Growth Week 2011: Ideas for Growth Session 9 - Climate Change, Environment, Natural Resources

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Growth Week 2011: Ideas for Growth Session 9 - Climate Change, Environment, Natural Resources

  1. 1. Harnessing Oil Revenues in Ghana Rick van der Ploeg, Radek Stefanski and Samuel Wills* Oxford Centre for the Analysis of Resource Rich Economies (OxCarre) Department of Economics, University of Oxford www.oxcarre.ox.ac.ukOxCarre Conference June 2011 1
  2. 2. Overview Ghana has • Ghana has discovered oil with estimated reserves of discovered oil between 780 and 4000 million barrels, but this is being revised upwards frequently • This is relatively modest on a global scale, though it will still comprise a significant component of Ghana’s GDP It is a small, • The oil windfall will also be temporary, so the issue is how temporary and to spread the new found wealth between present and volatile windfall future generations. • Ghana will also have to cope with the notorious volatility of oil prices and the effects this will have on its budget and economy. • To make the most of this windfall Ghana must consider all To harness the aspects of oil production, though our focus is on spending. windfall they • Ghana should spend some of the income upfront to should repay debt stimulate GDP growth, whilst considering inflation, absorption and Dutch disease. This differs from typical and invest in recommendation of establishing a Sovereign Wealth Fund capital, rather than • Ghana should focus this spending on reducing foreign a SWF debt and investing in domestic capital to promote structural transformation of the economy Harnessing Ghana’s Oil Windfall 2
  3. 3. Ghana has discovered oil with estimated reserves of between 780 and4000 million barrels, but this is being revised frequently Ghana has discovered oil commercial oil reserves in two These reserves amount to between 780 and 4000 million licences off the eastern coast barrels Total Ghana oil reserves at different probs, m barrels 1600 p 10% 1400 p 1200 50% 1000 800 600 400 200 0 Total Total DWT Total Total Other Jubilee WCTP (non-Jubilee)Source: Tullow Oil 2010 full yr results Harnessing Ghana’s Oil Windfall 3
  4. 4. This places Ghana at approximately 50th in the world by proven oilreserves, with significantly less oil than major producersGhana vs Top 20 countries by proven (90%) oil reserves, m barrels 2010Source: CIA World Factbook, 2010 Harnessing Ghana’s Oil Windfall 4
  5. 5. The reserves are small relative to Ghana’s population, however theymay be significant as a proportion of GDP Oil reserves/population, ‘000 barrels per person 45 40 35 30 With potentially 160 25 barrels/head Ghana is 20 15 small in terms of 10 reserves per capita 5 0 Oil reserves/GDP, barrels per dollar 1.2 1.0 However, Ghana could 0.8 be in the top 20 0.6 countries by 0.4 reserves/GDP if most 0.2 of its reserves are accessible 0.0Source: CIA World Factbook, 2010 Harnessing Ghana’s Oil Windfall 5
  6. 6. Current planned production from the Jubilee field is likely to betemporary and last for ~20 years, peaking from 2012-2015Predicted average oil output by year, m barrelsSource: World Bank, 2009, “Economy-wide impact of oil discovery in Ghana” Harnessing Ghana’s Oil Windfall 6
  7. 7. Ghana collects the revenue from this production through fourchannels Oil revenue has four These four components combine reservesGhana’s total oil income Jubilee 90% proven to give components Cumulative oil revenue when oil price=$75/barrel, $ m (2010) Name Size Royalty 5% gross GNPC 13.75% commercial net profit profits Additional Oil 10-25% if Entitlement rate of return 18-33% Income Tax 35% net profit Harnessing Ghana’s Oil Windfall 7
  8. 8. The level of revenue depends closely on the oil price, and may amountto a potentially significant share of GDP and govt income per yearGhanaian government oil revenue from Jubilee field, % 2010 GDP and % 2010 Govt Revenue 8% The “Additional Oil $/barrel: Entitlement” increases 100 6% with the oil price Oil revenue 75 from Jubilee 4% 50 field as a share 30 of 2010 GDP 2% 0% 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 50% 100 Oil revenue 40% 75 from Jubilee 30% 50 field as a share 30 of 2010 20% Government 10% Income 0% 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029Source: World Bank 2009, Team Analysis Harnessing Ghana’s Oil Windfall 8
  9. 9. Ghana will thus have a small and temporary windfall which hasparticular challenges compared to other resource rich countriesTaxonomy of different types of resource rich countries Windfall size Windfall duration Challenges Example Small Temporary • Speed up economic Ghana development • Provide for future generations Large Temporary • Speed up economic Nigeria development • Provide for future generations • Manage absorption constraints • Prevent underutilisation of capital •Prevent inequality and corruption Large Long-lasting • Manage oil price volatility to Iraq (Large economy) safeguard recurrent spending (mostly government jobs) • Less focus on future generations Large Long-lasting • Avoid becoming a rentier state Kuwait (Small Economy) • No absorption constraints due to imports of skilled/unskilled labour and capital Harnessing Ghana’s Oil Windfall 9
  10. 10. Ghana also has its own specific challenges such as low GDP, lowcapital, unproductive agriculture and high inflationGhana vs the largest 48 oil producers, percentiles p10 p50 p90 p100 GDP/Capita Ghana: 1,192 Low GDP/capita 2005 USD 2,001 9,006 43,560 Ghana: 0.01 Capital/capita Low physical capital Proportion of US 0.02 0.19 0.92 Ghana: 0.63 Human Cap/capita Low human capital Proportion of US 0.54 0.67 0.86 Ghana: 998 Large and unproductive Labor prod. Agr. agricultural sector 2005 USD 514 3,594 50,874 Inflation rate 9.20% High inflation % pa, Mar 2011Source: World Development Indicatiors, 2011 Harnessing Ghana’s Oil Windfall 10
