No oil wars in Latin America?

Via Chris Blattman, resource curse academic Michael Ross has a new paper which finds that in Latin America, unlike the rest of the world, oil wealth seldom leads to secessionist conflicts.

In the rest of the world, oil heightens the danger of both “governmental” conflicts (over control of the existing state) and secessionist conflicts (to form new states); but in Latin America, oil is only linked to governmental conflicts. This is not because Latin American petroleum has unusual properties, but because the region is uniquely “secession-proof”: there have been no separatist conflicts in Latin America for over a century. I explore two possible explanations for this anomaly: the region’s long history of sovereign statehood, which may have caused national borders to become more widely-accepted; and obstacles to the mobilization of indigenous groups along ethnic lines.

As a few of Chris' commenters point out, I think the obvious counterexample is Bolivia, where there are genuine and long-standing secessionist (and ethnic) tensions between the poorer, more indigenous highlands and the wealthier, whiter lowlands (where, incidentally, most of the natural gas is to be found). It is to be seen how these ultimately play out.

It also reminds one how sample size is an such obstacle to any sort of meaningful statistical analysis in international relations or development.

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.

Afghanistan's great hope?

Apparently Afghans are quite excited about the recent $1 trillion estimate of the value of the country's mineral reserves.

In a news conference primarily with Afghan reporters, President Hamid Karzai’s spokesman, Waheed Omar, called the report “the best news we have had over many years in Afghanistan.”

“This will improve drastically the lives of the Afghan people, the economic status of the Afghan people and to see that positively, that will unite the Afghan people,” he said.

It sounds like an awful stretch to me. Leave aside for a moment that the investment preconditions like physical security, governance infrastructure are far from the level required to attract significant private capital, as FP Passport points out. The more fundamental question is how often (other than notable exceptions) has mineral wealth really translated to stability, political unity and sustainable economic growth in developing countries?

Hard to be transparent about oil when...

... you don't know how much is being produced:

The Nigeria Extractive Industry Transparency Initiative (NEITI) has described the records of the country’s crude production and export as unclear, saying that after 58 years of oil production, the country does not know exactly the quantity it produces.

Speaking at the presentation of a research report on the Nigeria Extractive Industry in Abuja weekend, Chairman of the Board of NEITI, Prof. Asisi Asobie, said despite all the inroads made by the country to expand operations in the oil industry, it had not been able to get operators to tell the truth about the actual oil volumes produced.

“After 58 years of producing oil, Nigeria does not know how much was being produced. It is regrettable that we have not been able to get oil companies to tell Nigerians exactly what they produce. The sector is shrouded in secrecy,” he said.

I find it quite surprising the that the government wouldn't be able to strong-arm this information from oil companies who depend entirely on the continued legitimacy of their concessions. Have they tried?

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.

A mining success story

To add to the recent slew of thoughts on the resource curse, here is a micro-level success story which has been verified with academic rigor:

This paper studies the impact of Yanacocha, a large gold mine in Peru, on the local population. Using annual household data from 1997 to 2006, we find robust evidence of a positive effect of the mine's demand of local inputs on real income. The effect, an average income increase of 1.7% per 10% additional mine's purchases, is only present in the mine's supply market and surrounding areas. We also find evidence of improvements on measures of welfare and reduction of poverty. We examine and rule out that our results are driven by increased public expenditure associated to the mining revenue windfall. Using a spatial general equilibrium model, we interpret these results as evidence of net welfare gains generated by the mine's backward linkages and its multiplier effect.

It is good to inform the macro-level resource curse debate with positive anecdotes like this one, to balance the many negative ones.

Via Roving Bandit, who also celebrates his one-year blogiversary. With so many good bloggers only one year (or two years) old, I find the robustness and vibrancy of the blogosphere simply astounding. Can you imagine what it will be like after another year, or five, or ten?

Duncan Green on resource curse

Oxfam’s Duncan Green reviews two new papers on natural resources and development, one by the World Bank and one by his own shop. He is harsh on the World Bank:

‘High oil and mineral prices mostly have a negative impact on long-run growth in exporting countries with bad governance. They have a significant positive impact on growth in exporters with good governance. This finding suggests that continued high commodity prices in the next few years could provide valuable resources to accelerate economic and social development in commodity exporting countries with good policies and governance.’

At this point alarm bells started to ring for me. Natural resources and governance are not independent variables – the interesting question is the impact of natural resources on governance itself. Countries are not born with either good or bad governance, they evolve, not least because of the influence of ‘money coming out of the ground’.

But that is nothing compared to this paper’s blind spot on environmental constraints. An entire paper on commodities, including agriculture, in which the only reference to climate is ‘investment climate’ is really quite an achievement... And nothing on natural resource exhaustion either... Other bits of the Bank are doing good work on climate change, but it doesn’t seem to have reached the authors.

His best point, responding to the Oxfam paper, is that the necessary domestic checks and balances and monitoring can become a much bigger tent than just the generic panacea of “civil society”:

At a national level, Lifting the Resource Curse argues, unsurprisingly, that the active involvement of civil society is essential both to increase the public pressure on governments to make the most of natural resource endowments and to act as watchdogs, tracking both the origins and uses of revenues from extractive exploitation. It is also of crucial importance to have public institutions that can support this process of participation and which are efficient in their control, monitoring, and enforcement of it.

But I think the paper could have gone a bit further with its power analysis on this – what other influential domestic groups have an interest in harnessing extractive industries for the national good? Answer, virtually all of them – business sectors (manufacturing, exporters, agriculture, finance), trade unions, media, national parliaments and local governments. Where and how have these kinds of coalitions formed and had an impact? There’s a lot more to life (and change) than CSOs.

