December 8th, 2014
@ GSID, Nagoya University
Preventing
Natural Resource Curse
Why do we need
to think about
Natural Resources?
Kazue Demachi
Kobe University
[email protected]
1
2
Natural Resources
Being Natural Resource-Rich is…
• Lucky?
•Commodities
„Do not need to import Oil, Gas or other metals
from other countries
„Can earn money by exporting them
• Exhaustive / Non Renewable Resources
• Mineral resources (Mining)
• Fossil Fuels(Coal , Crude Oil, Natural Gas)
• Unlucky?
„Many countries suffering from violent conflicts
„Unfair terms of trade (Prebisch-Singer Hypothesis)
„Resource-rich countries tend to have undemocratic
government
•Land
•Forest
•Water
Renewable
3
4
Advantages and Risks
• Many poor countries in the world are
historically dependent on natural resource
export
of having natural resources
advantages
Poverty ї Resource Dependence
• Booster for resource-based
‹wars and conflicts for long years, manufacturing
and agriculture declined, only left with
commodity export
• Resource revenue will finance investment in
education or agriculture (building schools, set up irrigation systems)
Resource Dependence ї Poverty
Risks
• Strong influence of price uncertainly and volatility
• Government budget and macroeconomy suffer from
‹ the availability of natural resource (and dollars
from it) leads to problems
industrialization (ex. Investmentin Petro-Chemistry)
Procyclicality
5
• …and other difficulties under “Resource Curse”
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Resource Curse
1
• historically resource-abundant low
income countries tend to experience
lower economic growth than resource
scarce countries
1.What Is
Resource Curse?
“Resource Curse”
“Oil Curse”
“Paradox of Plenty”
“Resource Trap”
7
8
Resource Curse 2
•Negative correlation between
commodity export and per capita
economic growth ratio between
1970 to 1989
(Sachs and Warner 2001)
9
Economic growth rate as
an outcome of many problems
Jeffrey Sachs and Andrew Warner (2001) “The Curse of Natural Resources,” European Economic Review 45: 827-838.
10
Mechanisms of “Curse”
A. Stagnation of other export sectors
(manufacturing / agriculture)
э Dutch disease
B. Budget deficit and procyclicality
(increase of government expenditure)
C. Accumulation of external debt
D. Current account deficit (increase of imports)
E. Corruption and undemocratic government
F. Capital Flight and Low domestic investment
G. Violent conflicts
2. How Does
the Resource Curse
Work?
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12
A. Stagnation of Export Sector
Dutch Disease
other than Natural Resources
Dutch Disease
• Resource Prices denominated in dollar
• Increase of Resource Export means more
inflow of foreign currency
• As foreign currency increases, domestic
currency appreciates
• Other export sector loses international
competitiveness as the currency
appreciates
• Other export sectors stagnate Ex.) Nigeria
13
Decline of other industries
Domestic
currency
appreciates
Exchange Rate
$1 = 100 Taka
T-shirt Export Price
1 Piece 160 Taka = $1.6
Resource Discovery
Resource Boom
foreign currency
(US$) inflow
increase
Chinese T-shirts
$1.8
Exchange Rate
$1 = 80 Taka
T-shirt Export Price
1 Piece 160 Taka = $2.0
Garment
sector
declines
Even higher
dependence on
resource export
14
B. Budget Deficit and Procyclicality
C. Accumulation of External Debt
Nigerian exports
60.0
50.0
40.0
When Resource Price is high
30.0
• government increases expenditure as Resource Revenue
increases (new projects, new constructions, salary increase)
• Inflow of foreign currency eases payment for imports, thus
import increases
20.0
10.0
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0.0
Oil Export (% of GDP)
Non-Oil Export (% of GDP)
Source䠖CBN(2011) , Table D1.1 “Foreign Trade”.
