Monetary Policy in Resource-Rich Developing Economies

New CERGE-EI WP:  The economic literature acknowledges that to avoid the resource curse, resource-rich countries should restrict fi…scal expansion and save a signifi…cant part of resource revenues outside the domestic economy. However, in these countries governments tend to ineffectively spend a considerable part of windfall revenues in the short run. In this research I construct a DSGE model for a small, open economy to show that if …scal indiscipline in the form of immediate responses to foreign resource revenue changes is inevitable, then monetary policy can help improve the allocation problem. The simulation results indicate that targeting the exchange rate or price level through foreign exchange interventions by the central bank can soften the negative effects of Dutch Disease and stabilize the economy in the face of volatile natural resource revenues in the short run. I also …nd that a …fixed exchange rate regime outperforms price level targeting by delivering higher isolation and hence less vulnerability to shocks in natural resource revenues. In contrast, if the central bank chooses to pursue a laissez faire policy, i.e., not to intervene, then the economy becomes vulnerable to shocks in foreign resource revenues and the resource curse becomes more severe.

Direct Distribution of Oil Revenues in Venezuela: A Viable Alternative?

New CGDev WP:  Venezuela is a textbook example of a resource-dependent country—between 1950 and 2008, oil generated over a trillion dollars of income for the state. Nevertheless, Venezuela currently combines an economy that is stagnant, despite high oil prices, with an increasingly authoritarian government. The authors argue that large oil rents that accrue to the state, together with a lack of formal and transparent mechanisms to facilitate citizen oversight, are a large part of the problem. They consider the nature of the fiscal contract between the Venezuelan government and its people. This has been characterized by increasing discretion of the executive; only a small share of the rents is now subject to political oversight within the framework of the budgetary system. The authors consider the case for direct distribution of rents, distinguishing it from a populist approach to transfers as effected through Venezuela’s misiones. They also report on focus group discussions of the direct distribution approach and the political viability of direct transfers.

Arctic Resources, Exposed by Warming, Set Off Competition

New York Times: At stake are the Arctic’s abundant supplies of oil, gas and minerals that are, thanks to climate change, becoming newly accessible along with increasingly navigable polar shipping shortcuts...

Poverty in the midst of abundance

Daniel Kaufmann writes on Trustlaw: In 1990, almost 600 million people lived on less than $5 a day in resource-rich countries. Today, it is estimated that poverty has increased to about 700 million people. Among this population, close to 300 million live in dire poverty, surviving on $2 a day or less. The majority of the poor in resource-rich countries live in Africa, where 80 percent of citizens in extractive-intensive countries live on under $5 a day, and over 50 percent live on under $2 a day.
In many countries the failure to harness natural resource wealth towards national well-being is in large measure linked to a failure of national governance. Of the hundreds of millions of citizens living on under $2 a day in resource-rich nations, 85 percent live in very poorly governed countries – countries which, according to the updated Worldwide Governance Indicators (WGI), rate very poorly in corruption control and other governance dimensions...

The End of Global Warming

Noah Smith writes in The Atlantic: Here is the good news. US carbon emissions are decreasing rapidly. We're down over 10% from our emissions peak in 2007. Furthermore, the drop isn't just a function of the Great Recession. Since 2010 our economy has been growing, but emissions have kept on falling. The reason? Natural gas. With the advent of "fracking" technology, the price of gas has plummeted far below that of coal, and as a result, essentially no new coal plants are being built. Although gas does release carbon, it only releases about half as much as coal for the same amount of electricity. This is why -- despite our failure to join the Kyoto Protocol or impose legal restrictions on CO2 -- the United States is now outpacing the rest of the developed world in reducing our contribution to global warming...

Government Spending, Subsidies and Economic Efficiency in the Gulf countries

New OxCarre paper:  Public investment and subsidies are typically inefficient but in the GCC these are crucial engines of growth. Subsidies are also used to redistribute oil windfalls in the region, and the problem of a government that wants to „distribute‟ oil money is a problem fully symmetric to the one analyzed by Ramsey (1927) of optimal taxation. The second-best policy (when lump-sum transfers are not available) is to use subsidies across a wide range of goods (as opposed to the focus on energy chosen by the GCC). In addition, the „inverse‟ Ramsey model implies that commodities for which demand is least elastic to prices should be subsidized at higher rates. This suggests subsidizing basic needs at higher rates, in particular food, healthcare and education. In addition, when subsidies are very large, they create additional distortions because households prefer to queue for subsidies (e.g. public service jobs, subsidized mortgages in Saudi Arabia) rather than participate in private markets. As an example, we draw a model where recruitment of public servants can induce a large disincentive to take private sector positions and compute the conditions under which the disincentive is so strong that overall employment is actually decreased as public servants are being hired.

