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Institutions, Resource Rents, and Cleanliness:
The Institutional Basis of Efficiency in
Resource-Rich Countries
Christophe...
Outline of Presentation
Introduction: The Resource Curse
Theory: Resource Abundance and Resource
Waste
What are Institutio...
THE RESOURCE CURSE
The “Resource Curse”
Countries that have abundant natural resource
endowments seem to grow less or have much more
volatile...
GDP and Resources

Source: Manzano and Rigobon (2008)
GDP Volatility of Luxembourg and Nigeria:
Over 2 Years
20

18

2 year rolling standard deviation of growth

16
14

12
10
8...
GDP Volatility of Luxembourg and Nigeria:
Over 5 Years
20

18

Rolling 5-year standard deviation of growth

16

14

12

10...
Economics, Scarcity,
and the “Resource Curse”
But why? Resource abundance has been linked with poor economic
performance v...
ABUNDANCE AND USAGE
But How Would Resource Abundance
Affect Resource Usage?
Natural resource abundance may imbue
people with a false sense of ...
Resource Abundance and Resource Usage:
A False Sense of Security
The true “paradox of plenty:” economics is the science
of...
Resource Abundance and Resource Usage:
Blunting Incentives
Where abundance can blunt incentives to create
wealth, it also ...
An Example: Oil Use Intensity in
Finland v. Saudi Arabia
12.00

10.00

8.00

World Oil Price Crash

6.00

4.00

2.00

Saud...
THE INSTITUTIONAL DIMENSION
What is an “Institution?”
Institutions are a set of
rules, constraints, and behavioral
guidelines, enforced by either form...
Institutions in Resource-Rich Countries
Previous research shows a relationship between resource
abundance and institutiona...
Institutions and Resource Abundance
In general, various institutions linked with economic
metrics of success…
– Property r...
The Relationship Between Institutions
and Resource-Use Efficiency
Economic
Performance

Institutions

Resource
Abundance

...
The Final Link in the Chain:
Institutions influencing Efficiency
I believe both political and economic institutions can me...
The Final Link in the Chain:
Institutions influencing Efficiency (II)
Economic institutions may have an even
more direct i...
Paper Intensity v. Property Rights
Normalized Paper Intensity (Production+ImportsExports/GDP)

2.5

2

1.5

1

0.5

0
1

2...
TESTING THE THEORY
The Model
The Estimator
Seemingly Unrelated Regression (SUR), as from Zellner (1962), of
three models:
Resource Abundance → Developm...
The Data
Annual data on 130 countries, developed and developing, from 1970-2011
Commodity and energy production and consum...
Measuring Resource Efficiency
Indicator

Definition

Source

Intensity Indicators
CEIC

Electricity Usage

Electricity con...
Measuring “Institutions”
Economic Institutions
– Property rights:
 ICRG “investment profile” sub-indicator (formerly risk...
Results: Resource Intensity,
Abundance, and Institutions (I)
Gas
1

2

Electricity
3

4

5

Paper
6

7

8

Oil
9

10

11

...
Results: Resource Intensity,
Abundance, and Institutions (II)
Gas

Electricity

Paper

Oil

1

2

3

4

5

6

7

8

9

10
...
Results Summary
Natural gas efficiency appears to be driven by other
determinants than its abundance
– Political constrain...
Wait! What about ENDOGENEITY!
Notorious in
macroeconomics, but
especially in regards to
institutions
“Everything causes
ev...
Results: Resource Intensity,
Abundance, and Institutions – 3SLS
Gas
1

2

Electricity
3

4

5

Paper
6

8

9

Oil
10

11

...
Conclusions and Further Research
Basic institutional development can help to
improve environmental efficiency
For the futu...
Thank you!

