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.

1. 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.


2. Hedging of export proceeds – Simply buy insurance against low oil prices, like the Government of Mexico has done. Easy.


3. 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.


4. 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.


5. 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.


6. Transparent commodity funds – The challenge is in the transparent part.


7. Lump-sum distribution – Last but not least, my favourite. Just give people the money.

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.

The right attitude

I just started Gregory Clark's A Farewell to Alms, which I was already excited about, largely because Tyler Cowen reviewed and liked it and wrote a series of "Book Forum" posts, which I intend to follow in parallel.

I'm further encouraged by this nicely-worded sentiment from the preface.

Doubtless some of the arguments developed here will prove over-simplified, or merely false. They are certainly controversial, even among my colleagues in economic history. But far better such error than the usual dreary academic sins, which now seem to define so much writing in the humanities, of willful obfuscation and jargon-laden vacuity. As Darwin himself noted, "false views, if supported by some evidence, do little harm, for every one takes a salutary pleasure in proving their falseness, and when this is done, one path towards error is closed and the road to truth is often at the same time opened." Thus my hope is that, even if the book is wrong in parts, it will be clearly and productively wrong, leading us toward the light.

This is a great attitude - for a scholar, for a book, and definitely for a blog.

African growth rates and oil

Looking at this chart from Roving Bandit, the first thing that jumps out at me (by design, to be fair) is that oil countries pretty much straddle the spectrum.
Which of these is sustainable is of course another question, and one on which I will soon post a new point of view I recently read.

WWID: Not growth policy?

In Chapter 6 of What Works in Development, Abhijit Banerjee of JPAL recaps the ineffectual history of research on economic growth and concludes that "it is not clear that the best way to get growth is to do growth policy of any form." Perhaps it would be better, he says, to focus on keeping our house in order - maintaining social stability and building human capital - so that we can take advantage of the growth "spark" when it occurs.

I sympathize with commentator Peter Klenow, a micro-oriented macroeconomist, who responds:

Beyond accounting, macroanalysis has contributed a slew of robust correlations that help guide microexperimental work. Correlation need not imply causality, of course, but certainly does not rule it out... It is up to theorists and microexperimentalists to flesh out the causal mechanisms behind these correlations.

Bill Easterly - editor of the book, and reserving the last word for himself - makes three main points:

1. Macroanalysis established the negative effects of extreme policies and outcomes (e.g. land expropriation and hyperinflation in Zinbabwe); it was only in cases of moderate variation where the conclusions broke down completely.


2. "Macroeconomists have earned their ignorance the hard way," largely "because the demand for explanations of growth was so intense."


3. RCTs "do not really offer a serious alternative to how to achieve 'growth success'", because the small interventions they test in specific situations could never scale up to meaningful increase growth on a macro scale.
   

I think Easterly is being too pessimistic here, and Klenow is closer to the mark - the right answer has to be a middle ground where RCTs are one of many tools in the toolkit, microexperimental work complements and is informed by macroanalysis, and we keep on trying to crack the mystery of growth, counter to Banerjee's skepticism that we ever can.

WWID: Recognizing high dimensionality

In Chapter 6 of What Works in Development, Ricardo Hausmann makes, in commentator Ross Levine’s words, an “imaginative, provocative, and substantive” argument that much work on economic growth willfully ignores the complexity inherent in the classical development formula (“peace, easy taxes, and justice” in Adam Smith’s words, or trade openness, sound finances, and property rights, to paraphrase Larry Summers). Providing the right public inputs, particularly regulation, to enable a nation to develop new productive capabilities is a very “high dimensional” problem, which Hausmann compellingly illustrates with the myriad policy elements required to enable an efficient real estate market.

The necessary information to determine optimal policies is highly dispersed, Hausmann continues, and in such a context central planning is bound to fail. Unlike a product market, the market for public inputs lacks mechanisms to aggregate information (prices), incentivize action (profits), and allocate resources (capital markets). Hausmann then hypothesizes that in the United States, the open political architecture allows lobbyists may play a market-making role in the provision of public inputs. (Not without some rent-seeking, of course, but this is a necessary tension “in the absence of an omniscient and benevolent social planner.”)

How, then, to incorporate broad input into the provision of public inputs in developing countries? He doesn’t have all of the answers, and neither do commentators Nava Ashraf (who suggests looking to social enterprise for systems) and Levine (who uses the example of racism to argue that institutions themselves evolve in response to underlying incentives, and their change cannot be mandated independently of those incentives). But I find the question alone quite profound.

Very interesting stuff… I will have to let it marinate for a while, and hope to have further reflections at some point.