  11. 11. To address these challenges Ghana must consider all aspects of oilproduction, though this work focuses on spendingThe twelve precepts of the Natural Resource Charter Stage Precepts Overarching Issues 1. Maximising benefits to citizens Decision to 2. Ensuring openness and accountability Extract 3. Realising full benefit subject to attracting investment, with stable and robust Fiscal Regime policies Contracts & 4. Using competition to award contracts and development rights Operations 5. Protecting or compensating the environment and local society 6. Operating nationally owned resource companies transparently and Tax & Royalty competitively Collection 7. Promoting growth through high levels of investment Focus Revenue 8. Smoothing spending through stabilization funds or limited foreign borrowing of this Management 9. Effectively spending to increase efficiency and equity work Sustainable 10. Building private investment to stimulate and diversify growth Development International 11. Requiring and enforcing best practice amongst the international community Actors 12. Following best practice amongst resource companiesSource: http://www.naturalresourcecharter.org Harnessing Ghana’s Oil Windfall 11
  12. 12. The spending decision can be divided into two questions: whether toconsume or invest the windfall, and what to consume or invest in A Consume or invest the windfall? B What to consume or invest in? Harnessing Ghana’s Oil Windfall 12
  13. 13. The spending decision can be divided into two questions: whether toconsume or invest the windfall, and what to consume or invest in A Consume or invest the windfall? B What to consume or invest in? Harnessing Ghana’s Oil Windfall 13
  14. 14. A The Ghana Petroleum Revenue Management Act (PRMA) hasrecently been passed, outlining the planned spending/savings mix Spending •Unless otherwise directed by the national development min 70% Long-term plan, allocated to 11 priorities: investment •human resources •agriculture •welfare •education /health •transport •water/sanitation •rural Annual Budget •institutions/governance •security 70%* •alternative energy •environment 30% •Unallocated ConsumptionPetroleum Account(BoG) Saving • Built up quickly to capped level, which is reviewed 30% 70% Stabilisation regularly Fund • Used to cushion the impact of adverse price/production changes •After production ends, combined with Heritage fund for Petroleum Funds permanent income • Built up slowly initially, then receives all contributions min30% Heritage Fund once stabilization fund established • Used to support welfare of future generations once resources exhausted *: Mix based on “Benchmark Revenue”, moving avg of past and predicted oil prices and output. Can vary from 50-70% Source: Petroleum Revenue Management Act 2011 Harnessing Ghana’s Oil Windfall 14
  15. 15. A To assess various spending rules we construct a simple model of anintertemporally optimizing agent who can either consume or save abroad As a benchmark we take the permanent income, spend- The permanent income rule is then adjusted for a range all and bird-in-hand rules of assumptions Substitutability and impatience Household chooses consumption and foreign assets to maximise intertemporal utility Finite lives (Blanchard Yaari constant hazard rate) Consumption is perfectly smoothed, and the permanent income from the windfall is consumed, when r=ρ Productivity growth Population growth The spend-all rule dictates that all oil income is consumed as it is received Precautionary savings The bird-in-hand rule consumes a fixed proportion of foreign assets: 4% in the case of Norway Dynamic programming following Skinner (1998), see Backup Harnessing Ghana’s Oil Windfall 15
  16. 16. A On the spectrum of spend/save options, The PRMA is closer to thespend-all than the permanent-income or bird-in-hand rules PRMA Spend All Elaborated in next slides Bird in Hand (4%) Permanent Income Spending options Benefits Spending and Asset Profile Consumption*, % 2010 GDP Spend all 5% • Better returns earned through domestic investment than foreign 4% Sovereign Wealth Fund 3% • Discounting future generations 2% PRMA welfare (impatience); e.g., finite lives 1% •Substitutability of generations welfare 0% 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 • Spending stability Assets*, % 2010 GDP • Less inflation and currency 50% appreciation 40% • Less Dutch disease 30% • Precautionary savings 20% 10% PRMA • Population growth 0% Permanent • Absorption constraints Income -10% 201120132015201720192021202320252027202920312033*: Assumes oil price is constant at $75/barrel. r=2.5%. Ignores current debt positionSource: Team analysis Harnessing Ghana’s Oil Windfall 16
  17. 17. A Spending the windfall upfront can make sense if policymakershave a short decision horizon or are very utilitarianComparison of spending rules to permanent income baseline Substitutability Finite Lives Spend All Impatience Permanent Income Adjustment Description Spending and Asset Profile Consumption*, % 2010 GDP • Utilitarian (perfect substitutability between 5% utility of different generations, EIS = ∞) versus Rawlsian (no substitutability, EIS = 0). 4% Substitutability • More substitutability brings consumption forward, so that it is not affected by discounting 3% •This analysis assumes r=2.5%, ρ=20% and 2% EIS=1 (spending peaks at 7.5% of GDP) 1% • Impatience describes the rate at which future periods are discounted 0% • This analysis assumes the real rate of interest 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 Impatience r=2.5%, ρ=20% and EIS=0.5 • It could be thought of as a 17.5% chance of Assets*, % 2010 GDP the government being removed from office 40% each year 30% 20% •Finite lives may be another reason why 10% policymakers are impatient 0% Finite Lives • We use a stylised adjustment setting the average lifetime to 61 years (Blanchard constant -10% death rate=1.64%) -20% -30% 201120132015201720192021202320252027202920312033*: Assumes oil price is constant at $75/barrel. Ignores current debt positionSource: Team analysis Harnessing Ghana’s Oil Windfall 17