Ex-Elf boss extradited to Togo in fraud probe

BBC reports:  Former French oil chief executive Loik Le Floch-Prigent has been extradited from Ivory Coast to Togo on suspicion of involvement in a massive fraud... The 68-year-old was detained on Saturday as part of an investigation into a complaint from a businessman who alleged that he was victim of a $48m (£30m) fraud scheme, according to AFP news agency... Mr Le Floch-Prigent has served a five-year sentence for embezzling more that $350m of public funds during his reign at Elf. He currently works as an oil industry consultant, reports say.

The Optimal Carbon Tax and Economic Growth

New OxCarre paper:  In a calibrated integrated assessment model we investigate the differential impact of additive and multiplicative damages from climate change for both a socially optimal and a business-as-usual scenario in the market economy within the context of a Ramsey model of economic growth. The sources of energy are fossil fuel which is available at a cost which rises as reserves diminish and a carbon-free backstop supplied at a decreasing cost. If damages are not proportional to aggregate production output, and the economy is along a development path, the social cost of carbon and the optimal carbon tax are smaller as damages can more easily be compensated for by higher output. As a result, the economy switches later from fossil fuel to the carbon-free backstop and leaves less fossil fuel in situ. This is in contrast to a partial equilibrium analysis with damages in utility rather than in production which finds that the willingness to forsake current consumption to avoid future global warming is higher (lower) under additive damages in a growing economy if the elasticity of intertemporal substitution is smaller (bigger) than one.

The determinants of extreme commodity prices

New OxCARRE paper: Fat-tailed commodity price innovations are well-documented in the literature and long recognized as disruptive for consumers and producers, yet little is known about what factors drive such extreme events. Utilizing a wide range of factors from the economics and finance literature and quantile regression techniques, we shed light on this issue. Our models explain more variation in extreme than in median price innovations. Common global nancial and demand factors account for a greater proportion of extreme daily spot price variations than do commodity-speci c factors such as basis and open interest. Financialization of commodity markets, via signifi cant and increasing co-variation of extreme spot price innovations with US equity market and trade-weighted US dollar returns, appears to be a major driver of extreme events in the 2000-2009 period.

Optimal Oil Production and the World Supply of Oil

New OxCARRE Paper: We study the optimal oil extraction strategy and the value of an oil field using a multiple real option approach. The numerical method is flexible enough to solve a model with several state variables, to discuss the effect of risk aversion, and to take into account uncertainty in the size of reserves. Optimal extraction in the baseline model is found to be volatile. If the oil producer is risk averse, production is more stable, but spare capacity is much higher than what is typically observed. We show that decisions are very sensitive to expectations on the equilibrium oil price using a mean reverting model of the oil price where the equilibrium price is also a random variable. Oil production was cut during the 2008-2009 crisis, and we find that the cut in production was larger for OPEC, for countries facing a lower discount rate, as predicted by the model, and for countries whose governments' finances are more dependent on oil revenues. However, the net present value of a country's oil reserves would be increased significantly (by 100 percent, in the most extreme case) if production was cut completely when prices fall below the country's threshold price. If several producers were to adopt such strategies, world oil prices would be higher but more stable.