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Christopher A. Hartwell. Institutions, Resource Rents, and Cleanliness: The Institutional Basis of Efficiency in Resource-Rich Countries

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Open seminar at Eesti Pank

Christopher A. Hartwell
Head of Economic Research, IEMS
Visiting Researcher, BOFIT
December 6, 2013

Published in: Technology, Economy & Finance
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Christopher A. Hartwell. Institutions, Resource Rents, and Cleanliness: The Institutional Basis of Efficiency in Resource-Rich Countries

  1. 1. Institutions, Resource Rents, and Cleanliness: The Institutional Basis of Efficiency in Resource-Rich Countries Christopher A. Hartwell Head of Economic Research, IEMS Visiting Researcher, BOFIT December 6, 2013 DISCLAIMER: This presentation represents my own research, and in no way represents the views of E&Y or the Moscow School of Management
  2. 2. Outline of Presentation Introduction: The Resource Curse Theory: Resource Abundance and Resource Waste What are Institutions? How Would They Affect Environmental Efficiency? The Empirical Model The Results Conclusions and Further Research
  3. 3. THE RESOURCE CURSE
  4. 4. The “Resource Curse” Countries that have abundant natural resource endowments seem to grow less or have much more volatile growth paths than countries without these endowments… on average. Two quotes from American humorist PJ O’Rourke put things in perspective: – “I had one fundamental question about economics: Why do some places prosper and thrive while others just suck? Natural resources aren't the answer. Africa has diamonds, gold, uranium you name it. Scandinavia has little and is frozen besides. ” – “Japan is powerful without natural resources. Singapore is important without physical territory. And Luxembourg wields enormous influence and barely has people.”
  5. 5. GDP and Resources Source: Manzano and Rigobon (2008)
  6. 6. GDP Volatility of Luxembourg and Nigeria: Over 2 Years 20 18 2 year rolling standard deviation of growth 16 14 12 10 8 6 4 2 0 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Luxembourg Nigeria
  7. 7. GDP Volatility of Luxembourg and Nigeria: Over 5 Years 20 18 Rolling 5-year standard deviation of growth 16 14 12 10 Luxembourg Nigeria 8 6 4 2 0 196519671969197119731975197719791981198319851987198919911993199519971999200120032005200720092011
  8. 8. Economics, Scarcity, and the “Resource Curse” But why? Resource abundance has been linked with poor economic performance via many channels: “Dutch Disease,” or real appreciation of the currency hurting manufacturing or other tradable sectors; Fostering systemic breakdown and conflict (Addison et al., 2002 and Collier and Hoeffler 2004 and 2005, although Brunnschweiler and Bulte 2009 disagree); Reducing human capital (Gylfason 2001); Skewing incentives for prudent policies via an increased sense of security (Sachs and Warner 1999, Gylfason 2001); and Increasing economic fragility (Rodrik 1999, Collier and Venables 2010).
  9. 9. ABUNDANCE AND USAGE
  10. 10. But How Would Resource Abundance Affect Resource Usage? Natural resource abundance may imbue people with a false sense of security and lead governments to lose sight of the need for good and growth-friendly economic management… incentives to create wealth tend to become too blunted by the ability to extract wealth from the soil or the sea. Rich parents sometimes spoil their kids. Mother Nature is no exception. -Gylfason (2001:848)
  11. 11. Resource Abundance and Resource Usage: A False Sense of Security The true “paradox of plenty:” economics is the science of scarcity – Production and usage adjusts to the hard budget constraint of lack of resources Sudden resource abundance as a “soft budget constraint” (Kornai 1986) – “If the budget constraint is hard, the firm has no other option but to adjust… by improving quality, cutting costs, introducing new products or processes” (Kornai 1986:10) – see whale oil as a prime example – Moreover, firms do not pay full cost of any resource depletion they may cause, meaning that “clearly, if the environmental asset is provided for free, suboptimally high levels of production… result” (Smulders 2005: 7).
