with exhaustible natural resources. The rate of increase in the price of natural resources and resource depletion are faster than demanded by the Hotelling rule. As a result, the country substitutes away from resources to capital too rapidly so that it saves and invests more than a homogenous society. The power struggle boosts output, but depresses aggregate consumption and social welfare. Genuine saving is nevertheless zero in a fractionalized society, since the too rapid depletion of natural resources is exactly in line with the too rapid accumulation of physical capital. World Bank measures of genuine saving are likely to be over-estimated. This exacerbates the puzzle of why many resource-rich countries experience negative genuine saving rates.

Voracious Transformation of a Common Natural Resource into Productive Capital. International Economic Review, 51(2),  365-381, 2010.

02/08 Rabah Arezki & Rick van der Ploeg

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

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