What Central Bankers Need to Know about Forecasting Oil Prices

New CEPR DP: Recent research has shown that recursive real-time VAR forecasts of the real price of oil tend to be more accurate than forecasts based on oil futures prices of the type commonly employed by central banks worldwide. Such monthly forecasts, however, differ in several important dimensions from the forecasts central banks require when making policy decisions. First, central banks are interested in forecasts of the quarterly real price of oil rather than forecasts of the monthly real price of oil. Second, many central banks are interested in forecasting the real price of Brent crude oil rather than any of the U.S. benchmarks. Third, central banks outside the United States are interested in forecasting the real price of oil measured in domestic consumption units rather than U.S. consumption units. Addressing each of these three concerns involves modeling choices that affect the relative accuracy of alternative forecasting methods. In addition, we investigate the costs and benefits of allowing for time variation in VAR model parameters and of constructing forecast combinations. We conclude that quarterly forecasts of the real price of oil from suitably designed VAR models estimated on monthly data generate the most accurate forecasts among a wide range of methods including forecasts based on oil futures prices, nochange forecasts and forecasts based on models estimated on quarterly data.

Shale Gas Development and Property Values

New NBER WP: While shale gas development can result in rapid local economic development, negative externalities associated with the process may adversely affect the prices of nearby homes. We utilize a triple-difference estimator and exploit the public water service area boundary in Washington County, Pennsylvania to identify the housing capitalization of groundwater risk, differentiating it from other externalities, lease payments to homeowners, and local economic development. We find that proximity to wells increases housing values, though risks to groundwater fully offset those gains. By itself, groundwater risk reduces property values by up to 24 percent.

Regulating the Resource Curse

Foreign Policy: It's not often that a change in accounting rules could reduce the probability of war. But that's exactly what happened at the U.S. Securities and Exchange Commission (SEC) last week.
On Wednesday, the SEC finally enacted long-overdue regulationsrequiring any oil company that is publicly listed on a U.S. stock exchange to report the tax, royalty, and other payments it shells out to foreign governments where it operates. Previously, companies were able to conceal this information, enabling a culture of corrupt payoffs that kept the petrodollars flowing into authoritarian leaders' coffers -- even where it directly contravened U.S. interests.

Natural Resource Abundance, Growth, and Diversification

MENA is one of the richest regions in the world in terms of natural resources: it holds more than 60 percent of the world’s proven oil reserves, mostly located in the Gulf region, and nearly half of gas reserves. Oil represents 80-85 percent of merchandise exports in the region, making it highly depending on fluctuations in international prices. A long strand of economic literature has suggested that such dependence may hurt a country’s growth prospects and the scope for job creation by reducing economic diversification...

A forthcoming World Bank volume focused on the Middle East and North Africa.

Poverty, Growth and the Demand for Energy

New paper presented at the IIES birthday party:
Most of the future growth in energy use is forecast to come from the developing world. Understanding the likely pace and specific location of this growth is essential to inform decisions about energy infrastructure investments and to improve greenhouse gas emissions forecasts. We argue that countries with pro‐poor economic growth will experience much larger increases in energy demand than countries where growth is more regressive. When poor households’ incomes go up, their energy demand increases along the extensive margin as they buy energy‐using assets for the first time. We also argue that the speed at which households come out of poverty affects their asset purchase decisions...

Natural Resource Transparency

Daniel Kaufmann at Brookings: In fact, our own data and research suggests that in the long run there is up to a 300 percent development to citizens dividend from increased transparency, accountability and improved governance. In particular, improved governance can contribute to a threefold rise in incomes and two-thirds decline in infant mortality.
Read it all here.

Africa, oil and the West

The Economist: BARELY a month goes by without a new oil discovery in Africa. Only five of the continent’s 55 countries are neither producing nor exploring for oil. Most places are also extracting lots of lucrative minerals. A resource bonanza is in train across the continent, generating big government revenues and real benefits for Africans. Road networks are expanding, public services are improving. But most of this happens behind a veil of secrecy. Money sloshes out of public scrutiny at the insistence of officials and politicians who prefer it that way...

Read it all here.

Labor and petroleum in Ecuador

A new article in Focaal: 

This article analyzes the struggles of the petroleum labor movement against the neo-liberalization of the petroleum industry in Ecuador. Though originally focused on defending collective bargaining rights, since the 1990s the movement has put forward a populist, nationalist critique of the state's governance of petroleum. The article traces the roots of the movement and focuses on two contested terrains of petroleum politics, refineries and oilfields, to examine labor's role in resource governance. The article argues that by strategically joining concerns over class and nation, over a number of administrations from the 1970s to the 2000s (from populist, military juntas, to neoliberal), the petroleum labor movement became a defining actor in petroleum governance.