When Resource Price falls
Nigerian Exports by category
manufacturing
100%
80%
60%
fuels and mining
40%
20%
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
Source: WTO Statistics Database
2012
agriculture
0%
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Pro--Cyclicality
When Resource Price falls
䞉 Government revenue decrease
䚓 but once enlarged budget cannot be cut
䞉 Difficult to borrow money (credibility deteriorate)
䞉 Difficult to import (less dollar, weaker currency)
䞉 Need to pay back the old debt
Boom
Bust
䞉 Government revenue increases
• Government revenue decrease
se
¾Cannot size down the expenditure
diture immediately
• Government runs budget deficit
¾Borrowing from domestic banks
¾Borrowing from foreign banks э debt accumulation
¾Printing money э Inflation tax (seigniorage䠅
16
Where this “Cycle” comes from?
•Prices і World Economic Cycle
•Volatility of International Prices
‹Sudden Price hike and sudden Price fall
‹Difficult (almost impossible) to forecast
the movement
їdifficult to forecast the government revenue change
䚓 Spending also increases
䞉 Easier to borrow money from abroad
䞉 Easier to import (abundant dollar,
strong currency)
When Resource Price is high
Boom-and-bust
cycle
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Shale gas “revolution” in North America
Crude Oil Prices 1861-2013
ї opening export for Japan (2017䡚)
US dollars per barrel, world events
Natural Gas Price (Quarterly, real)
US$
20
Russian Federation
18
Indonesia
United States
16
Financial crisis
14
12
Volatile
Unpredictable
10
8
6
4
2
Data source: IFS.
World gas prices may converge in lower level?!
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Investment vs Consumption
D. Current Account Deficit
• High dependence on Import (due to Dutch disease)
Current Account = Export-Import
Consumption
Boom
• Increase in Imports
¾High consumption, low saving (Current Account deficit)
When Resource Price is high
¾ If Export > Import: Current Account Surplus
Surplus allocated to domestic or foreign investment
¾ If Export < Import : Current Account Deficit
Deficit must be fulfilled through foreign borrowing
э accumulation of foreign debt
• Increase of Consumption goods Import
Consumption Goods … Consumed for one time
(Food, Alcohol etc.)
Capital Goods … Used for domestic production
(Machineries etc.)
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E. Corruption and
Undemocratic Government
• Resource abundance
эgovernment does not need to collect tax
эno responsibility to be accountable to
tax payers
• Undemocratic government
эno regal tool to accuse government
эweak motivation for citizens to
accuse government
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F. Capital Flight
•A few domestic investment opportunity
•Less trust on
• own government policy
• local banks
• value of their own currencies
э Outflow of capital (Capital Flight)
Despite the strong need
of capital and investment
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2013Q3
2012Q4
2012Q1
2011Q2
2010Q3
2009Q4
2009Q1
2008Q2
2007Q3
2006Q4
2006Q1
2005Q2
2004Q3
2003Q4
2003Q1
2002Q2
2001Q3
2000Q4
2000Q1
1999Q2
1998Q3
1997Q4
1997Q1
1996Q2
1995Q3
1994Q4
1994Q1
1993Q2
1992Q3
1991Q4
1991Q1
1990Q2
1989Q3
1988Q4
1988Q1
1987Q2
1986Q3
1985Q4
1985Q1
0
䕔Other problems associated with
G. Violent Conflicts
Resource-dependent Economies
• disputes over rights to control the
resources or providing revenue to cover
the cost of war
їNatural Resource revenue triggers/prolongs a conflict
(1) FDI into Manufacturing vs Extractive
Industries
(2)High unemployment ratio, increase of
youth generation, and widening income
gap
• Over the past 60 years, 40% of civil wars are
associated with natural resources
• since 1990 there have been at least 18 violent
conflicts fuelled by the exploitation of natural
resources
(3)Unsustainable development
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(1) FDI to Extractive Industries
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(2) Income gaps and unstable society
• “FDI is a very important key factor for successful
growth in developing countries”
… in case of FDI into manufacturing.
¾Local employment
¾Technology dissemination through industrial
linkage
¾Influence on Human Capital
Demographically…
• High population growth
• Unstable society with large share of young population
FDI into Extractive Industries…
• Little job creation in the resource industry
ї high unemployment among youth
їwidening income gap
ї increasing risks of criminals, violence and conflicts
• FDI into extractive sector is…
• Capital intensive: little impact on local employment
• High technology: difficult to be transmitted to local
їnot necessarily growth conducive
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(3) Unsustainable development
•Unrenewable nature of metals and fossil fuels
•Possible technical change and demand shift
in the world
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3. How Resource Curse
Can Be Prevented?