  18. 18. A Alternatively, saving beyond the PI rule may make sense if there ispopulation growth, though precautionary savings is only a minor concernComparison of spending rules to permanent income baseline Prec Saving CRP=3 Pop’n Growth Spend All Prec Saving CRP=11 Permanent Income Adjustment Description Spending and Asset Profile Consumption, % 2010 GDP 2% • Precautionary savings is when people Zoomed In save more when income is volatile as a buffer against future income shocks. Precautionary This delays consumption 1% Savings • This assumes oil is the only source of income • CRP=3 and CRP=11 (very conservative) • P_O=$75, StdDev_O=24* 0% 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 Assets, % 2010 GDP • Population growth delays consumption to allow more when 70% there are more people in the future 60% •This analysis assumes population 50% Population growth at 1.85% (Ghana 2011 rate) Growth 40% 30% 20% 10% 0% -10% 201120132015201720192021202320252027202920312033*: fit to annual Brent Crude data, 1970-2010Source: Team analysis Harnessing Ghana’s Oil Windfall 18
  19. 19. A On balance, Ghana’s windfall spending can be brought forward relative tothe PI rule. What it should be spent on is discussed in the next section Spending rule Importance CommentSpend now High •If properly considered then should borrow heavily to smooth consumption GDP growth PI across generations Spend All High • Too aggressive due to inflation and absorption constraints PRMA N/A •Less spending than spend-all and is just as volatile which is not so good. However, does accumulate some assets for future •A more utilitarian social welfare function leads to much more Substitutability High consumption by present generations at expense of future generations made possible by large-scale borrowing. Medium •Consumption is much more upfront if politicians are myopic due to the Impatience fear of being removed from office. •Allowing for finite lives (no bequest motive) implies more consumption Finite Lives Low upfront and less in future, so initially borrowing and less asset accumulation in the long run than the PIH. Permanent High •Good benchmark for developed countries, but development needs mean Income more should be spent upfront in countries like Ghana Precautionary Medium •Prudence leads to less consumption upfront and more precautionary Savings buffers Population Medium •Realistic population growth also leads to less consumption upfront and to Save now Growth a gently rising stock of assets. Harnessing Ghana’s Oil Windfall 19
  20. 20. The spending decision can be divided into two questions: whether toconsume or invest the windfall, and what to consume or invest in A Consume or invest the windfall? B What to consume or invest in? Harnessing Ghana’s Oil Windfall 20
  21. 21. B Once the decision of whether to consume or invest the windfall ismade, Ghana must decide what to consume or invest in i Repay foreign borrowing We focus on Investment ii Accumulate foreign capital (SWF) investment iii Accumulate domestic capital iv Citizen dividends Consumption v Lower taxes or higher public consumption vi Subsidies to specific industries or consumers Harnessing Ghana’s Oil Windfall 21
  22. 22. B i) Repaying foreign borrowing may reduce spreads and the risk oflower creditworthiness due to resource-driven conflictLower foreign borrowing will reduce interest rate spreads, Lower foreign borrowing will also reduce the risk ofboosting capital accumulation and development reduced creditworthiness due to resource-driven conflictLn bond spread residual vs debt/GNI residual, Ln bond spreads vs resource exports/GDP Slope = 1.89 •Expect oil wealth to improve credit worthiness and lower spreads •But, in more fractionalized, corrupt societies oil wealth may cause conflict and civil war (Collier, Hoeffler) •Creditworthiness falls and bond spreads riseSource: van der Ploeg and Venables (2011) Harnessing Ghana’s Oil Windfall 22
  23. 23. B i) If Ghana faces an increased cost of borrowing due to foreign debt, it isoptimal to postpone windfall consumption and quickly repay borrowings Ghana may be facing high interest spreads due to its The interest rate premium makes it optimal to postpone stock of foreign debt consumption in the short term to repay debt •External stock of public debt is ~37% of GNI (2009) •Solving a standard CRRA maximisation, with a risk • S&P rates 2007 10yr $750m Eurobond as “B”, 3 steps premium on debt: below Egypt’s “BB”. Yield range from 6.7-7.1% past 6 mth If Ghana’s debt is increasing the cost of borrowing it can be represented by a kink in the interest rate •The inclusion of the debt premium alters the Euler equation, depending on the level of debt •Both converge to the steady state = r * for F ≤ F and = r * +Π ( F ) > r * for F > F r r •Kink allows interest premium and endogenous choice of F in steady stateSource: van der Ploeg and Venables (2011), World Bank Datacentre, Bloomberg (2011) Harnessing Ghana’s Oil Windfall 23
  24. 24. B i) Following a windfall, consumption should rise slightly and debtshould be repaid quickly. A SWF is only suitable if the windfall is large The dynamics from a small and large windfall can be It shows that a SWF is only suitable if the windfall is expressed in a phase diagram sufficient to completely reduce the interest premium Time Consumption, C Debt, F After Consumption Borrowing, announcement path jumps up increasing level of debt During Steep increase Rapid pay down extraction in consumption debt Small windfall case: Large windfall After depletion Resume growth path but ‘further along’ the development path Small windfall Large windfall case: During Run debt down to F during Initial jump in total consumption: extraction extraction. Start building SWF After depletion Support permanent increase in λu is eigenvalue with positive real part > r*, so consumption from interest on SWF smaller in a smaller capital-scarce economy as Π′ pushes up λu.Source: van der Ploeg and Venables (2011) Harnessing Ghana’s Oil Windfall 24
