Saturday, March 30, 2013

We Are Entering a New Era of Fossil Fuels‏

A neat article in the Pacific Standard: Rapidly advancing technologies are opening up astonishing sources of oil and gas all over the world. We are entering a new era of fossil fuels that is reshaping global economics and politics—and the planet...

Friday, March 29, 2013

Commodities on the Rise

Dambisa Moyo: The economic fundamentals of supply and demand remain the key factors in driving the direction of commodity prices and determining whether the commodity super-cycle will persist. In practical terms, this means that oil prices, for example, are more likely to hover near $120 per barrel over the next decade, rather than $50; and we are unlikely to see a $20 barrel of oil ever again...

Thursday, March 28, 2013

Commodity booms, busts and bubbles

The Financial Times has a summary of the IMF-OxCarre conference on International Commodity Price Fluctuations that took place at the IMF last week: Commodity markets are prone to bubbles, but like the ones in bathtubs, they don’t last...

The papers presented at the conference can be downloaded here.

Wednesday, March 27, 2013

From this week's Economist

Managing Oil Wealth in Brazil

World Bank blog: 

Mr. Fajnzylber: The study showed that it would be optimal for Brazil to save a significant share of the oil windfall, not only with the objective of reducing the volatility of the economy around oil-price fluctuations, but also to help ensure inter-generational equity, fund pro-diversification investments, help smooth the consumption of poor households during economic downturns, and prevent sudden exchange appreciations in the short run. The project also showed that the oil windfall creates an additional motivation for redoubling efforts to improve public investment management and ensuring that oil-financed social expenditures are as progressive as Brazil’s social programs.

The Trade Post: What kind of resistance are you getting to this type of reform, and how do you try to overcome it?

Mr. Fajnzylber: There is a natural tendency for Brazil to increase public and private consumption and indebtedness ahead of the expected rise in national wealth associated with the new oil discoveries. If, however, the newly generated wealth were to be smaller than anticipated, the country would have to go through a potentially painful adjustment in consumption. To minimize this risk, we recommend that policies be based on the most conservative projections for oil production growth. Similarly, if at least part of the windfall is to be used to finance public or private investments, there may be trade-offs between the quality of those investments and the speed at which they can be implemented. In other words, the project showed that it may be optimal for Brazil to pace the exploitation of the new oil reserves with a view to maximize their potential transformative impact.

Tuesday, March 26, 2013

Saudi Arabia and the Oil Market

Forthcoming in Economic Journal: In this paper we document two features that have made Saudi Arabia different from other oil producers. First, it has typically maintained ample spare capacity. Second, its production has been quite volatile even though it has witnessed few domestic shocks. These features can be rationalised in a general equilibrium model in which the oil market is modelled as a dominant producer with a
competitive fringe. We show that the net welfare effect of oil tariffs on consumers is null. The reason is that Saudi Arabias' monopolistic rents fall entirely on fringe producers.

Monday, March 25, 2013

Ecuador's energy policy mix: Development versus conservation and nationalism with Chinese loans

Energy Policy: Ecuador's energy policy faces a complex variety of political and economic objectives that are difficult to reconcile in a consistent manner. Ecuador is a small oil producer and exporter with significant renewable (mainly hydropower) resources, hosting some of the richest biodiversity areas in the world, part of which are inhabited by so far indigenous un-contacted people. Being a developing country, tensions arise between conservation aims and development imperatives, as well as between resource nationalism and much-needed foreign financing. However, the really limiting factor for the country's energy development seems to be its constraints in financing the government's development and redistributive policies. Resorting to Chinese loans-for-oil may be part of the solution in the short term, but it does not substitute for a more consistent energy policy. Ecuador's case illustrates the dilemmas of energy policy in natural resource-rich developing countries when confronted with diverging political economy, social, environmental and macro-financial goals.

Saturday, March 23, 2013

Why Canada's economy is in trouble (Dutch Disease?)

Sober Look: 
  • Canada's exports are heavily concentrated in energy with a big focus on the nation's largest trading partner, the US. And as discussed before, the US energy markets are now quite well supplied. The US has a tremendous domestic source of natural gas, while crude oil inventories are high relative to historical levels - reducing demand for Canadian energy product in the US.
  • Over the past decade the Canadian dollar has strengthened dramatically, and in spite of some temporary weakness during the financial crisis is still close to parity with the US dollar. This makes Canadian products more expensive on a relative basis.
  • Over the past decade Canada's manufacturing labor costs have sharply outpaced those in the US, making Canadian firms less competitive.
  • Driven in part by the strength of the Canadian dollar as well as worsening labor competitiveness, Canada's current account has been in the red for some time now. What's particularly troubling is Canada's deterioration of the current account outside of energy exports. The trend is making the nation increasingly reliant on its energy export just as the demand from the US declines.