  12. 12. Resource Abundance and Resource Usage: Blunting Incentives Where abundance can blunt incentives to create wealth, it also blunts incentives to conserve Similarity to Austrian Business Cycle Theory (ABCT) – sudden abundance of credit creates malinvestments through change in relative prices – Resource abundance, like credit abundance, changes the relative worth of resource X vis a vis other substitutes (including time) – What was once self-evidently best according to an efficiency criterion may now not necessarily be so
  13. 13. An Example: Oil Use Intensity in Finland v. Saudi Arabia 12.00 10.00 8.00 World Oil Price Crash 6.00 4.00 2.00 Saudi Arabia Finland 2011 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 0.00 1981 Normalized Oil Intensity (thousand barrels per unit of GDP) Oil glut and high production
  14. 14. THE INSTITUTIONAL DIMENSION
  15. 15. What is an “Institution?” Institutions are a set of rules, constraints, and behavioral guidelines, enforced by either formal or informal means external to the individual, which are designed or arise to shape the behavior of individual actors. (Hartwell 2013) Can be further divided into: – Political: Pertaining to distribution of political power – Economic: Designed or arising to maximize the utility of principals in the economic sphere, by solely influencing and mediating economic outcomes pertaining to distribution of resources. – Social: Institutions not explicitly concerned with political power or economic incentives but geared towards behavior and norms outside these spheres
  16. 16. Institutions in Resource-Rich Countries Previous research shows a relationship between resource abundance and institutional development (and in that direction): Resource abundance retards development of economic institutions (Mehlum, Moene, and Torvik 2006); It also alters the development of political institutions and in particular fosters rent-seeking (Alkhater 2012) Indeed, most prior research has been one-way on effect of resource abundance on political institutions, leading to: Larger public sectors (Robinson et. al 2006), Overextended public finances (Auty and Gelb 2001), and Increased levels of corruption in the government (Alkhater 2012).
  17. 17. Institutions and Resource Abundance In general, various institutions linked with economic metrics of success… – Property rights and executive constraints good for growth, investment, savings – Privatization and bank reform good for foreign investment …but little* work has been done on how institutions could work to counteract the ill effects of resource abundance – What are the channels that could cause good institutions to encourage efficiency in a resource-abundant environment? – That is, we know resources affect institutional development, how can it run the other way? *(notable exception, cough cough, Coursey and Hartwell 2000)
  18. 18. The Relationship Between Institutions and Resource-Use Efficiency Economic Performance Institutions Resource Abundance Resource use efficiency
  19. 19. The Final Link in the Chain: Institutions influencing Efficiency I believe both political and economic institutions can mediate the effects of resource abundance on resource-use Political (and especially executive) constraints – Andersen and Aslaksen (2008) find that parliamentary systems insulate against the negative effects of resource abundance – Wealth of real world experience showing the tendency towards autocracy in resourcerich countries Production (bbl/d ay) 10,900,000 Russia 9,900,000 Saudi Arabia 8,453,000 United States 4,231,000 Iran 4,073,000 China 3,592,000 Canada 3,400,000 Iraq 3,087,000 United Arab Emirates 3,023,000 Venezuela 2,934,000 Mexico 2,682,000 Kuwait 2,633,000 Brazil 2,525,000 Nigeria 1,998,000 Norway 1,885,000 Algeria 1,840,000 Angola 1,635,000 Kazakhstan 1,631,000 Qatar Country – Governments also tend to use a lot of resources… not necessarily cleanly Share of World % 13.28% 12.65% 9.97% 4.77% 4.56% 3.90% 3.75% 3.32% 4.74% 3.56% 2.96% 3.05% 2.62% 2.79% 2.52% 2.31% 1.83% 1.44% Freedom House Classification Not Free Not Free Free Not Free Not Free Free Not Free Not Free Not Free Partly Free Partly Free Free Partly Free Free Not Free Not Free Not Free Not Free