  25. 25. B i) Now, if there is endogenous capital formation, then the windfallshould be spread between debt repayment and public infrastructure We assume the government can choose public capital, When transfers are available, taxes are set to zero, and transfers and taxes to maximise welfare the windfall is spent on public capital and repaying debt •Government chooses time paths for lump sum transfers •Optimal income tax rate is zero T, distortionary taxes τ, and public capital stock S, and hence paths of K, Y, W, D, C, to maximise •Intratemporal smoothing: G =ψ σC ∞  C1−1/σ +ψ G1−1/σ  ∫   exp(− ρ t )dt •Optimal infrastructure: WS ( S ,0) r * +Π ( D) + DΠ ( D) + δ S = 0  1 − 1/ σ  • • = [r * +Π ( D)]D + G + T + S + δ S − N − τ Y D •Optimal time profile of private consumption: •Production with private & public capital: Y = K α L1−α S γ C σ C [ Π ( D) + DΠ ( D)] for D > D, else C 0 = = •Foreign capital supply: (1 − τ )αK α −1L1−α S γ = r* => K = K ( S ,τ ) When transfers aren’t available, consumption must rise (Marginal product of capital = world interest rate) through lower taxes and higher public infrastructure •Private consumption is now C = W(S,τ) •Consumption: C =W + T •Marginal Cost of Public Funds increases with tax rate: = φ 1 >1 •α=0.4, γ=0.25, ρ=r*=0.05, σ=0.75, ψ=0, δK=δS=0.05 - Depresses demand for  α  τ  1−    public vs private C  1− α   1−τ  σ This lets us find the optimal mix of policy - resources relax this ψ  G =   W( S ,τ ) after a resource windfall φ  •Public infrastructure:Source: van der Ploeg and Venables (2011) Harnessing Ghana’s Oil Windfall 25
  26. 26. B i) If lump sum transfers are possible, income taxes are stopped,debt is repaid and public capital is accumulatedResponse of economy to anticipated temporary windfall When a windfall is announced (division of 1st yr resource revenues): -Transfers rise (68%) - Debt is quickly repaid (11%) - Public capital is accumulated (21%) This results in: - lower r - more private K -higher output - higher wage - high consumption No windfall brought forward Anticipated windfallSource: van der Ploeg and Venables (2011) Harnessing Ghana’s Oil Windfall 26
  27. 27. B i) If lump sum transfers are not possible, income tax is reduced,debt is repaid and public capital is accumulatedResponse of economy to anticipated temporary windfall When a windfall is announced: -Tax falls - Debt is quickly repaid - Public capital is accumulated This results in: - lower r - more private K - higher output - higher wage - high consumption brought forward No windfall Anticipated windfallSource: van der Ploeg and Venables (2011) Harnessing Ghana’s Oil Windfall 27
  28. 28. B ii) If the windfall is large enough, accumulating foreign capital in aSovereign Wealth Fund may help with volatility and absorptionArguments for and against setting up a Sovereign Wealth Fund Argument Discussion 1. Providing for future generations Part A 2. Smoothing against oil price volatility Next slide >> For 3. Holding funds temporarily until Part B iii) absorption constraints are alleviated 1. Greater marginal benefit from Part B iii) current consumption or investment in domestic capital Against Harnessing Ghana’s Oil Windfall 28
  29. 29. B ii) Oil volatility is a major part of the resource curse and should bemanaged by hedging, stabilisation funds and a flexible economy Mexico oil export price, $ barrel • Use derivatives to hedge against adverse price movements • Used by Mexico (spent $1.5bn on option, earned $8bn), Ecuador, Colombia, Algeria, Texas, Louisiana Hedging • Unlikely to become widespread: • Political risks when lose • Market impact of hedging (information and market power) Harnessing Ghana’s Oil Windfall 29
  30. 30. B ii) Oil volatility is a major part of the resource curse and should bemanaged by hedging, stabilisation funds and a flexible economy Stabilisation funds should be considered The size of a stabilisation fund should be separately to “future generations” funds: determined according to four criteria: SWF of 31 oil producers, 2005 • Cost of volatility to the domestic economy? Stabilisation Stabilisation Fund • Opportunities for borrowing in downturn? Stab/Savings Savings • Stochastic process governing resource? None • Political risk – fund is lootable? It is impossible to fully insulate an economy from oil price volatility •2008-early 2009, MENAP FOREX reserves fell $40 bn and non-oil growth fell 5% points. •There were transmission channels other than revenue: - Resource sector investment - Capital mobility – Zambia Flexible - Other private sector responses Economy Therefore, the domestic economy should be designed to handle residual volatility • Encourage flexible labour and capital markets • Avoid hard to reverse commitments • Diversify….. Source: IMF Harnessing Ghana’s Oil Windfall 30
  31. 31. B ii) A sovereign wealth fund can be used to smooth “Dutch disease”: acontraction of the traded sector and a real appreciation during an oil boom Dutch disease overview Dutch disease simulations •Oil output increases •Spending rises on traded (T) and non-traded (NT) goods •T goods can be imported, but NT goods must be produced domestically • Labour (and capital) switch from T to NT • The relative price of NT also rises – a real appreciation These effects will be • If total labour (L) fixed, workers will move from T to NT Substitution effect mitigated if capital as NT goods can’t be imported and labour are imported Wealth effect • If total labour (L) flexible, workers still leave T as these goods are imported, but they choose to retire instead Managing Resource Revenue in LICs 31