Friday, March 22, 2013

From Boom to Bust: A Typology of Real Commodity Prices in the Long Run

NBER WP by David Jacks: This paper considers the evidence on real commodity prices over 160 years for 30 commodities representing 7.89 trillion USD worth of production in 2011. In so doing, it suggests and documents a complete typology of real commodity prices, comprising long-run trends, medium-run cycles, and short-run boom/bust episodes. The findings of the paper can be summarized as follows: real commodity prices of both energy and non-energy commodities have been on the rise from 1950 across all weighting schemes; there is a consistent pattern, in both past and present, of commodity price super-cycles which entail decades-long positive deviations from these long-run trends with the latest set of super-cycles likely at their peak; these commodity price super-cycles are punctuated by booms and busts which are historically pervasive and becoming more exacerbated over time. These last elements of boom and bust are also found to be particularly bearing in determining real commodity price volatility as well as potentially bearing in influencing growth in commodity exporting economies.

The Economist's blog on it.

Thursday, March 21, 2013

Unconventional oil and the US economy

Finance and Development: High prices and new technology have triggered a sudden surge in oil and gas production in the United States that could shake up global energy markets...

Climate change and conflict

Ted Miguel gave a convincing lecture on how climate change increases the probability of conflict. Probably the highlight at the CSAE conference. Markus Goldstein has a nice summary in a  World Bank blog.

Wednesday, March 20, 2013

From Mine to Coast

New OxCarre WP by Bonfatti and Poelhekke: Mine-related transport infrastructure specializes in connecting mines to the coast, and not so much to neighboring countries. This is most clearly seen in developing countries, whose transport infrastructure was originally designed to facilitate the export of natural resources in colonial times. We provide first econometric evidence that mine-to-coast transport infrastructure matters for the pattern of trade of developing countries, and can help explaining their low level of regional integration. The main idea is that, to the extent that it can be used not just to export natural resources but also to trade other commodities, this infrastructure may bias a country's structure of transport costs in favor of overseas trade, and to the detriment of regional trade. We investigate this potential bias in the context of a gravity model of trade. Our main fi ndings are that coastal countries with more mines import less than average from their neighbors, and this e ffect is stronger when the mines are located in such a way that the related infrastructure has a stronger potential to a ffect trade costs. Consistently with the idea that this e ffect is due to mine-to-coast infrastructure, landlocked countries with more mines import less than average from their non transit neighbors, but more then average from their transit neighbors. Furthermore, this eff ect is speci fic to mines and not to oil and gas fi elds, arguably because pipelines cannot possibly be used to trade other commodities. We discuss the potential welfare implications of our results, and relate these to the debate on the economic legacy of colonialism for developing countries.

Tuesday, March 19, 2013

In the press this week (Oil in Kenya, mining in Kyrgistan...)

The Economist:
Bloomberg Businessweek:

Are There Efficiency Gains from the Removal of Natural Resource Export Restrictions? Evidence from British Columbia

The World Economy: Log export bans (LEBs) are a popular development tool utilised by developing nations with sizable endowments of timber; however, the actual impact of these policies is debatable. British Columbia has a developed forestry sector and still maintains a LEB. This trade restriction continually creates conflicts with Canada's international trade partners, including the United States. This paper examines the efficiency implications of a hypothetical removal of roundwood export restrictions in British Columbia using roundwood price and quantity data from 1995 to 2008. A time-series econometric approach is utilised to determine supply and demand elasticities for British Columbia's roundwood. Empirical results from a vector error correction model suggest that a removal of export restrictions will generate an overall increase of approximately $347.91 million US dollars per year to British Columbia's forest economy.

Monday, March 18, 2013

Aid is Not Oil: Donor Preferences, Heterogeneous Aid, and the Aid-Democratization Relationship

New paper: This paper develops a model that incorporates changing donor preferences and the heterogeneity of aid into theories on the relationship between aid and the likelihood of democratic change in recipients. Revisiting existing studies and conducting a new analysis, it is found that the relationship between aid and the likelihood of democratic change has evolved from a negative one during the cold war to a neutral one in the post-cold war period. The same cannot be said for the relationship between oil revenue and democratic change, which is negative throughout. This suggests that there is something different about aid, such as the presence of a donor with its own objective function and the heterogenous nature of aid funds. In contrast to recent trends, the findings here argue strongly against aggregating across aid and other forms of income.

Saturday, March 16, 2013

Sudan rivals 'to resume pumping oil'

BBC: South Sudan and Sudan have agreed to resume pumping oil after a bitter dispute over fees which saw production shut down more than a year ago...

South Sudan's government used to earn 98% of its revenues from oil and its economy has collapsed since it shut down oil production, with vital development work put on hold, our correspondent says.

