These are all valid ideas, but in many cases (e.g. #4) the devil is really in the implementation (or the political economy, if you prefer). I'm a fan of the more thorough treatment in Escaping the Resource Curse, although from a quick glance it looks like this paper covers much of the same ground and sources in a more concise fashion.
- Indexation of oil contracts – Contracts between oil companies and governments could easily (but usually don’t) have explicit clauses to deal with global price volatility - sharing the downside and upside risk.
- Hedging of export proceeds – Simply buy insurance against low oil prices, like the Government of Mexico has done. Easy.
- Denomination of debt in terms of oil – i.e. promise to repay a quantity of oil rather than a dollar amount. This insures the borrowing government and transfers the price-risk to the lender.
- Chile-style fiscal rules – Chile managed to save its copper boom and spend its way through the global recession by having an independent fiscal panel make assessments of the medium-term price and output gap – and tell the government how much they were allowed to spend.
- A monetary target that emphasizes product prices – If the Central Bank has greater political independence than government coffers, monetary policy could be geared towards building up higher-than-otherwise-desirable stocks of foreign currency reserves – in order to ensure the savings aren’t raided.
- Transparent commodity funds – The challenge is in the transparent part.
- Lump-sum distribution – Last but not least, my favourite. Just give people the money.
Showing posts with label Escaping the Resource Curse. Show all posts
Showing posts with label Escaping the Resource Curse. Show all posts
7 ways to overcome the resource curse
The Roving Bandit summarizes a new survey article by Jeffrey Frankel highlighting seven ways to overcome the resource curse.
Does the oil curse exist?
The oil curse is a generally accepted truth - there are is no shortage of anecdotes from countries with oil (e.g. Brazil, Nigeria) and concern from those who might discover it (e.g. Greenland). The comparative growth trajectories of Latin America and China/India draw a striking (if not statistically rigorous) contrast between natural resource wealth and economic growth.
But at Aid Watch, Adam Martin questions whether the curse does in fact stand up to analytical scrutiny. He argues that empirical work on the oil curse confuses abundance with dependence and cites three recent papers that show that "even natural resource dependence does not undermine democratization." He later clarifies for commenters:
But at Aid Watch, Adam Martin questions whether the curse does in fact stand up to analytical scrutiny. He argues that empirical work on the oil curse confuses abundance with dependence and cites three recent papers that show that "even natural resource dependence does not undermine democratization." He later clarifies for commenters:
- I’m not claiming there are no ill effects associated with natural resources. I’m saying these studies failed to find evidence that resources systematically effect democracy, growth, or development, and most of the popular studies that do have fundamental flaws.It's quite an interesting and counterintuitive finding. I am inherently skeptical of cross-country regressions, especially when they run counter to things that so many people have seen firsthand in practice. But it is good to keep an open mind, and I applaud Martin for arguing the other side of the story.
- It’s also not the case that these studies (or I) claim that there are NO countries that fit the Curse story, but that it’s not the systemic phenomenon other studies had argued for.
Book review: Poisoned Wells
I just finished reading Poisoned Wells: The Dirty Politics of African Oil, by Nicholas Shaxson. I was turned on to the book by Chris Blattman.
Overall, I recommend the book because it is interesting reading (although not so highly that you should throw down whatever you're reading now and rush to the nearest Barnes and Noble). There is a lot of interesting ground to cover with African oil, and the author's 15+ years of journalism on the subject have made him very, very deep. He has a lot of interesting details and anecdotes to supplement the overall historical narrative (which is not new).
He has some conspiracy theories, but they are generally plausible and not too outrageous. He's critical of oil companies, but not so blinded by hatred that he can't take a nuanced view, which I appreciated. On the other hand, I was often irritated by the feeling that he was cherry-picking facts and stories to tell his tale in a very journalistic and non-rigorous way.
At the end of his book, he commendably attempts to move beyond criticism to suggest three "radical surgeries" that would help "draw the poison.
