Working Papers

Authors: Adeel Malik, Bassem Awadallah

Nov 2011

This 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 development. We explain this economic 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.

Keywords: Arab spring, fragmentation, regional trade, protectionism

Reference: 79

Individual View

Authors: Rick Van der Ploeg

Oct 2011

A windfall in a developing 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.

JEL Codes: E60, F34, F35, F43, H21, H63, O11, Q33

Keywords: optimal management of windfalls, economic development, capital scarcity, public capital, PIMI, investment adjustment costs, absorption constraints, genuine saving, Dutch disease

Reference: 66

Individual View

Much 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 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.

JEL Codes: O13, 055, Q1

Keywords: land deals, farmland, Africa, rent, lease

Reference: 69

Individual View

Authors: Yu-Hsiang Lei, Guy Michaels

Oct 2011

We 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.

JEL Codes: Q34, Q33, O13

Keywords: Natural Resources, Resource Curse, Petroleum, Armed Conflict, Civil War

Reference: 67

Individual View

Authors: Luca Spinesi

Oct 2011

How 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 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.

JEL Codes: O13, O30, Q54, H23

Keywords: Global warming, Carbon taxes, Technological change

Reference: 68

Individual View

Authors: Nikolay Aleksandrov, Raphael Espinoza

Sep 2011

We 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 of a country’s oil reserves is increased significantly (by 100 percent, in the most extreme case) if production decisions are made conditional on oil prices. We also show that the marginal value of additional capacity is higher for countries with bigger resources and longer production horizons. We apply the model to Brazil and the U.A.E. in order to pin down two points of the global supply curve.

JEL Codes: C61 ; Q30 ; Q43

Keywords: Oil production ; Real Options ; Capacity Expansion ; Stochastic Optimization

Reference: 64

Individual View

Authors: Paul Collier, Sambit Bhattacharyya

Sep 2011

As poor countries deplete their natural resources, for increased consumption to be sustainable some of the revenues should be invested in other 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 to 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.

JEL Codes: E0, O1

Keywords: Natural resources; public capital

Reference: 65

Individual View

Authors: Karlygash Kuralbayeva

Jun 2011

Empirically, the cyclical pattern of scal 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 analyzing 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.

JEL Codes: E32, E62, F41, H30, H54, Q33, Q43

Keywords: public investment; public consumption; scal policy; procyclicality; natural resources, external shocks

Reference: 60

Individual View

Authors: Ghada Fayad, Robert H. Bates

Jun 2011

In 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 between 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 – to 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.

JEL Codes: C23, O11, O17, O55

Keywords: Income, democracy, Sub-Saharan Africa, Dynamic panel data, parameter heterogeneity, Cross-section dependence.

Reference: 61

Individual View

Supply 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 amount 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.

JEL Codes: D9, Q3, Q4, Q5

Keywords: non-renewable resource, depletion, exhaustible, Hotelling, fossil fuel, carbon tax

Reference: 62

Individual View

Authors: Richard P C Brown, Fabrizio Carmignani, Ghada Fayad

Apr 2011

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.

Keywords: Remittances, Financial Development, Financial Literacy, Azerbaijan, Kyrgyzstan

Reference: 59

Individual View

Authors: Ghada Fayad

Feb 2011

The 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 remittances 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.

JEL Codes: F2, F4, O1, Q3

Keywords: Remittances, manufacturing, export-led growth, Dutch disease, migrant net-works

Reference: 57

Individual View

Authors: Rick Van der Ploeg, Cees Withagen

Jan 2011

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.

JEL Codes: Q30, Q42, Q54

Keywords: Hotelling rule, non-renewable resource, dirty backstop, coal, global warming, carbon tax, renewables, tax on coal, subsidy on renewables, transition times, Herfindahl rule

Reference: 56

Individual View

Authors: Sambit Bhattacharyya, Roland Hodler

Dec 2010

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.

JEL Codes: D7, O1

Keywords: Natural resources; political institutions; financial development

Reference: 53

Individual View

Authors: Karlygash Kuralbayeva

Dec 2010

Macro cross-country data and micro US county data indicate that resource-rich regions have small but relatively productive manufacturing sectors and large but relatively unproductive non-manufacturing sectors. We suggest a process of specialization to explain these facts. Windfall revenue induces labor to move from the (traded) manufacturing to the (nontraded) 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 nonmanufacturing 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 differences 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 productivity in those countries is a consequence of manufacturing’s smaller size.

Reference: 54

Individual View

Authors: Rick Van der Ploeg, Cees Withagen

Dec 2010

Optimal climate policy is investigated in a Ramsey growth model of the global economy 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 initial 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 stock 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.

JEL Codes: D90, E13, Q30, Q42, Q54

Keywords: Green Ramsey model, carbon tax, renewables, exhaustible resources, global warming, development, growth, intergereational inequality aversion, second best, Green Paradox

Reference: 55

Individual View

Authors: Massimo Morelli, Dominic Rohner

Oct 2010

We examine how natural resource location, rent sharing and .ghting 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.

JEL Codes: C72, D74, Q34.

Keywords: Natural Resources, Con‡ict, Strength Proportionality, Resource Proportionality Secession, Bargaining Failure

Reference: 50

Individual View

Authors: Rick Van der Ploeg, Steven Poelhekke

Oct 2010

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.

JEL Codes: C21, C33, F21, Q33

Keywords: outward non-resource and resource FDI, subsoil assets, co-integration tests, spatial econometrics, hydrocarbon reserves, external margin, sample selection bias

Reference: 51

Individual View

Brunnschweiler 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.

JEL Codes: C12, C21, C82, F43, O11, O41, Q32

Keywords: resource curse, resource exports, resource rents, natural capital, subsoil assets, reserves, instrumental variables, volatility

Reference: 33

Individual View

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 requires 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.

JEL Codes: E21, E62, F43, H63, O11, Q33

Keywords: absorptive capacity, absorption constraints, irreversible investment, windfall, natural resources, Dutch disease, economic development

Reference: 52

Individual View

Authors: Radoslaw Stefanski

Jul 2010

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 humpshaped emission intensities and consequently falling emission intensity growth rates.

Keywords: Environmental Kuznets Curve; Emissions; Emission Intensity; Structural Transformation, Pollution Accounting

Reference: 47

Individual View

Authors: Radoslaw Stefanski

Jul 2010

What 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 perma-

nently 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 2010. 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.

Reference: 48

Individual View

Authors: Facundo Alvaredo, Anthony B Atkinson

Jun 2010

There 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 1 per 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.

Reference: 46

Individual View

We 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.


JEL Codes: H21, H23, Q54

Keywords: global warming, intra-generational and inter-generational redistribution, equally-distributed-equivalent utility, social discount rate, prudence, carbon tax, income tax, CO2 abatement, climate adaptation, non-homothetic preferences

Reference: 49

Individual View

Authors: Anthony Venables

May 2010

Countries 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.

JEL Codes: Q32, O11, E2, H0

Keywords: Natural resources, revenue management, resource curse, permanent income

Reference: 44

Individual View

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