IMF: $5.3 Trillion Energy Subsidy Problem

The IMF direct blog writes [imf.org] about new estimations on the scope of energy subsidies, among which subsidies for energy derived from non-renewable resources. The blog has more links to technical papers.

US$5.3 trillion; 6½ percent of global GDP—that is our latest reckoning of the cost of energy subsidies in 2015. These estimates are shocking. The figure likely exceeds government health spending across the world, estimated by the World Health Organization at 6 percent of global GDP, but for the different year of 2013. They correspond to one of the largest negative externality ever estimated. They have global relevance. And that’s not all: earlier work by the IMF also shows that these subsidies have adverse effects on economic efficiency, growth, and inequality.

OxCARRE Seminar: Winning the Oil Lottery: The Impact of Natural Resource Extraction on Growth

Today we have Tiago Cavalcanti [sites.google.com] presenting his paper with Daniel Da Mata [sites.google.com] and Frederik Toscani [cam.ac.uk] on

Winning the Oil Lottery: The Impact of Natural Resource Extraction on Growth

Abstract:

This paper provides evidence on the causal impact of oil discoveries on local development. Novel data on the drilling of 20,000 oil wells in Brazil allows us to exploit a quasi-experiment: municipalities where oil was discovered constitute the treatment group while municipalities with drilling but no discovery are the control group. The results show that oil discoveries significantly increase per capita GDP and urbanization. We find positive spillovers to non-oil sectors, specifically an increase in services GDP which stems from higher labor productivity. The results are consistent with greater local demand for non-tradable services driven by highly paid oil workers.

Available here [google.com]

New Research: Mining and local corruption in Africa

A new working paper by Andreas Kotsadam [wordpress.com], Eivind Hammersmark Olsen [uio.no], Carl Henrik Knutsen [uio.no], and Tore Wig [uio.no], all at University of Oslo (and other affilitations)

Mining and local corruption in Africa

Abstract:

We investigate whether mining affects local-level corruption in Africa. Several cross-country analyses report that natural resource production and wealth have ad- verse effects on political institutions, for instance by increasing corruption, whereas other country-level studies show no evidence of such “political resource curses”. These studies face well-known endogeneity and other methodological issues, and employing alternative designs and micro-level data would allow for drawing stronger inferences. Hence, we connect 90,000 survey respondents in four Afrobarometer survey waves to spatial data on about 500 industrial mines. Using a difference-in-differences strategy, we find evidence that mining increases bribe payments. Mines are initially located in less corrupt areas, but mining areas turn more corrupt after mines open and actively produce. A closer study of South Africa — using even more precise spatial matching of mines and survey respondents — corroborates the continent-wide results. Hence, mineral production is, indeed, a “curse” to local institutions.

Available here [pdf, uio.no]

New Research: A Quantitative approach to assessing sovereign default risk in resource-rich emerging economies

Unurjargal Nyambuu [nyu.edu] (New York University)􏰀,􏰁 and Lucas Bernard [cuny.edu] (The City University of New York), write on

A quantitative approach to assessing sovereign default risk in resource-rich emerging economies
Abstract:

The problem of sovereign default is a tricky one for bankers, policy makers, politicians and investors alike. Purely financial models are likely to miss nuance and cultural idiosyncrasies. Nonetheless, risk metrics must play a role. Using a stochastic growth model in an open economy, we propose a Kealhofer, McQuown and Vasicek (KMV)-style approach for assessing sovereign default risk in resource-rich emerging economies. As is well known, financial effects, specifically external debt, can make a country vulnerable to economic shocks. Excessive external debt is, thus, a prime indicator for financial health in both resource-poor and resource-rich countries; yet, safe ratios are difficult to determine. Using a straightforward and easily implementable methodology, we show how optimal debt ratios may be used to define a ‘distance from default’ indicator variable. Further, we demonstrate that this is a plausible risk metric for a number of different developing countries, including representatives from Latin America, Africa and Asia.

Published in International Journal of Finance & Economics, available here [wiley.com].

Why does a low oil price proof to be beneficial to GDP growth for some countries, but not for others?

This week's economists has two articles that relate a country's economic growth to the low oil price. We featured some forecasts earlier (here and here). With the first data coming in, the picture appears mixed (Quelle surprise!). 'Economists' are puzzled by the lack of economic boosts in the US, while Pakistan appears to reap the benefits. That sounds all a bit spurious to me.  However, the shared indicator seems price stability since, both are enjoying historically low inflation.