If you're interested in a preview, check out this chapter on the recently deceased Omar Bongo, who ruled Gabon as president for 42 years (Chris Blattman also blogged this a few months ago). This short interview in Harper's also covers most of his main points in a concise way.
Overall, I recommend the book because it is interesting reading (although not so highly that you should throw down whatever you're reading now and rush to the nearest Barnes and Noble). There is a lot of interesting ground to cover with African oil, and the author's 15+ years of journalism on the subject have made him very, very deep. He has a lot of interesting details and anecdotes to supplement the overall historical narrative (which is not new).
He has some conspiracy theories, but they are generally plausible and not too outrageous. He's critical of oil companies, but not so blinded by hatred that he can't take a nuanced view, which I appreciated. On the other hand, I was often irritated by the feeling that he was cherry-picking facts and stories to tell his tale in a very journalistic and non-rigorous way.
At the end of his book, he commendably attempts to move beyond criticism to suggest three "radical surgeries" that would help "draw the poison.
- "Cut our energy use, drastically and urgently." This one is hard to argue with in theory, but tougher to implement in practice. He suggests increasing fuel taxes and cutting other taxes to compensate. (Note: another revenue-neutral solution would be to tax-and-rebate; I really like the theoretical elegance of this solution, which is like turning the tragedy of the commons on its head.)
- Crack down on tax havens for dirty money. This one is also nice in theory but hard in practice. Shaxson believes that "much of the problem could be eliminated with a few well-aimed legislative strokes", like criminalizing receipt of proceeds of illicit activity by U.S. banks, and forbidding banks from operating in jurisdictions which are beyond the law. I don't know enough to judge these measures on feasibility and effectiveness.
- Distribute oil revenues directly to citizens. This final and most audacious suggestion is the one I'm most uncomfortable with. The idea has pedigree (it was proposed by a Columbia professor in an IMF working paper in 2003). I see how it could reduce corruption, by limiting the opportunities for distributional funny business by politicians. But it basically gives up on what should be the core goal of resource extraction - translating a country's physical, non-productive wealth (like oil or metals or gems) into economically productive capital (physical or human). Directly distributed oil revenues would likely be funneled largely into consumption, rather than investment; in addition to terrible inflation, this would fundamentally squander the opportunity to use resource wealth on public goods and capital formation. Yes, corruption makes this very hard, and attempts to mimic Norway's success with its resource wealth fund have mostly fallen short; but that alone is not a good enough reason to stop trying.
Finding oil is like dumping itching powder from helicopters, aggravating existing divisions.He also brings to life the complexity of corruption, and how the black and white Western view is very difficult to reconcile with the African political and cultural context (and is often resented as a form of ideological colonialism).
If you're interested in a preview, check out this chapter on the recently deceased Omar Bongo, who ruled Gabon as president for 42 years (Chris Blattman also blogged this a few months ago). This short interview in Harper's also covers most of his main points in a concise way.
Brazil must beat corruption, not Dutch disease
I've already posted twice on Brazil's oil today, so I promise this is the last one. I've been critical of the media coverage overall, but I liked this Reuters analysis which concluded that of the elements of the resource curse, Brazil should worry more about corruption and less about Dutch disease.
Also, Forbes has a good little "factbox" on other countries' experience with the oil curse. Basically Norway made out fine, and no one has been able to replicate their success since.
Also, Forbes has a good little "factbox" on other countries' experience with the oil curse. Basically Norway made out fine, and no one has been able to replicate their success since.
PetroSal's raison d'être
The concept has been much-discussed, but it looks like now the government of Brazil is moving forward with plans to create a separate state oil company called Petrosal to control its heralded potential oil reserves in the pre-salt geological layer of the ocean off the Brazilian coast.
I haven't seen much understanding in the English-speaking media of the purpose of PetroSal. It will not be an operating company (Petrobras is already among the best in the world at deepwater exploration and production, private oil majors included). Rather, it will be a separate legal and financial entity that will "own" the reserves and interface - legally speaking - with foreign oil majors interested in the pre-salt area.
