Working Papers

Climate change must deal with two market failures: global warming and learning by doing in renewable energy production. 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 might have to rely on a second-best subsidy only. With credible commitment the second-best subsidy is 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 °C, under second best without commitment 3.5°C, and without any policy 5.1°C 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%.

JEL Codes: H21, Q51, Q54

Keywords: first best, second best, commitment, Markov-perfect, Ramsey growth, carbon tax, renewables subsidy, learning by doing, directed technical change

Reference: 168

Individual View

Developing 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.

JEL Codes: Q3

Keywords: Natural resources, non-renewable, depletion, resource curse, Dutch disease, revenue management, diversification, genuine saving

Reference: 169

Individual View

Authors: Rabah Arezki, Patrick Bolton, Sanjay Peters, Frederic Samana, Joseph Stiglitz

Dec 2015

This 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 identifying 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.

JEL Codes: H49, H54, G30, G38

Keywords: Infrastructure, Public Private Partnership, Long-term Investors, Savings, and Investment Policy

Reference: 166

Individual View

Authors: Brick Smith, Samuel Wills

Oct 2015

Do oil booms reduce rural poverty and inequality? To study this we measure rural poverty by counting people that live in darkness at night: combining high-resolution global satellite data on night-time lights and population from 2000-2013.  We develop a measure that accurately identifies 74% of households as above or below the extreme poverty line when compared to over 600,000 household surveys. We find that both high oil prices and new discoveries increase illumination and GDP nationally. However, they also promote regional inequality because the increases are limited to towns and cities with no evidence that they benefit the rural poor.

JEL Codes: D31,E01,O11,O13,O47,Q32,Q33,Q43

Keywords: oil, rural poverty, poverty measurement, regional inequality, night-time lights, urbanization

Reference: 164

Individual View

Authors: Brock Smith

Oct 2015

This 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 resource 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.

Keywords: Natural resource curse; economic growth; growth regressions; growth accounting; oil

Reference: 165

Individual View

Authors: Fidel Perez-Sebastian, Ohad Raveh, Yaniv Reingewertz

Sep 2015

How do state tax rates respond to federal tax shocks? This paper presents a novel mechanism of heterogeneous vertical tax externalities across state-levels of .scal advantage, showing that tax increases can be expansionary .even without their reinvestment. States rich in natural resources have a .scal 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 fiscally 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 fiscally advantaged states, through an increase in their tax base. Using the case of the U.S., 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.

JEL Codes: H77, Q32

Keywords: Federalism, natural resources, …scal advantage, tax competition

Reference: 160

Individual View

Authors: Fernando M Aragon, Juan Pablo Rud, Gerhard Toews

Sep 2015

This 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 nd that mine closures led to persistent reductions in population size and participation rates.

Reference: 161

Individual View

Authors: Gry Ostenstad, Wessel N. Vermeulen

Sep 2015

We 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 reallocation 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.

JEL Codes: F12, Q37

Keywords: Resource windfalls, heterogeneous firms, trade, welfare

Reference: 162

Individual View

Authors: Thomas McGregor

Sep 2015

This paper uses a panel-VAR approach to estimate both the dynamic and structural macroeconomic response of resource-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 only that global macroeconomic conditions do not respond to individual low-income country conditions contemporaneously. The results suggest that a one standard deviation 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 those 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 deindustrialisation does exist. The channel through whichthis 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 collapseon the Nigerian economy.

JEL Codes: O11, O13, L16, Q02, C01, C33

Keywords: Dutch disease, Natural resources, Structural transformation, Panel-VAR

Reference: 163

Individual View

Authors: Thomas McGregor

Sep 2015

This paper uses a panel-VAR approach to estimate both the dynamic and structural macroeconomic response of resource-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 only that global macroeconomic conditions do not respond to individual low-income country conditions contemporaneously. The results suggest that a one standard deviation 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 those 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 deindustrialisation 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 collapseon the Nigerian economy.

JEL Codes: O11, O13, L16, Q02, C01, C33

Keywords: Dutch disease, Natural resources, Structural transformation, Panel-VAR

Reference: 163

Individual View

Authors: Andrea Ferrero, Martin Seneca

Jul 2015

How 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 tradeo between the stabilization of domestic ination 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 rate following a drop in the oil price. In contrast, a central bank with a mandate to stabilize consumer price inflation would raise interest rates to limit the inationary impact of an exchange rate depreciation.

JEL Codes: E52, E58, J11

Keywords: small open economy, oil export, monetary policy

Reference: 158

Individual View

Authors: Fidel Perez-Sebastian, Ohad Raveh

Jul 2015

Previous 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 power of the central and regional governments. We provide cross country empirical evidence for the main hypotheses, finding that resource booms: (i) decrease the level of fiscal decentralization with no U-shaped patterns, (ii) cause the former due to risk sharing incentives primarily when regional governments are relatively strong, and (iii) have no effect on political decentralization.

JEL Codes: H77, Q33

Keywords: Natural resources, decentralization, bargaining power, risk sharing, secession

Reference: 142

Individual View

Authors: Rabah Arezki, Sambit Bhattacharyya, Nemera Mamo

Jun 2015

The 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 (giant and major) oil and mineral 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.