WWID: An Experimental Approach

In Chapter 2 of What Works in Development, Dani Rodrik (who has sadly stopped blogging) argues that 1), we shouldn't consider RCTs superior to other types of studies, because while they have strong internal validity they often have weak (and unacknowledgedly so) external validity (and other studies can be stronger on external validity), and 2), there is a philosophical convergence on "experimentalism" between micro development economists (e.g. the randomistas) and macro development economists, who now think much more in terms of diagnostics and testing to find binding constraints on economic growth than the previous worldview which came with an a priori vision of what works (e.g. the Washington Consensus).

Then there are two short commentaries:

• Sendhil Mullainathan sees a divergence instead of a convergence (with the macro guys willing to make sweeping recs, and the micro guys only willing to make "guarded statements" about very specific interventions)


• Martin Ravaillon argues that the internal validity of RCTs is less ironclad than advertised because of omitted variables like selective participation, other actors (e.g. gov't shifts resources toward control villages, etc.)

(Interim) book review: What Works in Development

I am almost finished reading What Works in Development; it is not light reading, but quite interesting and worthwhile. The format with two commentaries on each essay made each discussion much richer. So far I have particularly enjoyed two chapters.

Chapter 2, The New Development Economics: We Shall Experiment, But How Shall We Learn? (Dani Rodrik)

Chapter 6, The Other Invisible Hand: High Bandwidth Development Policy (Ricardo Hausmann)

Update: Chapter 7, Big Answers for Big Questions: The Presumption of Growth Policy (Abhijit Banerjee) is also worth a synopsis. Overall I found the volume quite good - Todd Moss's African Development remains my favorite synthesis of the history, issues and actors in development, but this gets the reader much closer to the leading minds in and cutting edge of development research (and the "civil war" allegedly engulfing them).

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:

- 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 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.

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.

Gini coefficient is falling

Following up on my post and the comments discussion on how successful the last decade has been, I was very impressed to see how far the worldwide Gini coefficient has fallen:


If you assume it does not come at the cost of slower overall economic growth (a very relevant caution when formulating economic policy), I'd argue that higher equality of income is unambiguously good.

There are more charts and analysis here. Hat tip to Marginal Revolution.

Not such a bad decade after all

The Roving Bandit excoriates Paul Krugman for his America-centric pessimism about the last decade:

Via The Monkey Cage, apparently Paul Krugman has been whining about the "naughties" and how nothing good happened in America. This is why I don't read Paul Krugman. He focuses too much on America.

Erm Paul, the continuation of the WORLD'S GREATEST ANTI-POVERTY PROGRAMME EVER? NO? NOT GOOD ENOUGH FOR YOU?!!

This resonates with the interesting recent writing and forthcoming book by Charles Kenny on "The Success of Development", which argues that aside from growing income (a surprisingly intractable problem), development has succeeded admirably in the last fifty years:

This book explores the bad news and the good news about development. It lays out the evidence on growing income disparities between the global rich and the global poor that are at the heart of a narrative of crisis. And it chronicles the failed search for a silver bullet to overcome economic malaise.

But it also discusses the considerable successes of development. Not least, the evidence for any country being stuck in a Malthusian nightmare is threadbare. The book points to global progress in health, education, civil and political rights, access to infrastructure and even access to beer. This progress is historically unprecedented and has been faster in the developing world than in the developed.

Amartya Sen would of course be proud of this broader conception of what development really means.

See also Tyler Cowen on the "Fruitful Decade for Many in the World" (especially "China, India, Indonesia, Brazil, and much of Africa"), and via his MR blogging partner Alex Tabarrok, this post on and list of African successes:

In recent years, a broad swath of African countries has begun to show a remarkable dynamism. From Mozambique’s impressive growth rate (averaging 8% p.a. for more than a decade) to Kenya’s emergence as a major global supplier of cut flowers, from M-pesa’s mobile phone-based cash transfers to KickStart’s low-cost irrigation technology for small-holder farmers, and from Rwanda’s gorilla tourism to Lagos City’s Bus Rapid Transit system, Africa is seeing a dramatic transformation. This favorable trend is spurred by, among other things, stronger leadership, better governance, an improving business climate, innovation, market-based solutions, a more involved citizenry, and an increasing reliance on home-grown solutions. More and more, Africans are driving African development.

An equal right to pollute?

Happy New Year! I'll kick off 2010 with an interesting idea from Bono, via Owen Barder:

An Equal Right to Pollute (and the Polluter-Pays Principle)
One smart suggestion I’ve heard, sort of a riff on cap-and-trade, is that each person has an equal right to pollute and that there might somehow be a way to monetize this. By this accounting, your average Ethiopian can sell her underpolluting ways (people in Ethiopia emit about 0.1 ton of carbon a year) to the average American (about 20 tons a year) and use the proceeds to deal with the effects of climate change (like drought), educate her kids and send them to university. (Trust in capitalism — we’ll find a way.) As a mild green, I like the idea, though it’s controversial in militant, khaki-green quarters. And yes, real economists would prefer to tax carbon at the source, but so far the political will is not there. If it were me, I’d close the deal before the rising nations want it backdated.