  32. 32. B ii) Sovereign wealth funds can also be used to park fundstemporarily abroad to avoid absorption constraints binding• If there are absorption constraints, i.e., it takes nurses to train nurses, it takes roads to build new roads, etc., there may be real absorption constraints so that windfall can in the short run not be properly spent.• In that case, the real exchange rate will appreciate and reverse back as absorption constraints are relaxed.• This happens via gradually running down capital in the traded sector via wear and tear if traded sector is capital intensive or via gradual build up of home-grown capital if non-traded sector is capital intensive.• Message is that there may a justification to temporarily park revenue from windfall abroad until domestic capacity is big enough.• Must avoid investing in white elephants.• See van der Ploeg and Venables (2010) Managing Resource Revenue in LICs 32
  33. 33. B iii) To complement debt reduction, accumulating domestic capitalwill boost GDP and begin structural transformation • Ghana has both low GDP and low GDP growthLow GDP •This can be attributed to all sectors •To boost GDP growth Ghana must invest in domestic capital •Traded capital can be importedCapital •Non-traded capital must be “home-grown”: teachersInvestment teaching teachers •Investment should be in: •physical capital (infrastructure ) •human capital (education and health) Elaborated in •stimulating risk taking, entrepreneurship and R&D (via following slides generic tax subsidies). •Domestic investment will begin the structural transformationStructural away from agriculture, which should be promotedTransformation •Now that the PRMA is passed this is the major question facing GhanaSmooth •Although there will be pressure to support agriculture, thisTransition should be done only to smooth the transition to more productive industries Harnessing Ghana’s Oil Windfall 33
  34. 34. B iii) Ghana’s GDP per worker is low and growing slowly, drivenlargely by small and slow growing capital stock Ghana has low GDP per capita and low GDP per This is driven in large part by a small and slow- capita growth growing capital stock Contribution to GDP growth, 1993-2007 Growth accounting following Caselli (2005): Data flaws mean employment in manufacturing is overpredicted in NigeriaSource: Penn World Table, UN, IFPRI, Own Calculations Harnessing Ghana’s Oil Windfall 34
  35. 35. B iii) This suggests Ghana is far from its steady state. To analyse theeffect of the oil windfall we therefore must capture its transition pathWe use a simple three sector model to generate structural This is driven by exogenous growth rates and differenttransformation and capture Ghana’s transition path factor intensities in each sector that drive overall growth Parameterisation of simplified Acemoglu and Guerrieri (2006) model •Non-homothetic preferences for agriculture • Exogenous growth. Highest in Manufacturing, Services then Agriculture • Services are L intensive, manufacturing is K intensive • As capital accumulates, draws labour into M, then S (eg Rybczynski effect for 1 country over time)Source: Acemoglu and Guerrieri (2006); Gollin et al (2002)
  36. 36. B iii) By including growth we find that the importance of oil declines withtime. The level of Dutch disease depends on the stage of developmentAs the economy grows the relative size of the oil shock The shock causes a small reallocation of factors from T todeclines NT, the extent will depend on the stage of transformation. “Dutch disease”•The model is fitted to data from 1993-2007. It alsoassumes constant growth rates, based on these years.This explains why there isn’t a large hump inmanufacturing factor shares.Source: van der Ploeg, Stefanski and Wills (2011)
  37. 37. B iii) As well as sector effects, the optimal response of total capital is to fallbefore the shock, and accumulate during it, to smooth consumptionOptimal response of total capital to oil shock, expressed as ratio of K in oil vs non-oil economy • Without capital markets (relative to a world with no oil) capital stock should be driven down in anticipation of the shock •Once shock hits, capital should be accumulated •With international bond markets, the effect is weakened but still dominantSource: van der Ploeg, Stefanski and Wills (2011)
  38. 38. B iii) The fluctuations in K cause a small real depreciation thenappreciation, as capital becomes relatively scarce then abundantOptimal response of P_S/P_M, expressed as ratio of oil vs non-oil economy •Relative prices follow similar path to capital – first depreciation of RER (as capital is driven down) then appreciation as boom hits •This reflects the anticipation effect and the higher labor intensity of the non-traded sector : • Since capital declines initially, labor more abundant relative to capital •Price of sector that uses labor more intensively (NT) goes down •As capital increases relative to labor, opposite effect •Notice the relatively small magnitudes! Reflects small oil find and (assumed) flexibility of labor and capital.
  39. 39. B iii) To boost growth Ghana should invest in domestic capital,especially as the largest sector (agriculture) is the least productiveSectoral employment estimates, labour productivity and TFP Employment Labour Share Productivity TFP Sector % 2005 USD Levels •Large size and Agriculture 55% 849 2 low productivity are linked (Lagakos and Waugh). Services 31% 7462 180 •Cocoa has been crucial for combating Manufacturing 12% 1011 35 poverty. Construction 1% 18280 341Mining and utilities 1% 21354 14Source: Kuralbayeva and Stefanski (2011) Harnessing Ghana’s Oil Windfall 39
  40. 40. B iii) By investing in domestic capital Ghana will raise its genuinesavings ratesAdjusted net savings (Genuine savings)* 2008 excluding pollution damage, % Gross National Income Ghana Malaysia Venezuela Kuwait 30 20 Ghana’s genuine savings rate is 10 currently negative 0 -10 1970 1975 1980 1985 1990 1995 2000 2005 East Asia & Pacific Sub-Saharan Africa Latin America & Caribbean 30 20 As is Sub- Saharan Africa’s 10 as a whole 0 -10 1970 1975 1980 1985 1990 1995 2000 2005*: Gross savings – depreciation of fixed capital + education expenditure – depletion of natural resourcesSource: World Bank Harnessing Ghana’s Oil Windfall 40