Sudan has been suffering too - the IMF predicted that its economy would shrink by 11% in 2012 because of the loss of oil revenue following the South's secession...

Friday, March 15, 2013

Ethnic Cleansing or Resource Struggle in Darfur? An Empirical Analysis

Journal of Development Economics: The conflict in Darfur has been described both as an ethnic cleansing campaign, carried out by the Sudanese government and its allied militias, and as a local struggle over dwindling natural resources between African farmers and Arab herders. In this paper, we use a previously unexploited data set to analyze the determinants of Janjaweed attacks on 530 civilian villages in Southwestern Darfur during the campaign that started in 2003. Our results clearly indicate that attacks have been targeted at villages dominated by the major rebel tribes, resulting in a massive displacement of those populations. Resource variables, capturing access to water and land quality, also appear to have played an important role. These patterns suggest that attacks in the area were motivated by both ethnic cleansing and resource capture, although the ethnic variables consistently have a larger impact.

Thursday, March 14, 2013

Not a Curse at All: Why Middle Eastern Oil States Fail and How it can be Prevented

Journal of Intervention and Statebuilding: Western scholarship has often noted that oil states in the Middle East are affected by the ‘resource curse’. Thus, such states are to eventually fail due to their plundering of resources and their neglect of the social contract with their citizens. However, this is not the case, as oil states are neither failed states, nor fully democratic. They hover in a middle ground in which they assure security through coercion, but lack representation and legitimacy. Due to the events of the Arab Spring, a pragmatic, insightful and comprehensive review of oil states in the region is necessary. Although oil states in the region thus far have remained stable, change can be expected in the future. How will oil states deal with the pressures of a more demanding society and an ever-challenging economic atmosphere? Furthermore, what can history teach us so that state failure can be averted?

Wednesday, March 13, 2013

Climate Change, Border Tax Adjustments, and the Green Paradox

New paper: A major problem in coordinating international efforts in combating climate change is that some countries have incentives to free ride: they can capture the bene…fits without incurring the costs. In the context of international trade, the free riding countries enjoy an additional advantage: without imposing a carbon tax (or equivalent measures), the competitive positions of their …firms will be enhanced. Concerns over the loss of competitive advantage due to free riding behaviour of trading partners have lead economists and policymakers to contemplate proposals for various forms of “border tax adjustments” (BTA), defi…ned as differential taxation of traded goods that is motivated by differences in underlying carbon prices. In particular, they consider the possibility of setting a charge on imports equal to some notion of carbon tax ‘not paid ’abroad, and remitting tax on exports in similar fashion. BTA has been considered as a possible mechanism to combat “carbon leakage”, de…fined as the phenomenon where the effort of abating countries are offset to some extent by increasing emissions in nonabating countries. Our paper presents a model of BTA in the context of fossil fuel extraction when a backstop technology is available. We study the impact of border tax adjustments (BTA) when owners of fossil fuel stocks adjust their extraction paths to maximize their wealth, and where the rate of interest is endogenously determined. Using this framework, we investigate the possibility of a Green-Paradox outcome when BTA is implemented. The term Green Paradox was coined by Sinn (2008), in his analysis of intertemporal supply behavior of extractive fi…rms. It refers to the possibility that, due to intertemporal supply side adjustment, a policy measure intended to reduce CO2 emissions might have the opposite effect. This phenomenon has been further explored in a series of papers investigating various channels through which a Green-Paradox outcome might arise. Our paper identifi…es a new channel: a policy measure intended to reduce carbon leakage may indirectly induce a change in the equilibrium interest rate which in turn increases extraction in the near future.

Tuesday, March 12, 2013

Natural Resources and Local Communities: Evidence from a Peruvian Gold Mine

Forthcoming in AEJ Economic Policy: This paper examines the local economic impact of Yanacocha, a large gold mine located in Northern Peru. 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 1.7% per 10% additional mine's purchases, is only present in the mine's supply market and surrounding areas. Results suggest that the effect is channelled to rural areas through an increase in the price of locally produced food. We examine and rule out that the effects are explained by a fiscal revenue windfall, or by other plausible mechanisms. Taken together, our results underline the potential of backward linkages from extractive industries to create positive spillovers in less developed economies.

Monday, March 11, 2013

Poverty, inequality, and the local natural resource curse

World Bank WP: The extent to which local communities benefit from commodity booms has been subject to wide but inconclusive investigations. This paper draws from a new district-level database to investigate the local impact on socioeconomic outcomes of mining activity in Peru, which grew almost twentyfold in the last two decades. The authors find evidence that producing districts have better average living standards than otherwise similar districts: larger household consumption, lower poverty rate, and higher literacy. However, the positive impacts from mining decrease significantly with administrative and geographic distance from the mine, while district-level consumption inequality increases in all districts belonging to a producing province. The inequalizing impact of mining activity, both across and within districts, may explain part of the current social discontent with mining activities in the country, even despite its enormous revenues.