This sounds attractive, but it shares problems with the "carbon intensity" pledges that China has offered. For overall emissions to be reduced (or even levelled), the "average" right to pollute would be quite low (I'm guesstimating 1-4 tons a year based on relative rich/poor populations in the world), so it requires Americans and other rich-world citizens to pay for virtually all of their pollution... except unlike cap-and-trade, where the money goes to their governments (and much of it ends up rebated), all of that money goes to poor countries. Once that math is laid out... how exactly is this more sellable than what failed to be agreed upon in Copenhagen?

Oil efficiency: Now what?

This is old, but too important to let pass without mention. Morgan Downey summarizes a new paper with a disturbing punchline (summary is Downey's, emphasis is mine):

Dargay/Gately find that much of the efficiency in oil consumption in OECD countries since 1970 was due to oil being effectively phased out as an electricity generation fuel. The oil saved from electricity generation was used in transport. Transport demand for oil facilitates economic growth and is thus highly correlated with economic growth.

Now that this shift away from oil being used for electricity generation has been completed, growth in Total oil demand is going to be much more highly correlated to economic growth than it has been since 1970. Because of this, one cannot use growth in Total oil demand since 1970 as a predictor of future oil demand growth. Instead, growth in Total oil demand is likely to be higher than the 1970-today period.

Oil demand in 2009 is just over 84 million barrels per day (mbd). A major reason for the difference between the Dargay/Gately demand number by 2030 of 134 mbd and the IEA forecast of 105 mbd is due to Dargay/Gately incorporating the fact that the one off switching effect from electicity use to transport use cannot be repeated. Dargay/Gately are not stating that supply of 134 mbd or 105 mbd will be available. They are simply looking at the demand side of the equation and saying that if economic and population growth progresses as the OECD forecasts then the oil demand this implies is likely to be a lot higher than the IEA's forecast of 105 mbd.

The conclusion I take from Dargay/Gately's paper is that if supply is not available to meet this 134 mbd oil demand then economic growth cannot progress as the OECD forecasts and/or an extremely large and unprecedented change in the level of oil consumption efficiency will have to take place between now and 2030. This efficiency will likely be driven by high oil prices.

Given how hard it was for the world to reach 90 mbd even under record prices in 2008, a 50% increase in supply (to 134mbd) by 2030 seems far-fetched... so we will have to see how far innovation (in efficiency and alternate transportation energy sources) can take us.

The West's carbon emissions are irrelevant

This is Richard Muller in the WSJ, via Energy Outlook. His point is essentially that:

Every 10% cut in the U.S. is negated by one year of China's growth.

But the bottom line is that 80% cuts in U.S. emissions will have only a tiny benefit.

It's a case which make sense numerically, but that doesn't mean developing countries will see it that way.

The limits of green energy

I heartily agree with Geoff Styles:

In the last year or so the rationale for renewable energy has evolved from emphasizing mainly energy security and climate change to focusing on the creation of "green jobs" and the development of an industry that many perceive as the "next big thing": a new global growth wave along the lines of information technology and telecoms. Unfortunately, neither of these newer justifications withstands serious scrutiny.

Read here for why. Here are my posts on green jobs.

What is Buffett betting on?

Everyone's talking about Warren Buffett's big $26 billion acquisition of Burlington Northern Santa Fe railroad, which the Wizard himself characterized thus:

“It’s an all-in wager on the economic future of the United States,” he said in a written statement. “I love these bets.”

Dig a bit deeper, and there are a few other angles. Green Sheet sees it as a bet on government infrastructure spending, especially on carbon-friendly railroad. Environmental Capital notes the same, but also uncovers a fascinating tidbit:

About half of Burlington Northern Santa Fe’s cargo is coal, from the huge coal fields around Wyoming, notes Reuters. Coal accounts for one-quarter of BNSF’s revenue. And coal accounts for about half of the electricity generated in the U.S. today.

That makes Mr. Buffett’s deal basically a massive bet on coal, argues Brad Plumer at The Vine.

Economic growth is good for energy and thus for coal... unless cap-and-trade or some other carbon price comes into effect, in which case coal will take a big hit. I would be very curious what Buffett thinks the net impact of a bill like Waxman-Markey would be on his newest and biggest acquisition.

4.6 barrels per year

Morgan Downey at Scarce Whales brings us this fascinating chart:

He explains of the curious stability of per capita oil consumption since 1982 as the shift to open markets:

Why has per capita consumption been so stable since 1982 having grown at an increasing pace for the prior 120 years (chart 2 again)? The answer is that a new method of rationing demand emerged in 1983: benchmark pricing linked to transparent free liquid markets (see chapter 1 of Oil 101). Free markets and necessarily volatile oil price became the adjusting factor matching available supply to demand.