This is particularly important for countries in which civil society, for whatever reason, struggles to punch at the same weight as powerful political and business interests.

P.S. Duncan is picky with his language, which is an excellent quality in a writer. Here’s him abolishing “human capital” and “political will”, respectively, from his vocabulary.

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.

Oil curse in Brazil

Municipalities that receive oil windfalls report significant increases in spending on infrastructure, education, health, and transfers to households. However, the windfalls do not trickle down and much of the money goes missing. Indeed, oil revenues increase the size of municipal workers’ houses but not the size of other residents’ houses.

That is Francesco Caselli and Guy Michaels, via Chris Blattman.

They also mention more media mention of corruption and federal police operations in municipalities with higher oil outputs. On the latter I am skeptical - I used to live in Rio, and I don't think the favelas and their problems have anything to do with the area's substantial resource income - but nevertheless their overall findings ring true to me.

Another oil book

Green Inc. interviews Peter Maass, author of Crude World, in two parts. Nicholas Shaxson’s Poisoned Wells, which I review here, seems to have beaten Crude World to the market, as it’s not clear Maass’ book is that different (except that Maass takes on a broader scope, both outside of Africa and in speculating about Peak Oil).

I’m not particularly compelled by the interview, but if anyone reads the book and finds differently, let me know.

Greenland's oil, cont.

Via Felix Salmon, Greenland is "poised to achieve a geopolitical importance it hasn’t had since the invention of Risk."

Some estimates, including those of the U.S. Geological Survey, suggest Greenland’s coastal waters could hold anywhere from 16 billion to 47 billion barrels of oil, or 800,000 barrels for every man, woman, and child. That would mean a staggering leap in income for Greenlanders, who until two generations ago were mostly subsistence hunters and fishermen.

As the article notes (and I've noted before), not everyone is happy with this prospect. But it seems like both the hopers and the worriers will have to be a bit more patient:

The state oil company, Nunaoil, had one of the largest booths, with an eye-catching flame flaring out of an oil-burning lamp. I asked a company rep manning the booth where the oil was from. “Italy,” he laughed. “It’s olive oil from the grocery store. We haven’t found oil here yet.”

Oil find in Uganda

Western oil company Tullow strikes black gold in Uganda, and it looks like the government managed to strike a pretty good deal:

Reports of a deal between Tullow Oil and the Ugandan government suggest that for every ten barrels found by Tullow, the government gets eight. This would represent a huge windfall for the landlocked East African country, where annual gross domestic product is estimated at $14.53 billion.

If a suitable pipeline to the coast in Kenya or Tanzania can be built, the nation could could become a significant oil exporter.

Hopefully this turns out well, but there is reason to be cautious.

Is Africa resource-rich?

Via Chris Blattman, an intriguing answer to this question:

OECD nations have $123,000 worth of wealth under the average square kilometer of soil, in spite of the fact that they’ve been pulling wealth out of the ground for 200 years.

The average wealth per square kilometer in Africa: closer to $23,000.

As Collier pointed out, we weren’t completely in error. The $23,000 figure comes from known resource wealth. This suggests that another $100,000 is probably lying under the average square kilometer in Africa.

That’s right. Think the ‘resource curse’ is bad now? Wait until known resources multiply by six.

He relates a conversation with the Sierra Leone government last week, days after the sudden discovery of oil. “Now you have diamonds and oil,” he said. “You can be like Angola!”

Indeed.

The post also includes a link to the Natural Resources Charter, which I had not seen before but seems to have the right spirit. Unfortunately it appears to be mostly academics and have no industry backers. The Extractive Industries Transparency Initiative has more sway, although I have heard it criticized as well. In any case, I think the move toward formalizing the social compact between resource-extracting foreign companies and the citizens of their host nations is a positive step, even if they don't come out perfect the first time.

How NOT to run a resource wealth fund

Nigeria gives us a textbook example of how NOT to run a save-for-a-rainy-day resource wealth fund:

Nigeria withdrew 87 billion naira ($564 million) from a fund created to save revenue from oil exports when prices are high, ThisDay newspaper reported, citing Oludare Osibote, the country’s acting Accountant-General.

The money will enable the federal, state and local governments to meet some of their expenditures following a drop in revenue earmarked for them in this year’s budget, the Lagos- based newspaper said.

First of all, this is not a rainy day:

Funds are placed into the so-called excess crude account when oil prices rise above $45 a barrel, and are used as a reserve when prices decline.

Compare that to current oil prices of around $70/bbl. But even more concerning is this:

The account now holds about $9 billion, down from $20 billion at the beginning of this year, according to the newspaper.

The fund has lost or had withdrawn half of its assets in the last nine months?? Even though equity markets are up and oil prices have barely dipped below (and mostly stayed well above) the $45/bbl threshold?? Something doesn't add up here.

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.”

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.

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.

Greenland the next Kuwait?

Except... with >20x (!) the oil per capita. I'm struck by the (probably wise) comment of the experienced Greenlander businessman who says flat out, "I hope it doesn't happen." Besides his obvious recognition of the resource curse, it reminds me of two things: the old villager from Blood Diamond who tells Leo and Djimon something like, "God forbid they find oil here," and my second-favorite John Steinbeck book.

Resource ripples from Iran

I was worried that the amount of space on this blog dedicated to Iran was beyond its original intended scope, but never fear, resource implications are seldom far away... might Uganda's recent energy deal with Iran be put in jeopardy?

I think world crude markets have noticed too but I try not to pay too much attention to their day-to-day fluctuations.

P.S. For anyone interested in a serious exploration of the resource curse, I highly recommend "Escaping the Resource Curse" - Stiglitz and Sachs edit a collection of strong essays on a variety of relevant topics from a variety of perspectives (academia, business, law, government, etc.).