Professional Documents
Culture Documents
Jeffrey Frankel
Example:
followed by China.
Growth falls with fuel & mineral exports
5
Are natural resources necessarily bad?
No, of course not.
Commodity wealth need not necessarily lead
to inferior economic or political development.
Rather, it is a double-edged sword,
with both benefits and dangers.
It can be used for ill as easily as for good.
8
5 Possible Natural Resource Curse Channels
1. Volatility
2. Crowding-out of manufacturing
3. Autocratic Institutions
4. Anarchic Institutions
5. Procyclicality including
1. Procyclical capital flows
2. Procyclical monetary policy
3. Procyclical fiscal policy.
9
(1) Volatility
in global commodity
prices arises because
supply & demand are
inelastic in the short run.
10
Commodity prices have been especially
volatile over the last decade
Source: UNCTAD
Effects of Volatility
Volatility per se can be bad for economic growth.
Hausmann & Rigobon (2003), Blattman, Hwang, & Williamson (2007),
and Poelhekke & van der Ploeg (2007).
corruption,
rent-seeking,
intermittent dictatorship,
ineffective judiciary branch, and
2. Unenforceable
property rights
3. Civil war
See Appendix 2 for
elaboration on each. 17
(5) Procyclicality
The Dutch Disease describes unwanted
side-effects of a commodity boom.
Procyclicality in:
Capital inflows; Monetary policy;
Real exchange rate; Nontraded Goods
Fiscal Policy
18
The Dutch Disease:
5 side-effects of a commodity boom
20
The Dutch Disease: 5 side-effects of a commodity boom
22
Procyclical capital flows
According to intertemporal optimization theory,
capital flows should be countercyclical:
net capital inflows when exports are doing badly
and net capital outflows when exports do well.
27
Two budget items account for much
of the spending from oil booms:
(i) Investment projects.
Investment in practice may be
“white elephant” projects,
which are stranded without funds
for completion or maintenance Rumbi Sithole took this photo
in “Bayelsa State
in the Niger Delta,in Nigeria.
when the oil price goes back down. The state government
received a windfall of money
and didn't have the capacity
Gelb (1986).
to have it all absorbed in
social services so they decided
to build a Hilton Hotel.
The construction company
did a shoddy job, so the tower
is leaning to its right and
it’s unsalvageable..”
An important development --
some developing countries, including
commodity producers, were able to break
the historic pattern in the most recent decade:
taking advantage of the boom of 2002-2008
to run budget surpluses & build reserves,
thereby earning the ability to expand
fiscally in the 2008-09 crisis.
Chile is the outstanding model.
Also Botswana, China, Indonesia, Korea…
30
Correlations between Government spending & GDP
2000-2009
procyclical
Arbitrage =>
expected rate of price increase = interest rate.
The empirical evidence
With strong theoretical arguments on both sides,
either for an upward trend or for a downward
trend, it is an empirical question.
4.1 Unsustainably
rapid depletion
When exhaustible resources
are in fact exhausted,
the country may be left with nothing.
Three concerns:
Protection of environmental quality.
A motivation for a strategy of economic diversification.
The need to save for the day of depletion
Invest rents from exhaustible resources in other assets.
Hartwick (1977) and Solow (1986). 39
The example of Nauru
phosphate mining
4.2 Unenforceable property rights
Depletion would be much less of a problem
if full property rights could be enforced,
thereby giving the owners incentive
to conserve the resource in question.
http://indiancountrytodaymedianetwork.com/2011/02/27/amazon-gold-rush-laying-waste-to-peruvian-rainforest%E2%80%99s-madre-de-dios-20021
4.3 War
Where a valuable resource such as oil or diamonds
is there for the taking, factions will likely fight over it.
Oil & minerals are correlated with civil war.
Fearon & Laitin (2003), Collier & Hoeffler (2004),
Humphreys (2005) and Collier (2007).
43
Appendix 3:
The NRC Skeptics
Which comes first, oil or institutions?
Source: OECD education data featured in Knowledge and skills are infinite – oil is not by Andreas Schleicher.
49
Part II
Policies & institutions to avoid
pitfalls of the Natural Resource Curse
Some that are not recommended:
Institutions that try to suppress price volatility.
Recommended:
Devices to hedge risk.
Ideas to reduce macroeconomic procyclicality.
Institutions for better governance.
The Natural Resource Curse should not
be interpreted as a rule that commodity-
rich countries are doomed to fail.