This may be true in part, but I am still surprised - economic growth tends to increase per capita consumption of resources even in the presence of free markets (which we can see with oil):

To put the global average of 4.6 barrels of oil consumption per year in perspective, the number of barrels consumed per person in 2008 in India was 0.9, China 2.2, Brazil 4.6, Germany 11.1 and the US 23.3.

Since global GDP has grown quite a bit since 1982 (I would guess faster than population), I would have expected per capita consumption of oil to rise accordingly. In other words, I would have expected the free market to match supply and demand, but to meet higher global demand. Have efficiency gains completely offset this? I'd be interested to hear if anyone has a good explanation.

Wrinkles in measuring GDP from space

At Roving Bandit ("Probably the best economics blog in southern Sudan"), the Skeptical Bandit lists some good objections to the catchy idea of measuring GDP from space (which I mentioned here). His points about accuracy are well-taken; his point about extractive industries not showing up is theoretically on point, but if we care about economic growth as it contributes to human welfare, I wonder whether this is actually a better measure than GDP (after all, if the wealth from natural resources isn't finding its way into the community, is that really GDP we want to be conuting?).

The original MR post also cites the WSJ saying that the effect of resources do actually show up in pseudo-controlled situations:

They also noted how data from night lights can be focused to provide data on a local level. In Southern Madagascar large deposits of rubies and sapphires were discovered in late 1998 near the towns of Ilakaka and Sakaraha, leading to an economic boom. But the data from the satellites tell the story of where the benefits were felt most deeply. “Over the next five years there was a sharp growth in the number of pixels for which light is visible at all, and in the intensity of light per pixel,” the economists said. “The other town visible in the figure, Ihosy, shows no such growth. If anything, Ihosy’s light gets smaller and weaker, as it suffers in the competition across local cities for population.”

Agricultural yield upside and population growth

This image will come out far too small on the blog, so see the full-size original connected to this short Atlantic piece titled "The Next Breadbasket?", which gets some major messages right:

Sub-Saharan Africa, despite its long history of food insecurity, is one place where yields could increase dramatically; agricultural basics such as good seed and fertilizer would go far in a region that the green revolution bypassed. “We could increase yields in sub-Saharan Africa threefold tomorrow with off-the-shelf technology,” says Kenneth Cassman, a well-regarded agronomist who researches potential yields. The problem is the continent’s long history of corruption, poor infrastructure, and lack of market access.

Agricultural investment in Africa—and in a few other high-potential places such as Ukraine and Russia—may be the world’s best bet for keeping food plentiful and cheap. This investment could bring other benefits too; the World Bank estimates that agricultural development is twice as effective at reducing poverty as other sources of growth.

However, the article's reference to Paul Ehrlich (of The Population Bomb) goes off track. Contrary the predictions of Ehrlich (and Thomas Malthus, for that matter), population growth has been slowing as fertility rates drop off with higher wealth; most experts now predict human population will stop growing some time this century. The inexorable driver of demand growth is increasingly per capita consumption, which rises with economic development (mainly calories and meat for food, but also energy, water, etc.). What is really scary is not 9 billion people, but 9 billion people with the environmental footprint of the average American.

And the map itself is a good idea, but some of its numbers seem funny to me, which makes me doubt its rigor. I buy that Sub-Saharan Africa and Eastern Europe are low, but not that Australia is equally low. I don't think India should be higher than Latin America - India's farmers are notoriously constrained for inputs and credit - and I find it very hard to believe that the U.S., whose industrial monocultures produce the best per-acre average yields in the world, is worse than Myanmar. I like the concept of the map, but the execution seems sloppy.

Natural resources and economic growth

Some striking economic facts on China, India and Latin America from NextBillion.net:

In 1980 the Latin American and the Caribbean (LAC) economy was twice as large as that in China and India. By 2004, LAC was 20% smaller than China and India. The fast economic growth of these two countries was accompanied by a speedier integration in world markets, while LAC stayed behind. Today, China’s and India’s combined share of world exports is 50% larger than LAC’s share, while in 1990 the opposite was true.

What's striking is that this reversal took place in the context of Latin America being rich in natural resources, and China and particularly India being resource-poor - a stark macro-level illustration that resource wealth all too often does not translate into economic prosperity.

Measuring economic activity from space

Via Marginal Revolution, this creative paper shows that, in Africa, "exogenous agricultural productivity shocks (high rainfall years) have substantial effects on local urban economic activity." This is good news for the latest and greatest agricultural development agenda from the powers that be.