  41. 41. B iii) This will involve investing in education to boost intangiblecapital, which is the main creator of wealthComposition of wealth, $ per capita and % share, 2000Total Wealth 7,532 27,616 439,063 95,860 $ per capita Expanded next 100% slide 90% 80% 70% Type of capital 60% Natural 50% Produced 40% Intangible 30% 20% 10% 0% Low Middle High (OECD) World Country income groupNote: All dollars at nominal exchange rates. Oil states excluded. National wealth is PV sustainableconsumption 2000-25 using discount rate of 4%. Produced capital from PIM.Source: World Bank (2006, Table 2.1). Harnessing Ghana’s Oil Windfall 41
  42. 42. B iii) And moving away from the reliance on natural capital whichcharacterises low income countries Composition of land resources, percent of total wealth, 2000Total land 1,925 3,496 9,531 4,011resources $ per capita 30% Type of land 25% resource Pastureland 20% Cropland 15% Protected 10% NTFR* 5% Timber 0% Subsoil Low Middle High (OECD) World Country income group*: NTFR = Non-Timber Forest ResourcesSource: World Bank (2006, Table 1.2). Harnessing Ghana’s Oil Windfall 42
  43. 43. Summary Ghana has • Ghana has discovered oil with estimated reserves of discovered oil between 780 and 4000 million barrels, but this is being revised upwards frequently • This is relatively modest on a global scale, though it will still comprise a significant component of Ghana’s GDP It is a small, • The oil windfall will also be temporary, so the issue is how to spread the new found wealth between present and temporary and future generations. volatile windfall • Ghana will also have to cope with the notorious volatility of oil prices and the effects this will have on its budget and economy. • To make the most of this windfall Ghana must consider all aspects of oil production, though our focus is on spending. To harness the windfall they • Ghana should spend some of the income upfront to stimulate GDP growth, whilst considering inflation, should repay debt absorption and Dutch disease. This differs from typical and invest in recommendation of establishing a Sovereign Wealth Fund capital, rather than • Ghana should focus this spending on reducing foreign a SWF debt and investing in domestic capital to promote structural transformation of the economy Harnessing Ghana’s Oil Windfall 43
  44. 44. Background material 44
  45. 45. It is also likely to affect the exchange rate as it will amount to a largecomponent of exports per year2008 Ghanaian merchandise exports by sector, $ million 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 - Food Manuf Agriculture Ores and Fuel Oil at peak Minerals production**: Based on 120,000 bopd at USD 75/barrelSource: World Bank WDI, 2011 Harnessing Ghana’s Oil Windfall 45
  46. 46. A Wealthy future generations are often used to justify upfrontspending, though if taken seriously spending should rise even furtherPI rules for government spending under different growth and oil assumptions, $ m (2010) 12,000 If the wealth of future generations is properly considered, then government should borrow heavily now to smooth consumption across generations 10,000 8,000 6,000 4,000 No oil, no growth Oil, no growth 2,000 Oil and growth (0.5% pa) - 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033*: Based on 20% of GDP accounted for by government expensesSource: World Bank data, team analysis Harnessing Ghana’s Oil Windfall 46
  47. 47. The effects of precautionary savings were solved using dynamicprogrammingDynamic programming methodology, following Skinner (1998)The stochastic Euler equation is given by: This gives the full system of equations:The second order Taylor expansion is:Simlifying and solving recursively gives: Harnessing Ghana’s Oil Windfall 47
  48. 48. A Ultimately Ghana should focus on spending upfront to stimulate GDPgrowth, whilst considering inflation, absorption and Dutch disease Aim Policy Pitfalls •Protect wealth • Invest windfall abroad in SWF • Fund governance for future - Diversify amongst bonds, - Ensuring it is preserved for future generations Mature generations equity and real estate, economy ensuring it is orthogonal to the stochastic path of the oil price •Develop wealth • Invest windfall domestically: •Political bias for future - Focus on generic ways of - investing in illiquid, partisan projects to avoid generations promoting entrepreneurial political rivals raiding liquid, non-partisan funds spirit and research & •“White elephants” development, eg. education, - high visibility, low use investments Developing health, infrastructure •Absorption constraints economy - Some capital must be “home-grown”: eg. existing teachers must train new teachers - This may justify temporarily investing abroad. •Inflationary pressures •Dutch disease •For explanation see backup With these aims in mind, Ghana’s Petroleum Revenue Management Act looks to be appropriate. The challenge now is to avoid the pitfalls Harnessing Ghana’s Oil Windfall 48
  49. 49. B iii) Ghana’s low TFP growth can be attributed to all sectors, and islagging behind other oil exporters like Nigeria and MalaysiaTFP decomposition by sector: Total to Agriculture, Industry , Services; 1970=1 All sectors have low TFP growth in Ghana. But, lowest growth has been in industry and agriculture. Nigeria and Malaysia have had more TFP growth in agriculture and services.Source: UN, IFPRI, Own Calculations Harnessing Ghana’s Oil Windfall 49
  50. 50. B iii) Genuine savings rates are a particular risk for Ghana as aresource rich country, many of which have negative intangible capitalIntangible capital, $ per capita and percentage share of total wealthIntangible capital 6,029 2,176 1,173 4,360 -3,215 -1,598 -3,418 -1,959 -12,158 $ per capita 300 200 100Intangible 0 capital % total -100 wealth -200 -300 -400 Type of capital Natural Produced IntangibleSource: World Bank (2006, pg 29). Harnessing Ghana’s Oil Windfall 50