I)
To make monetary policy less
procyclical: Product Price Targeting
PPT
II)
To make fiscal policy less
procyclical: emulate Chile.
I) The challenge of designing
a currency regime for countries where
terms of trade shocks dominate the cycle
Fixing the exchange rate leads to procyclical
monetary policy: credit expands in commodity booms.
Floating accommodates terms of trade shocks.
But volatility can be excessive;
also floating does not provide a nominal anchor.
Examples:
The EU’s Common Agricultural Policy
Bad for EU budgets, economic efficiency,
international trade & consumer pocketbooks.
Results:
Domestic supply is discouraged.
World prices go even higher.
An initiative at the G20
meetings in France
in 2011 deserved
to succeed:
Attempts to prevent
commodity prices from
fluctuating generally fail.
Attempts to prevent
commodity prices from
fluctuating generally fail.
Even though enacted
in the name of reducing volatility & income inequality,
their effect is often different.
Simulations of 1970-2000
Gold producers:
Burkino Faso, Ghana, Mali, South Africa
Other commodities:
Ethiopia (coffee), Nigeria (oil), S.Africa (platinum)
General finding:
Under Product Price Targets, their currencies
would have depreciated automatically in 1990s
when commodity prices declined,
perhaps avoiding messy balance of payments crises.
COL Managed floating Inflation targeting framework (1999) -0.0297 0.0489 0.0046
MEX Independently floating Inflation targeting framework (1995) 0.1070 0.1619 0.1086
TTO Other conventional fixed peg Against a single currency 0.0698 0.2025 0.0698
VEN Other conventional fixed peg Against a single currency -0.0521 0.0064 -0.0382
* Chile declared an inflation target as early as 1990; but it also had an exchange rate target, under an explicit band-basket-crawl regime, until 1999.
The 4 inflation-targeters in Latin America
show correlation (currency value in $ , import prices in $)
>0;
Presidents Patricio Aylwin, Eduardo Frei, Ricardo Lagos and Michelle Bachelet
Data: CEP, Encuesta Nacional de Opinion Publica, October 2009, www.cepchile.cl. Source: Engel et al (2011).
5 econometric findings regarding bias toward
optimism in official budget forecasts.
Official forecasts in a sample of 33 countries
on average are overly optimistic, for:
(1) budgets &
(2) GDP .
The bias toward optimism is:
(3) stronger the longer the forecast horizon;
(4) greater in booms
(5) greater for euro governments under SGP budget rules;
(4) The optimism in official budget forecasts is
stronger at the 3-year horizon, stronger among
countries with budget rules, & stronger in booms.
Open questions:
Are the budget rules to be interpreted as ex ante or ex post?
How much of the structural budget calculations are
to be delegated to the independent panels of experts?
Minimalist approach: they compute only 10-year moving averages.
Can one guard against subversion of the institutions (CBO) ?
References by the author
Project Syndicate,
“Escaping the Oil Curse,” Dec.9, 2011.
"Barrels, Bushels & Bonds: How Commodity Exporters Can Hedge Volatility," Oct.17, 2011.
“The Natural Resource Curse: A Survey of Diagnoses and Some Prescriptions,”
2012, Commodity Price Volatility and Inclusive Growth in Low-Income Countries , R.Arezki & Z.Min, eds..
HKS RWP12-014. High Level Seminar, IMF Annual Meetings, DC, Sept.2011.
"The Curse: Why Natural Resources Are Not Always a Good Thing,”
Milken Institute Review, vol.13, 4th quarter 2011.
“The Natural Resource Curse: A Survey,” 2012, Chapter 2 in Beyond the Resource Curse,
B.Shaffer & T. Ziyadov, eds. (U.Penn. Press); proofs & notes; Summary. CID WP195, 2011.
“How Can Commodity Exporters Make Fiscal and Monetary Policy Less Procyclical?”
Natural Resources, Finance & Development, R.Arezki, T.Gylfason & A.Sy, eds. (IMF), 2011. HKS RWP 11-015.
“On Graduation from Procyclicality,” 2012, with C.Végh & G.Vuletin; J. Dev. Economics.
“Chile’s Solution to Fiscal Procyclicality,” 2012, Transitions blog, Foreign Policy.
“A Comparison of Product Price Targeting and Other Monetary Anchor Options, for
Commodity-Exporters in Latin America," Economia, vol.11, 2011 (Brookings), NBER WP 16362.