JEL Codes: D72, O11

Keywords: Resource discovery; Conflict onset; Conflict incidence; Conflict intensity

Reference: 159

Individual View

Authors: Samuel Wills

Mar 2015

How should capital-scarce countries manage their volatile oil revenues? Existing literature is conflicted: recommending both to invest them at home, and save them in sovereign wealth funds abroad. I reconcile these views by combining a stochas- tic model of precautionary savings with a deterministic model of a capital-scarce resource exporter. I show that both developed and developing countries should build an offshore Volatility Fund, but refrain from depleting it when oil prices fall because it cannot be known when, or if, they will rise again. Instead, consump- tion should adjust and only the interest on the fund should be consumed. To do this I develop a parsimonious framework that nests a variety of existing results as special cases, which I present in four principles: for capital-abundant countries, i) smooth consumption using a Future Generations Fund, and ii) build a Volatility Fund quickly, then leave it alone; and for capital-scarce countries, iii) consume, in- vest and deleverage, and iv) invest part of the Volatility Fund domestically, then leave it alone.

JEL Codes: D81, E21,F43,H63,O13,Q32,Q33

Keywords: Natural resources, oil, volatility, sovereign wealth fund, precautionary saving, capital scarcity, anticipation

Reference: 154

Individual View

Authors: Rick Van der Ploeg, Mark Kaga, Cees Withagen

Mar 2015

Industria 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 monopoly power and sets the oil price to steal some of Industria’s climate rent. We analyze the relative speeds of oil extraction 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 find 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.

JEL Codes: C73, H30, Q32, Q37, Q54

Keywords: exhaustible resources, Hotelling rule, efficiency, carbon tax, climate rent, differential game, open-loop Nash equilibrium, subgame-perfect Nash equilibrium, HARA production functions

Reference: 155

Individual View

Authors: James Cust, Stevem Poelhekke

Mar 2015

Whether 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 increasingly turning to within-country evidence to deepen our understanding of the potential drivers, and outcomes, of resource wealth 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 datasets which provide greater disaggregation of economic responses and exogenous identification of impacts.

This paper surveys the literature on these studies of local and regional effects of natural resource extraction. We discuss data availability 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.

Keywords: survey, mining, Dutch disease, identification, spillovers

Reference: 156

Individual View

Acceleration 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 set too low, the second-best future carbon tax is set below the first best too 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 price carbon too low are analysed in a three-country model of the global economy.

JEL Codes: D62, D90, H22, H23, Q31, Q38, Q54

Keywords: unilateral carbon taxes, intertemporal terms of trade, tax incidence, Green Paradox, asset tax, carbon leakage, second best, global altruism, unburnt fossil fuel

Reference: 157

Individual View

Authors: Michel Beine, Serge Coulombe, Wessel Vermeulen

Jan 2015

This 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 `a 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 regions. 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.

JEL Codes: F22, O15, R11, R15

Keywords: Natural Resources, Dutch Disease, Immigration, Mitigation Effect

Reference: 151

Individual View

Authors: Alexander Naumov

Jan 2015

We 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 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; (ii) positive shocks to drilling activity affect the oil price negatively; (iii) shocks to costs of drilling do not have a permanent effect on the price of oil.

JEL Codes: Q31

Keywords: Natural Resource Extraction, Crude Oil Price, Upstream Cost

Reference: 152

Individual View

Authors: Rabah Arezki, Valerie A Ramey, Liugang Sheng

Jan 2015

This 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 aggregates 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.

JEL Codes: E00, F3, F4

Keywords: news shocks, current account, saving, investment, employment, oil, discovery

Reference: 153

Individual View

Authors: J-F Carpantier, W N Vermeulen

Nov 2014

This 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 government policy.

JEL Codes: E21, E62, F39, G23, H52

Keywords: Sovereign Wealth Fund, Institutions, natural resources

Reference: 148

Individual View

Authors: Alexander James

Oct 2014

A surprising feature of resource-rich economies is slow growth. It is often argued that natural-resource production impedes development by creating market or institutional failures. This paper establishes an alternative explanationa slow-growing resource sector.  A declining resource sector is disproportionately reflected in resource-dependent countries. Additionally, there is 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.

JEL Codes: Q2; Q3; O1

Keywords: Resource Dependence; Economic Growth; Resource Curse

Reference: 147

Individual View

Authors: Lucas Bretschger, Christos Karydas

Aug 2014

We 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.

JEL Codes: Q54, O11, Q52, Q32

Keywords: Non-Renewable Resource Dynamics; Pollution Di usion Lag; Optimum Growth; Clean Energy; Climate Policy

Reference: 144

Individual View

Authors: Antoine Bommier, Lucas Bretschger, Francois Le Grand

Aug 2014

The paper proves the existence of equilibrium in nonrenewable resource markets when extraction costs are non-convex and resource storage is possible.  Inventories atten the consumption path and eliminate price jumps at the end of the extraction period. Market equilibrium becomes then possible, contradicting 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.

JEL Codes: Q30, C62, D92, D41

Keywords: Exhaustible resources, nonconvex extraction cost, equilibrium existence, resource storage

Reference: 146

Individual View

Authors: Lucas Betschger, Alexandra Vinogradova

Aug 2014

Climate 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 consumption, 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 justifes more stringent climate policies as compared to the expectation-based scenario. We subsequently 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 $71 per ton carbon.

JEL Codes: O10, Q52, Q54

Keywords: Climate policy, uncertainty, natural disasters, endogenous growth

Reference: 145

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