  51. 51. B iii) As Ghana develops, labour will shift out of agriculture as part ofthe structural transformation process, which is happening in MalaysiaSectoral employment share, % In contrast to Ghana and Nigeria, Malaysia has been making a steady transformation of moving people out of agriculture into industry and services.Source: UN, IFPRI, Own Calculations Harnessing Ghana’s Oil Windfall 51
  52. 52. B iii) Cocoa is a large part of the unproductive ag. sector and may behurt by the transformation, though supporting it sustains low growthShare of sectoral value added, % 2005 •A large part of the Share of sector: unproductive agricultural •Cocoa: 16% sector is cocoa. •Yams: 12% 33% •Dutch disease effects 39% (appreciation of the currency) may especially hurt the export of cocoa and thus the livelihood of many Ghanaians. •One should be cautious of supporting this sector which 11% could exacerbate low 8% aggregate TFP growth. 9% Agr. Mining Mfg. •There may be more efficient Cstrn. Serv. ways to alleviate poverty.Source: IFPRI Harnessing Ghana’s Oil Windfall 52
  53. 53. B Finally, consuming the windfall has been done in a number of wayswith varying levels of success • (i) Citizen dividends: Alaska hands out the windfall to its citizens. The idea being is that the natural resources belong to them and that they know best what to do with it. • (ii) Lower taxes or higher public consumption: Another way is to let the oil revenue flow into a fund and withdraw say 4% from it each year for the general budget as Norway does. This can then be used for cutting taxes (higher private consumption) or raising public consumption. • (iii) Subsidies: The Netherlands has used its gas windfall to raise welfare benefits in the 1970s and 1980s (but later used it for a fund for investing in the domestic infrastructure). Iran, Kazakhstan, Netherlands and many other countries use the windfalls for fuel subsidies to consumers or ‘pet’ industries, but that is very inefficient indeed. Better is to use the windfall in that case for conditional transfers (e.g., to stimulate education or risk taking). Harnessing Ghana’s Oil Windfall 53
  54. 54. Ghana was previously a net-importer of oil, but net exports are soonto comprise more than half of productionGhana oil production and consumption, ‘000 bbl/day 2009 vs 2012 2009 Production 2012 Production140 140120 120100 100 80 80 60 60 40 40 20 20 0 0 Production Net Import Consumption Production Net Export Consumption**: Assuming constant oil consumption for comparisonSource: CIA World Factbook, Tullow Oil 54
  55. 55. Ghana experienced a period of hyperinflation during the 1970s-80s,which has since come under control but remains highCPI Inflation, % pa Military Coups 1966-81Source: World Bank Datafinder 55
  56. 56. Ghana’s economy is largely focused around agriculture and non-tradedservicesValue added and employment share of total, % 2007 40% Value Added 35% Employment 30% 25% 20% 15% 10% 5% 0% Agriculture Services Mining and Construction Manufacturing UtilitiesSource: UN, IFPRI, Own Calculations 56
  57. 57. Ghana’s agricultural sector is dominated by cocoa, and this accountsfor 1/5 of global production Ghana accounts for approximately one fifth of world Cocoa is the largest part of Ghana’s agricultural sector production Share of GDP Share of Agr Cocoa production Product % of GDP % of Agr Country % world, 2005 Cocoa beans 6% 13% Ivory Coast 38 Forestry 5% 2% Ghana 21 Yams 5% 2% Vegetables (domestic) 4% 2% Indonesia 13 Cassava 4% 4% Other 10 Fishing 2% 4% Maize 2% 5% Nigeria 5 Plantains 1% 6% Cameroon 5 Sorghum and millet 1% 9% Other meats 1% 11% Brazil 4 Cocoyams 1% 12% Ecuador 3 Rice 1% 14% Other 5% 16% Malaysia 1 Total Agriculture 39% 100% Total World 100%Source: GSS, IFPRI, Own Calculations, UNCTAD 57
  58. 58. Gujarat Pollution Control Board :Improving Industrial Pollution Control Hardik Shah Member Secretary Gujarat Pollution Control Board Gujarat, INDIA IGC 21 September 2011 1
  59. 59. GujaratArea 196,024 sq.km. (5.96 % of India)Capital GandhinagarClimate TropicalPopulation 50.60 million as per 2001 census (4.93% of India)Urbanization 38 % (Compared to the national average of 28%) 258 persons per sq.km. vis-à-vis 324 of nationalPopulation Density averageOfficial Language Gujarati Rs 1,050,230 million (=US$ 22,036 million) inNet State Domestic Product 2001-02Share of secondary sector in SDP 38.5% in 2001-02 at current pricesPer capita income (in 2009-2010) Rs 21,276 (=US$ 446) 2
  60. 60. GUJARATLAND OF MAHATAMA GANDHI The Mother Earth Provides for Needs of Everyone But Not for the Greed of Everyone
  61. 61. Economic Snapshot 5
  62. 62. Gujarat- Strong Industrial Base 6
  63. 63. Challenges to Regulating Industrial PollutionGPCB’s monitoring of industrial emissions includes three strategies:• Regulatory inspections of industrial plants • However, in the face of high industrial growth, staff time constraints limited GPCB’s in-house capacity to expand inspection operations• Court-mandated third-party environmental audit programme • However, concerns about auditor objectivity exist, since industry selects and pays auditors• Third-party environmental monitoring involving Technical Institutes • However, it can only be complimentary and not substitutive to GPCB’s monitoring• GPCB tested two innovative solutions to these challenges.• GPCB partnered with external evaluators to measure the impact of changing these two programmes.
  64. 64. The InnovationsMaking environmental auditsindependent• Auditors paid from central pool, and not by individual firms• Auditors randomly assigned to firms, not chosen by them• Audits back-checked by independent team from a local technical university; auditors’ payments based on their accuracyQuestion: Would changing auditors’incentives make reporting more accurate?Do reliable audits induce plant compliance?