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A. De-link the Government Expenditure
Possible measures
and Resource Revenue
• Setting Fiscal Rule on spending
A. De-link the Government
Expenditure and Resource Revenue
B. Set up Common Fund/Future
Generation Fund
C. Implement EITI
D. Promote Domestic Investment
Circumvent
human
psychological
problems
¾ Price-based rule
¾ Expenditure Growth Rule
䚓 set the ceiling and floor for expenditure growth
• Promote independence of Central Bank
• Focus on Non-resource Primary Balance (NRPB)
• Preferential allocation on growth-enhancing and
primary spending (education, health etc.)
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Ideal Counter-Cycle
B. Set up a Common Fund
When Resource Price is high
䞉 Set aside some revenue
䞉 Limit the expansion of government
expenditure
Smooth out the
consumption
and Investment
䞉 Supplement the Budget and
Current Account deficit
䞉 Stimulate the economy with
disbursement
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• High volatility of international resource prices
Stabilization Fund
• Minerals and Fossil fuel resources are exhaustible
эNeed to plan the economy after resource exhaustion
Future Generation Fund
•Need to allocate resources to priority socioeconomic
project
Development Fund
Recent increase in
Sovereign Wealth Fund
When Resource Price falls
33
Setting up
Common Funds
Aims:
• Buffering for price change and
revenue stabilization
• Reserve for future generation
(after resource dry up)
• Funding source for public
investment
Special skills and experiences required
Need specialists on international finances
Revenue Watch Institute (2013).
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“80% of countries fail to achieve good
governance in their extractive sectors”
•
•
•
•
Comprehensive and timely report
Follow legally mandated deposit and expenditure rules
Auditing
Legislative oversight
Resource Governance Index 2013
http://www.revenuewatch.org/rgi
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C. Implement the EITI
• Extractive Industry Transparency Initiative
Compliant countries: 29,
including Mozambique, Tanzania, and Zambia
Candidate countries: 17
including Ethiopia and Myanmar
• Objective
• Increase the government transparency of resource revenue
э accountability to citizens
• Promote the transparency of resource developing foreign
companies
• A guideline for Efficient use of Natural Resource Revenue
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FUTURE
TODAY
D. Promote Domestic Investment
• Current generation is depleting the
national wealth, which should be left
for future generation, at least in
different form
conversion of asset
Natural Resource ї man-made capital
(fund, buildings, infrastructures)
ї Human Capital
(knowledge, culture)
“just changing
the portfolio of
asset”
Non renewable
Natural
Resources
Assets in other
forms
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Cursed
4. Experiences of
Resource-Rich Countries
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Nigeria
• Dutch disease
• Decline of other industries
• Import-dependent: high consumption
• Low agricultural productivity: mass food import
• Budget deficit: high government spending and subsidy
• debt accumulation
• Insufficient refinery capacity, domestic supply shortage
• Violent conflicts, secession
• BiafranWar, continuous kidnapping by youth armed group
• High government corruption over “resource rent”
• Ministry of Petroleum Resourcesя national oil company (NNPC)
• government яtransnational companies
• government яdomestic oil venders
43
Success cases
Malaysian Exports by category
Indonesia and Malaysia
100%
90%
80%
70%
Indonesia
60%
manufactures
50%
• Prudent fiscal and exchange-rate policies
40%
30%
• Planning based on long-term vision
• Good control on over-spending
20%
10%
fuels and mining
agriculture
0%
• Resource allocation toward manufacturing,
agriculture and human resource development
• High saving ratio of resource revenue
Indonesian Exports by category
100%
90%
ex) 1974-78 Indonesia saved 1/3 of oil revenue abroad
• Investment in rural area
80%
manufactures
70%
60%
50%
40%
fuels and mining
30%
Malaysia
• Late comer: Operation started after development
policy got on track
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20%
10%
agriculture
0%
Source: WTO Statistics Database
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