Energy Resources and Economic Development 6th SITE Energy Day Elena Paltseva (SITE, Stockholm and NES, Moscow) November 27, 2012

Energy Resources and Economic Development

6th SITE Energy Day

Elena Paltseva (SITE, Stockholm and NES, Moscow)

November 27, 2012

Context

I

Russia:

I past decade: oil exports have risen from 120 million to 240 million tons (from $50 bln to $390 bln)

I o¢ cial statistics: commodity exports 60% of Russian budget revenues

I closer to some 75-80% in reality, if one were to account for the fact that much of service sector is driven by oil and gas money

I petro sector ~25% of GDP

I Is this good for Russia?

I

Two more examples:

I Norway (petroleum sector - 25-27% of GDP)

I Angola (petroleum sector - 45% of GDP)

Main question

I

Is it good for an economy to be rich in/be reliant on petro resources?

I or any kind of natural resources?

Resource curse

I

Hypothesis: Resources are bad for economic development

I negative correlation btw share of primary exports in GDP and economic growth (Sachs & Warner (1995), etc.)

I

Norway vs. Russia vs. Angola?

I variety in performance of resource-rich states I

WHEN are resources good and when are they bad?

Explanations for resource curse

I

"Dutch Disease":

I resource windfall!extra income!non-tradable good prices

" !higher wages in service sector!labor shifts from manufacturing to services!de-industrialization

I cannot explain the variety of outcomes among resource-rich countries

I

Institutional factors: whether resources are a curse or a blessing depends on institutional environment

I resource endowments a¤ect political incentives

I which, coupled with institutional constraints, determine the e¤ect of resources on economic (and political) developments

Institutions and resource curse

I

Good institutions - "resource blessing", bad institutions -

"resource curse"

I property rights protection!lower incentive to "grab" and misuse resource rents

I better accountability of politicians!^{same e¤ect}

I !democracy (??)

I

Reverse relation: resources may also shape institutions

I resource rents provide incentive to cling to power !^slow down/block democratization, have negative e¤ect on institutions

I

Empirically:

I Resource-institution link supported (Boschini, Pettersson and Roine (2007), Mehlum et. al. (2006), etc.)

I resources bad when institutions are weak, good - when strong

I also type of resources matters

I though, once you control for country-speci…c e¤ects, results are (somewhat) mixed

What about oil curse?

I

The above logic is valid for oil

I

Moreover, oil industry is often government-controlled + non-transparent ! even stronger incentives to grab the proceeds

I

Indeed,

I oil is found to have negative e¤ect on growth (Sala-i-Martin and Subramanian, 2003)

I through lowering institutional quality

I negative correlation between oil and democracy (Ross (2001))

I causal e¤ect unclear: level of oil production can be a¤ected by the decisions of those in power

I oil-discovery events and the size of discovery negatively a¤ect democracy (Tsui, 2011)

I oil wealth increases time in o¢ ce of political leaders in autocracies,but not in democracies (Andersen and Aslaksen, 2013)

Speci…c institutional/economic outcomes

I

Oil was also shown to

I increase corruption, but only in less democratic or autocratic countries (Aslaksen 2007 or Vincente, 2010)

I reduce corporate transparency in countries with greater risk of state expropriation (Durnev and Guriev, 2011)

I increase the electoral incumbency advantage and the size of public sector, while having no e¤ect on living standards (study of Brazil, Caselli and Michaels, 2012) and Ferraz and

Monteiro, 2010)

I increase the volatility of output growth, thereby harming growth (Van der Ploeg and Poelhekke, 2009)

I increase the chance of armed con‡ict (Collier and Hoe¤er, 2005 or Lujala, 2010)

Petro revenues and haven deposits

(based on Andersen, Johannesen, Lassen and Paltseva (2012)

I

Lots of anecdotal evidence on relation between oil and private rents of political leaders

I E.g., the Abacha regime in Nigeria, 1993-1998:

"...Abacha directed his national security advisor to create and present false funding requests, which Abacha authorized. Cash in truckloads was taken out of the central bank to settle some of these requests. The national security advisor then laundered the proceeds through domestic banks or Nigerian and foreign businessmen to o¤shore accounts held by family

members...Abacha is safely estimated to have embezzled between USD 2-4 billion during his four and a half year rule."

(FATF, 2011) I

No systematic evidence

I

Research question: When and to what extent do

petroleum rents transform into personal hidden wealth?

Approach

I

Use unique dataset on foreign deposits from Locational Banking Statistics - Bank for International Settlements

I observe bank deposits owned by residents of country i in havens/non-havens at year t (1977-2008)

I individual banks report breakdown of foreign liabilities on counterpart countries, central banks aggregate to the country-pair level

I 43 reporting countries including all major …nancial centers

I classify into non-havens (comply to international transparency standard) vs. havens

I E¤ectively residents of all world countries (190 in our largest dataset)

I Around USD 7,000 billion of foreign deposits in 2008

I

Relate haven and non-haven deposits to petro rents, degree of

democracy and proxies for …nancial and political risk

Results

I

In autocracies:

I shocks to oil and gas rents increase bank deposits held in havens

I the e¤ect is enhanced by higher political risk (i.e., just before the elections or domestic con‡icts)

I the e¤ect is more pronounced in oil-rich autocracies than in oil-poor ones

I

In other regimes: no such e¤ects

I

Size of the e¤ect:

I 6-10% of petroleum rents in autocracies are transformed into personalized hidden wealth

Summary

I

There are potentially substantial political and economic problems related to oil wealth

I

These problems are conditioned on the quality of institutions

I

The lesson: improve institutions

I which ones?

I invest in non-oil sector

I establish oil wealth fund

I …ght corruption (how?), etc. (?)

I

However, oil wealth itself may hinder institutional

development, in particular, due to lack of incentives of the current party in power

I how to get out of this trap?

I credible commitment?