Working Papers

Authors: Joan Esteban, Massimo Morelli, Dominic Rohner

May 2010

Since 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 con.ict 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, signi.cant 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 ff¤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 .ght 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.

JEL Codes: C72, D74

Keywords: Mass Killings, Civil War, Natural Resources, Intensity of Conflict, Group size

Reference: 45

Individual View

Authors: Akram Esanov, Karlygash Kuralbayeva

Apr 2010

This 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.

Reference: 43

Individual View

Authors: Rick Van der Ploeg, Dominic Rohner

Mar 2010

We build a theoretical framework that allows for endogenous conflict behaviour (i.e., fighting efforts) and 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 only 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.

JEL Codes: D45, D74, L71, Q34

Keywords: conflict, natural resources, voracious extraction, private resource exploitation, exploration investment, license fee, rebels

Reference: 42

Individual View

Authors: J Rodrigo Fuentes

Mar 2010

Authors: Dominic Rohner, Mathias Thoenig, Fabrizio Zilibotti

Mar 2010

We construct a theory of persistent civil conflicts, where persistence is driven by the endogenous dynamics of inter-ethnic trust and trade. In times of peace, agents belonging to two groups are randomly matched to trade bilaterally. Trade hinges on trust and cooperation. The onset of conflict signals that the aggressor has a low propensity to cooperate, harming future trust and trade. Agents observe the history of conflicts and update their beliefs over time. The theory predicts that civil wars are persistent. Moreover, even accidental con.icts that do not reflect economic fundamentals erode trust, and can plunge 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.

JEL Codes: D74, D83, O15, Q34

Keywords: beliefs, civil war, con‡ict, cultural transmission, ethnic fractionalization, human capital investments, learning, matching, peacekeeping, stochasic war, strategic complimentary trade

Reference: 58

Individual View

Authors: Lucas Bretschger

Feb 2010

The paper develops a theoretical model with different channels through which energy affects economic growth. The conditions for a crowding out of capital accumulation by intensive energy use are derived. In the empirical part, estimations using a system with five simultaneous equations for a sample of 37 developed countries with five-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 find 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.

JEL Codes: Q43, O47, Q56, O41

Keywords: Energy Prices and Growth, Endogenous Capital Accumulation, Structural Change, Panel Data

Reference: 34

Individual View

Authors: Rick Van der Ploeg, Cees Withagen

Feb 2010

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 may increase 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 more 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.

JEL Codes: Q30, Q42, Q54

Keywords: Green Paradox, Hotelling rule, non-renewable resource, renewable backstop, simultaneous use, global warming, carbon tax, monopoly, limit pricing

Reference: 35

Individual View

Authors: Christopher Adam, Anthony M Simpasa

Feb 2010

This 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.

Reference: 36

Individual View

The 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.

JEL Codes: Q32, Q55, Q56, O41

Keywords: Population growth, non-renewable resources, poor input substitu-tion, technical change, sustainability

Reference: 37

Individual View

Authors: Sambit Bhattacharyya, Jeffrey G Williamson

Feb 2010

Australia 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.

JEL Codes: F14, F43, N17, O56

Keywords: Commodity exports, price shocks, Australian economy

Reference: 41

Individual View

Authors: Bernard Gauthier, Albert Zeufack

Feb 2010

Oil 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.

Reference: 38

Individual View

Authors: Karen Pittel, Lucas Bretschger

Feb 2010

We analyze the long-termdynamics 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 dynamics 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 policy.

JEL Codes: O4, O41, Q01, Q3

Reference: 39

Individual View

Authors: Francesco Caselli, Guy Michaels

Nov 2009

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 increase, 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.

Reference: 28

Individual View

Authors: Christa N. Brunnschweiler

Nov 2009

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.

JEL Codes: Q32, O40, O13, P28

Keywords: oil, resource curse, economic growth, transition countries, oil ownership

Reference: 29

Individual View

Authors: Charlotte Werger

Nov 2009

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.

JEL Codes: Q38, Q32, Q39, P28, N50

Keywords: Natural resources, democracy, resource curse

Reference: 30

Individual View

Authors: Anthony Venables, Paul Collier

Nov 2009

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.

Reference: 31

Individual View

This paper investigates the scope for international rules to address market failures in trade in natural resources and the associated international 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 features 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.

Reference: 32

Individual View

Authors: Rick Van der Ploeg, Torfinn Harding

Oct 2009

Official 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 government asset position by 2060 unless fiscal policy becomes more prudent or current pension and fiscal reforms are successful.

JEL Codes: H20, H63, Q33

Keywords: oil windfalls, official forecasts, forward-looking fiscal policy rules, permanent income hypothesis, graying population, debt sustainability, Norway

Reference: 27

Individual View

Authors: Martin Ellison, Andrew Scott

Jul 2009

We 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 that 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.

JEL Codes: D43, D83, Q31

Keywords: Commodity Prices, Escape Dynamics, Hotelling, Learning, Scarcity, Self Confirming Equilibria

Reference: 25

Individual View

Authors: Adeel Malik

Jul 2009

In 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.1 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 markets, 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 question: 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.  1 See Malik and Temple (2009) for a more detailed review. 2 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 survives 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)).

Reference: 26

Individual View

Authors: Ruikang Marcus Fum, Roland Hodler

Jun 2009

We 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.

JEL Codes: D7, O1

Keywords: Natural resources; inequality; ethnic polarization; resource curse

Reference: 23

Individual View

The 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.

JEL Codes: C12, C21, C23, F43, G20, O11, O41, Q32

Keywords: volatility, growth, natural resource curse, financial development

Reference: 24

Individual View

Authors: Sambit Bhattacharyya, Roland Hodler

Apr 2009

JEL Codes: D7, O1

Keywords: Natural resources; democracy; political institutions; corruption

Reference: 20

Individual View

The effects of stochastic oil demand on optimal oil extraction 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, is very prudent, and future oil demand has high variance. Uncertain economic prospects induce even higher precautionary saving and, if nonoil 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.

JEL Codes: D81, E62, H63, Q32

Keywords: Hotelling rule, tax smoothing, prudence, vigorous oil extraction, precautionary saving, taxation and under‐spending, oil price volatility, uncertain economic prospects and oil reserves

Reference: 21

Individual View

What 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 nonpreferential trade liberalisation accrue largely to the more resourcerich 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.

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

Keywords: regional integration, natural resources, landlocked, Central Asia

Reference: 22

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