Working Papers

Authors: Paul Collier, Anthony Venables, Rick Van der Ploeg, Michael Spence

Jan 2009

This 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.

JEL Codes: D60, E21, E62, F34, H00, Q33

Keywords: windfall revenue, permanent income, liquidity constraints, capital scarcity, buffer stovcks, volatility, commodity prices

Reference: 15

Individual View

For 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.

JEL Codes: E20, F32, O13, Q01, Q32

Keywords: Exhaustible resources, Hotelling rule, Hartwick rule, capital, sustainable consumption, fractionalization, seepage, interconnected pools, insecure property rights, differential game, genuine saving, adjusted net saving

Reference: 16

Individual View

Authors: Christa N Brunnschweiler, Erwin H Bulte

Jan 2009

We use three different measures of fractionalization (with varying potential for members of one fraction to “mendaciously” pass for a member of another) to revisit the correlation between natural resources and the onset of conflict. The combination of ethnic fractionalization and resource wealth seems to translate into a greater risk of war, but the same is not true for linguistic and religious fractionalization. This is consistent with the “greed hypothesis” as a driver of conflict. However, we also find that the direct effect of resource wealth tends to attenuate the risk of war, and the net effect of resources on conflict is ambiguous.

Keywords: Civil war, conflict, natural resources, fractionalization

Reference: 17

Individual View

Authors: Christa N Brunnschweiler, Erwin H Bulte

Jan 2009

In 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.

JEL Codes: Q34, O11, N40, N50

Keywords: Civil war, resource abundance, resource dependence, greed versus grievance, resource curse

Reference: 18

Individual View

Authors: Anamaría Pieschacón

Jan 2009

In this paper I compute implementable .scal 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 e¤ects 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.

JEL Codes: F41, H30, H60, Q32, Q33, Q38, Q43

Keywords: oil depletion, …scal rules

Reference: 19

Individual View

Authors: Paul Collier, Benedikt Goderis

Nov 2008

Whereas 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 international 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.

JEL Codes: O13, O47, Q33

Keywords: commodity prices; natural resource curse; growth

Reference: 14

Individual View

Authors: Paul Collier, Anke Hoeffler

Nov 2008

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.

JEL Codes: O11, O40, Q

Keywords: political economy, natural resources, growth

Reference: 13

Individual View

This 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.

Reference: 12

Individual View

This 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.

Reference: 11

Individual View

We 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.

JEL Codes: E20, F32, O13, Q01, Q32

Keywords: Exhaustible resources, Hotelling rule, Hartwick rule, accounting price, genuine saving, capital, sustainable consumption, extraction technology, common pool, seepage, property rights, voracity, fractionalisation, soverign wealth fund

Reference: 10

Individual View

A 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.

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

Keywords: natural resource, windfall public revenues, risk premium on foreign debt, public infrastructure, private investment, credit constraints, optimal fiscal policy, debt management, Sovereign Wealth Fund, asset holding subsidy, developing economies

Reference: 09

Individual View

Authors: Benedikt Goderis, Samuel W. Malone

Sep 2008

We 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 .nd evidence in support of the theory, especially for oil and mineral booms. We also .nd that uncertainty about future commodity prices increases long-run inequality.

JEL Codes: O13, O15, F11, Q33

Keywords: Dutch Disease; Windfalls; Commodity Prices

Reference: 08

Individual View

Authors: Paul Collier, Benedikt Goderis

Sep 2008

Countries 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.

JEL Codes: O47, Q38, Q54

Keywords: commodity price shocks; natural disasters; growth, policies

Reference: 07

Individual View

Authors: Paul Collier, Benedikt Goderis

Sep 2008

This 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.

JEL Codes: F35, O13, O47

Reference: 06

Individual View

Authors: Rick Van der Ploeg

Mar 2008

Are 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.

JEL Codes: C12, C13, E01, F43, K42, O41, Q3

Keywords: Resource curse, cross-country, panel and quasi-experimental evidence, Dutch disease, institutions, corruption, financial development, volatility, Hotelling rule, genuine saving, Hartwick rule, natural resource wealth management, sustainable development

Reference: 05

Individual View

Where 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.

JEL Codes: F1, F35, Q3

Keywords: Aid, natural resources, import tariffs

Reference: 04

Individual View

Authors: Rick Van der Ploeg, Steven Poelhekke

Feb 2008

We 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.

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

Keywords: volatility, growth, resource curse, financial development, openness, landlocked, ethnic tensions, restrictions on current and capital account

Reference: 03

Individual View

We 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.

JEL Codes: E20, F32, O13, Q01, Q32

Keywords: Exhaustible resources, Hotelling rents, Hartwick rule, sustainable consumption, common pool, fractionalization

Reference: 02

Individual View

Authors: Rick Van der Ploeg, Rabah Arezki

Feb 2008

Most 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).

JEL Codes: C21, C82, O11, O41, Q30

Keywords: Resource curse, institutions, trade policies, income per capita

Reference: 01

Individual View


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