FDI, Natural Resources and Institutions

IGC Policy Brief: 

Foreign direct investment (FDI) is a good source of finance for long-term economic growth. It is especially important for its potential to transfer knowledge and technology, create jobs, boost overall productivity and enhance competitiveness in host countries. Many international development agencies, such as the World Bank, consider FDI as one of the most effective tools in the global fight against poverty, and therefore actively encourage poor countries to pursue policies that will encourage FDI flows. It is therefore important to determine the factors that affect FDI flows to developing countries.

This policy brief examines the interaction between FDI, natural resources and institutions. It answers three questions: (i) Do natural resources crowd out FDI - i.e., is there an FDI-natural resource curse?; (ii) Do institutions mitigate the adverse effect of natural resources on FDI? (iii) Can institutions completely neutralise the FDI-natural resource curse?

Discounting under Disagreement

NBER WP by Heal and Millner: A group of time consistent agents has access to a productive resource stock whose output meets their consumption needs. The agents disagree about the appropriate pure rate of time preference to use when choosing a consumption policy, and thus delegate the management of the resource to a social planner who allocates consumption efficiently across individuals and over time. We show that the planner's optimal policy is equivalent to that of a representative agent with a time varying rate of impatience. The representative agent's time preferences depend on the distribution of time preferences in the group, on the agents' tolerance for consumption fluctuations, and on the productivity of the resource. The representative agent's rate of impatience coincides with that of the individual with the lowest rate of impatience in the long run, and under plausible conditions is monotonically declining. In the work-horse case of iso-elastic felicity functions and Gamma distributed rates of impatience, analytic solutions are possible, and the representative agent has hyperbolic time preferences. We thus provide a normative justification for the use of declining rates of time preference in dynamic welfare analysis.

Solar is about to Change our World

Monetary Realism: I've been getting into Solar lately – the fall in prices has been absolutely shocking over the last 2-4 years. We are seeing price drops closer to 20% per year after several decades at 6% price drops per year. 6% year is a fantastic rate of decreases, but 20% is simply astonishing. 20% is an impressive number, but putting it into context will make your jaw drop with astonishment. My calculations show that if solar maintains 5 more years at current 23% rates per year price drops, solar power will be cheaper than using existing coal plants. That’s right – it will be cheaper to build new solar plants than to use existing coal plants. It sounds absolutely crazy. But it seems true looking at the data...

Oil for Food: The Global Food Crisis and the Middle East

New book:  In the wake of the global food crisis of 2008 Middle Eastern oil producers announced multi-billion investments to secure food supplies from abroad. Often called land grabs, such investments are at the heart of the global food security challenge and put the Middle East in the spotlight of simultaneous global crises in the fields of food, finance, and energy. Water scarcity here is most pronounced, import dependence growing, and the links between oil and food are manifold ranging from the economics of biofuels to climate change and the provision of crucial input factors like fuels and fertilizers. In the future, the Middle East will not only play a prominent role in global oil, but also in global food markets, this time on the consumption side.
In Oil for Food, Eckart Woertz analyzes the geopolitical implications behind the current investment drive of Arab Gulf countries in food insecure countries like Sudan or Pakistan. Having lived in Dubai for seven years, and drawing on extensive archival sources and interviews, he gives the inside story of how regional food security concerns have developed historically, how domestic agro-lobbies shape policy making, and how the failed attempt to develop Sudan as an Arab bread-basket in the 1970s carries important lessons for today's investments drive.
The book argues against the media hype that has been created around land grabs and analyzes why there has been such a gap between announced projects and their actual implementation. Instead, it calls for a revision of Gulf food security policies and suggests policy alternatives. It is essential reading for academics interested in the political economy of the Gulf region and for practitioners in governments, media, and international organizations who deal with contemporary food security and energy issues.

Cumulative Carbon Emissions and the Green Paradox

OxCarre paper by van der Ploeg: The Green Paradox states that a gradually more ambitious climate policy such as a renewables subsidy or an anticipated carbon tax induces fossil fuel owners to extract more rapidly and accelerate global warming. However, if extraction becomes more costly as reserves are depleted, such policies also shorten the fossil fuel era, induce more fossil fuel to be left in the earth and thus curb cumulative carbon emissions. This is relevant as global warming depends primarily on cumulative emissions. There is no Green Paradox for a specific carbon tax that rises at less than the market rate of interest. Since this is the case for the growth of the optimal carbon tax, the Green Paradox is a temporary second-best phenomenon. There is also a Green Paradox if there is a chance of a breakthrough in renewables technology occurring at some random future date. However, there will also be less investment in opening up fossil fuel deposits and thus cumulative carbon emission will be curbed.

Era of Big Oil secrecy is over

Daniel Kaufmann:

Earlier this month, the EU took a decisive step towards transparency: It agreed to mandate publicly-listed European companies as well as large private firms to disclose their payments to governments for oil, gas and mining projects. This transparency is crucial in the fight for better governance of resource-rich countries. It will empower citizens with information about the amount of money their governments receive, helping them to monitor how this money is ultimately used and to deter corruption.

Opacity has long ties with corruption, and both are detrimental to growth. Our research shows that countries that control corruption and improve governance can triple their incomes per capita in the long term...

The EU rules are part of the international community’s response to the opacity challenge, and are modeled after U.S. rules the Securities and Exchange Commission (SEC) released last August...

Major multinational oil companies have been trying to water down these requirements on both sides of the Atlantic...

Are the world’s financial markets carrying a carbon bubble?

A new report by the Carbon Tracker Initiative:
Regulators should:

• Require reporting of fossil fuel reserves and potential CO2 emissions by listed companies and those applying for listing.
• Aggregate and publish the levels of reserves and emissions using appropriate accounting guidelines.
• Assess the systemic risks posed to capital markets and wider economic prosperity through the overhang of unburnable carbon
• Ensure financial stability measures are in place to prevent a carbon bubble bursting.