Why is this necessary? For one, Petrobras is publically traded, and while the government controls voting through golden shares, any profits to Petrobras would be distributed widely to international investors, rather than kept entirely within Brazil.
Second, there are little-understood tax implications. Under existing contracts, royalties for offshore accrue mainly to the states of São Paulo and Rio de Janeiro - two of the richest states in Brazil. President Lula's goal is to use the proceeds to fund massive social spending to rise the standard of living in the poorest parts of Brazil, and a new legal structure for oil royalties would channel more of the proceeds to the federal government.
This points to a third reason for Petrosal, which in my mind is a good one - separating social goals from business ones. We've seen in Venezuela how Chavez has used PdVSA as his private piggy bank for social programs, and its oil-related investments suffer as a result. This has hit Venezuela's overall oil production; Petrosal could be a step in the right direction to avoid that fate.
The creation of Petrosal and other new rules alone will not be enough to avoid the resource curse, which as Moises Naim points out in the FT can result from both macroeconomic factors (Dutch disease) and political ones (corruption and lack of government accountability). But I remain optimistic that Brazil will be able to walk the delicate line between attracting enough foreign investment in exploration and giving away too many of the proceeds. As for the efficacy of the resulting social spending, on that only time will tell.
P.S. For anyone interested in the many manifestations and implications of "the resource curse", I highly recommend Escaping the Resource Curse, a collection of essays from diverse points of view (academic, government, legal, business) on the resource curse. Oh, and both Joe Stiglitz and Jeff Sachs are editors.
P.P.S. Apparently the markets didn't like the announcement too much, shaving $7bn off of Petrobras' ~$180bn market cap. I'm not convinced the market really understands what's going on here, though. Bloomberg certainly doesn't.
I haven't seen much understanding in the English-speaking media of the purpose of PetroSal. It will not be an operating company (Petrobras is already among the best in the world at deepwater exploration and production, private oil majors included). Rather, it will be a separate legal and financial entity that will "own" the reserves and interface - legally speaking - with foreign oil majors interested in the pre-salt area.
Why is this necessary? For one, Petrobras is publically traded, and while the government controls voting through golden shares, any profits to Petrobras would be distributed widely to international investors, rather than kept entirely within Brazil.
Second, there are little-understood tax implications. Under existing contracts, royalties for offshore accrue mainly to the states of São Paulo and Rio de Janeiro - two of the richest states in Brazil. President Lula's goal is to use the proceeds to fund massive social spending to rise the standard of living in the poorest parts of Brazil, and a new legal structure for oil royalties would channel more of the proceeds to the federal government.
This points to a third reason for Petrosal, which in my mind is a good one - separating social goals from business ones. We've seen in Venezuela how Chavez has used PdVSA as his private piggy bank for social programs, and its oil-related investments suffer as a result. This has hit Venezuela's overall oil production; Petrosal could be a step in the right direction to avoid that fate.
The creation of Petrosal and other new rules alone will not be enough to avoid the resource curse, which as Moises Naim points out in the FT can result from both macroeconomic factors (Dutch disease) and political ones (corruption and lack of government accountability). But I remain optimistic that Brazil will be able to walk the delicate line between attracting enough foreign investment in exploration and giving away too many of the proceeds. As for the efficacy of the resulting social spending, on that only time will tell.
P.S. For anyone interested in the many manifestations and implications of "the resource curse", I highly recommend Escaping the Resource Curse, a collection of essays from diverse points of view (academic, government, legal, business) on the resource curse. Oh, and both Joe Stiglitz and Jeff Sachs are editors.
P.P.S. Apparently the markets didn't like the announcement too much, shaving $7bn off of Petrobras' ~$180bn market cap. I'm not convinced the market really understands what's going on here, though. Bloomberg certainly doesn't.
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