Friday, March 8, 2013

How Rapidly Should Africa Go Green?

Collier and Venables in the World Financial Review: Superficially, Africa appears well-suited for green energy. Sunshine, water, land, forests, and being a latecomer all confer significant advantages. However, energy generation, energy saving, and carbon capture are intensive in capital, governance capacity and skills. Unfortunately, all of these factors are scarce in Africa. These factor scarcities offset the advantages conferred by natural endowments and are often decisive. Similarly, the historic advantage of being a latecomer to the installation of generating capacity is offset by the historic disadvantage of the acute energy scarcity inherited from past under-investment: Africa cannot afford to wait for further developments in green technologies. Nevertheless, there is scope for Africa’s natural advantages for green energy to be harnessed to a global advantage. But to do so will require international action that brings global factor endowments to bear on Africa’s natural opportunities.

Thursday, March 7, 2013

Petro-Aggression: When Oil Causes War

New book by Jeff D. Colgan: Oil is the world's single most important commodity and its political effects are pervasive. Jeff Colgan extends the idea of the resource curse into the realm of international relations, exploring how countries form their foreign policy preferences and intentions. Why are some but not all oil-exporting 'petrostates' aggressive? To answer this question, a theory of aggressive foreign policy preferences is developed and then tested, using both quantitative and qualitative methods. Petro-Aggression shows that oil creates incentives that increase a petrostate's aggression, but also incentives for the opposite. The net effect depends critically on its domestic politics, especially the preferences of its leader. Revolutionary leaders are especially significant. Using case studies including Iraq, Iran, Libya, Saudi Arabia and Venezuela, this book offers new insight into why oil politics has a central role in global peace and conflict.

Wednesday, March 6, 2013


CSAE conference paper: Natural resource revenues are an increasingly important financing source for public investment in many developing economies. Investing volatile resource revenues, however, subjects an economy to macroeconomic instability. This paper applies to Angola the fiscal framework developed in Berg et al. (2012) that incorporates investment inefficiency and absorptive capacity constraints, often encountered in developing countries. The sustainable investing approach, which combines a stable fiscal regime with external savings, can convert resource wealth to development gains while maintaining economic stability. Stochastic simulations demonstrate how the framework can be used to inform allocations between capital spending and external savings in facing uncertain oil revenues. An overly aggressive scaling-up path could render insufficient fiscal buffer. Consequently, negative oil shocks can interrupt investment progress and drive up the capital depreciation rate, disturbing economic stability and lowering the growth benefits of public investment.

Tuesday, March 5, 2013

Oil Discovery, Real Exchange Rate Appreciation and Poverty in Ghana

CSAE conference paper: The discovery of commercial quantities of oil and gas off the coast of Ghana in June 2008 has given rise to much optimism for improved prospects for accelerated growth and poverty reduction. However, although proper management of increased foreign exchange inflows may go a long way towards helping the government achieve the growth and poverty reduction objectives, the associated onset of Dutch disease may also reduce competitiveness in key export and import-competing sectors and adversely impact the livelihoods of major parts of the population. In order to assess the extent of vulnerability of Ghanaian households—particularly those at or below the national poverty line—to the likely appreciation in the real exchange rate (RER), this paper estimates the potential short-term impacts on poverty using a micro-accounting methodology drawing on the most recent round of the Ghanaian household survey.

Monday, March 4, 2013

From this week's Economist

Commodity Price Shocks and Fiscal Outcomes

CSAE conference paper: The experience of developing countries over 1990–2010 indicates that commodity prices have a significant impact on fiscal outcomes. Both revenue and expenditure rise in response to commodity (import or export) price increases; the response of the fiscal deficit is ambiguous. A floating exchange rate regime only partially offsets the impact; foreign-exchange reserves do not dampen the effects. Hence, there is a strong case for fiscal hedging against commodity price shocks. Hedging instruments based on a limited set of benchmark world prices for a narrow set of commodities may suffice to realize most of the potential benefits.

Friday, March 1, 2013

Optimal fiscal policy and different degrees of access to international capital markets

New WP by Kuralbayeva:  Empirically, the cyclical pattern of fiscal policy di ffers between developed and developing countries, with in particular much greater pro-cyclicality and volatility of public investment in developing countries. In this paper I provide a theoretical explanation for the observed differences by analyzing optimal fiscal policy under different degrees of access to world capital markets. If the supply of foreign capital is elastic, as in a developed country, then it is optimal to adjust to an adverse external shock by borrowing from abroad to finance public expenditure and cutting taxes to smooth private consumption. If the supply of foreign capital is inelastic, however, as in a developing country, the optimal adjustment policy is to reduce public investment (by much more than public consumption) and to raise consumption taxes.