  65. 65. Evidence from the Evaluation• Under the status quo (control group), auditors often reported readings just below the norms. Their reports were much lower than the readings from random back- checks conducted by the evaluators.• Under the modified programme (treatment group), auditors reported significantly higher pollution readings consistently.• Auditors who used to report readings just below PCB norms now reported higher readings that matched back- checks 9
  66. 66. Using evidence for policy change• The preliminary results from this evaluation were shared with GPCB officials and third- party auditors• Auditors suggested that adopting parts of the modified audit programme permanently would improve the quality of work they are able to provide 10
  67. 67. Using evidence for policy changeGPCB may consider changes to the auditpolicy in response to this evidence andfeedback from the auditor conference.• GPCB centrally administers a random assignment of auditors to firms, instead of allowing firms to select an auditor.• GPCB sets a fee structure for audits and verifies that auditors are paid accordingly, instead of allowing firms and auditors to negotiate a price. 11
  68. 68. A Continuing Collaboration• GPCB is partnering with researchers to test another pilot programme for air pollution regulation with two components:• Continuous emissions monitoring (CEMs) • Gives GPCB more detailed information on the total load of particulates emitted by industry• Emissions trading system • Tests the use of market-based regulatory instruments to reduce airborne particulate matter 12
  69. 69. India-Environment Protection-Religion• ALL IN THIS MANIFESTED WORLD, CONSISTING OF MOVING AND NON-MOVING ARE COVERED BY THE GOD. USE ITS RESOURCES WITH UTMOST RESTRAINT. DO NOT COVET THE WEALTH OF OTHERS. – UPANISHAD (RELIGIOUS GRANTHA WRITTEN CENTURIES AGO)
  70. 70. Thank You 14
  71. 71. Marketing Improved Cook-Stoves Mushfiq Mobarak Yale School of Management [Primary Collaborator: Grant Miller (Stanford Medical School)]Drawing on collaborative projects with BRAC (Bangladesh), Rob Bailis and P. Dwivedi (Yale FES), Sandro Gomez (Yale Mech. Engr.), S. Barnhardt (IFMR, India), Biolite Stove (USA)]
  72. 72. Understanding the Low Demand• Inexpensive welfare-improving technologies are often not adopted by poor households – Insecticide treated bed-nets, new varieties of seeds and fertilizer, improved cook-stoves, migration• Puzzle: Why do so many rural households refuse to adopt stoves even when the benefits are not external? – ARI: leading killer of children under 5 worldwide. Accounts for 22% of all non-communicable child deaths (WHO 2005) – Biomass combustion is the leading environmental “risk factor” for female mortality worldwide
  73. 73. Southern Bangladesh, Weds 8/97000 10-sec averages avg over entire cooking period avg over 30 mins600050004000 U.S. 24-hr PM2.5 Standard = 65 ug/m33000 Cook not in2000 kitchen 1300 ug/m3 ~70ug/m31000 640 ug/m3 0 11:00 11:15 11:30 11:45 12:00 12:15 12:30 12:45 13:00 Time (local Bangladesh)
  74. 74. Why Don’t People Adopt?• Some hypotheses: – Lack of liquidity, Information failure or learning externalities (inefficiently low experimentation), Intra- household externality, “Taste” and tradition• Disentangling different reasons for adoption has important policy implications – do we need to address costs, risk aversion, a stove attribute (food taste), or an information failure?• De we push existing technologies or do we need to develop new ones that people like better?
  75. 75. Forming hypotheses
  76. 76. Traditionalstove Improved stove 1: PortableImproved stove 2:Chimney
  77. 77. Experiments 2900 Households in 58 Villages, 2 Districts 2100 Households in 42 Villages 800 Households in 16 Villages Stove at Stove at Husband Wife Full Price Half Makes Makes Price Choice ChoiceNo Opinion- Choice of FreeLeader A B Chimney or E FInformation Free Portable StovePublicizing Choice of Tk.Opinion-Leaders’ C D 250 Chimney or G HAdoption Tk. 50 PortableDecisions Stove
  78. 78. Pricing Results• Highly price-elastic and non-linear demand.• Very low adoption at education plus “financially- sustainable” pricing• Inelastic chimney demand implies households less elastic with respect to health costs than time costs• The “refusal rate” (drop from stove orders to stove purchase) highly positively correlated with price – Suggests that liquidity / savings constraints are key• Adoption far from universal even when free – Non-price factor (e.g. stove characteristics) matter
  79. 79. Opinion Leaders• Asymmetric Effects – unanimous ‘no’s generally have a stronger effect on behavior – If the leader adopts, it’s not necessarily right for me, but if he doesn’t, then it cannot possibly be right for me.• OL influence larger for portable stove than the chimney stove• After households gain more experience with stoves, the OL influence smaller, and the difference between chimney and portable stoves almost disappears
  80. 80. Stated Adoption If Yes, Type Chosen Total No Stove Yes Stove Portable Chimney E - Men Choice, Free 197 12 185 94% 36 149 81% +5% F - Women Choice Free 202 0 202 100% 26 173 86% G - Men Choice Subsidy 197 55 142 72% 27 115 81% -2% H - Women / Subsidy 203 63 140 69% 29 111 79%Overall 799 130 669 118 548 • In the free treatment, women prefer stoves, and they prefer the healthier chimney stoves – Women have larger valuation for own and child health • Once we start charging for stoves (and relative price of chimney stove is increased), women less likely to purchase altogether, and shift towards the cheaper stove (relative to men) – Women more liquidity constrained, and cannot act on their preferences
  81. 81. Stove Orders Ordered a Ordered a chimney chimney stove out Any Stove stove out of those of those offered a Order who ordered a stove stoveFree Stove Condition -0.0597*** -0.0724* -0.121***(standard error) (0.0175) (0.0375) (0.0391)sample size 397 382 394Subsidized Stove Condition 0.0259 0.0140 0.0502(standard error) (0.0457) (0.0450) (0.0482)sample size 398 282 398p-value for equality ofcoefficients on male between 0.0400** 0.0764* 0.00384***free and subsidized cases
  82. 82. Stove Purchase Purchased a chimney stove Purchased a Refused to Any out of those chimney stove Purchase of Stove initially accepting out of those those who Purchase a stove offered a stove Ordered oneFree Stove Condition -0.0101 -0.108** -0.0803 -0.0496(standard error) (0.0477) (0.0492) (0.0516) (0.0462)sample size 397 275 394 397Subsidized Stove -0.0276 -0.00802 -0.00350 0.0535(standard error) (0.0455) (0.0746) (0.0399) (0.0505)sample size 398 111 398 398p-value for equality ofcoefficients on male 0.652 0.231 0.0809* 0.0041***between free and subsidy
  83. 83. Policy Implications• Can’t really market to either men or women.• Solution: bundle an attribute that men want with the stove.• Need financing solutions for a liquidity or credit constraint, or risk aversion about a new/unknown product• Clever marketing and persuasion techniques have limited effects when households can evaluate the technology for themselves

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