  20. 20. The Final Link in the Chain: Institutions influencing Efficiency (II) Economic institutions may have an even more direct influence on environmental efficiency Property rights – Tragedy of the Commons – Coase (1960): existence of extensive property rights may encourage the better usage of natural resources – Strong economic institutions may align the incentives for resource use efficiency with market costs and lengthen time horizons (Deacon and Mueller 2006) – Moreover, a larger private sector may be the flip side of political constraints; less ability for government to influence economy
  21. 21. Paper Intensity v. Property Rights Normalized Paper Intensity (Production+ImportsExports/GDP) 2.5 2 1.5 1 0.5 0 1 2 3 4 5 6 7 8 ICRG Investor Profile Score 9 10 11 12
  22. 22. TESTING THE THEORY
  23. 23. The Model
  24. 24. The Estimator Seemingly Unrelated Regression (SUR), as from Zellner (1962), of three models: Resource Abundance → Development of Institutions; Resource Abundance, Institutions → Economic Performance; and finally, Institutions, Economic Performance, Resource Abundance → Resource Use Efficiency Gylfason and Zoega (2006:1098), “the recursive nature of the system and the conceivable correlation of the error terms in the… equations make SUR an appropriate estimation procedure.” Also used in this context before - Beierlein, Dunn, and McConnon, Jr. (1981), “The Demand for Electricity and Natural Gas in the Northeastern United States”
  25. 25. The Data Annual data on 130 countries, developed and developing, from 1970-2011 Commodity and energy production and consumption – – – – Natural gas Electricity Paper Oil Difficult to say if these are “natural resources,” but good proxy for resource abundance Macroeconomic controls – – – – (log) level of current GDP per capita (Canas 2003) Initial level of GDP (1970) investment (Papyrakis and Gerlagh 2004, Mehlum et. al 2006) openness to trade (Arezki and van der Ploeg 2007) Institutional variables
  26. 26. Measuring Resource Efficiency Indicator Definition Source Intensity Indicators CEIC Electricity Usage Electricity consumption (billion Kilowatthours) divided by GDP Natural Gas Usage Gas consumption (billions of cubic feet) divided by GDP Oil Usage Oil consumption (thousands of barrels per day) divided by GDP FAOStat Paper Usage "Apparent Consumption" of Paper, defined as production of paper and imports of paper, less exports (all in tonnes), divided by GDP Abundance For each resource, value of resource X in exports, divided by GDP UNCTAD for oil, gas, electricity; FAOStat for paper CEIC CEIC Macroeconomic Controls GDP GDP in current dollars World Bank WDI GDP 1970 GDP in 1970 in then-current dollars World Bank WDI Investment Share of investment in GDP, % Openness Exports + Imports (current US$)/GDP (current US$) Penn World Tables CEIC
  27. 27. Measuring “Institutions” Economic Institutions – Property rights:  ICRG “investment profile” sub-indicator (formerly risk of expropriation) Political Institutions – Size of government as a percentage of GDP, an objective measure for (lack of) political constraints – Political constraints more broadly, taken from Heinsz’s (2000) “political constraint” database and including data on the veto power of the legislature, the executive, the judiciary, and sub-federal entities) – Executive constraints, via the Polity IV indicator for executive constraints (coded from 1 to 7 with higher values corresponding to more executive constraints)
  28. 28. Results: Resource Intensity, Abundance, and Institutions (I) Gas 1 2 Electricity 3 4 5 Paper 6 7 8 Oil 9 10 11 12 INSTITUTIONAL Variables Political Size of Government -0.01 0.02 -0.01 -0.003 1.00 5.06** 3.87** 2.57** Political Constraints -0.75 -0.04 0.15 -0.02 4.26** 0.72 3.19** 0.75 Executive Constraints -0.001 -0.0001 0.001 -0.0001 0.12 0.04 1.17 0.31 Economic Property Rights -0.003 -0.01 -0.003 -0.001 -0.003 -0.01 -0.02 -0.02 -0.02 -0.01 -0.01 -0.01 0.2 0.3 0.17 0.15 0.42 0.46 3.85** 3.57** 3.33** 4.85** 4.71** 4.58** RESOURCE Variables Resource 0.01 Abundance 0.66 0.02 0.02 -0.02 -0.02 -0.02 0.03 0.03 0.03 -0.01 -0.01 -0.01 0.88 0.67 2.23* 2.78** 2.79** 3.97** 4.10** 4.22** 1.25 1.03 1.05 n 783 783 770 620 620 620 1498 1497 1498 927 927 901 Partial R-squared country dummies? time dummies? 0.95 0.95 0.95 0.95 0.95 0.95 0.88 0.88 0.88 0.98 0.98 0.98 yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes
  29. 29. Results: Resource Intensity, Abundance, and Institutions (II) Gas Electricity Paper Oil 1 2 3 4 5 6 7 8 9 10 11 12 13 -0.07 -0.73 -0.21 0.22 -0.002 -0.20 -0.20 -1.07 0.14 -1.07 -0.19 -0.02 -0.16 0.09 4.16** 0.29 0.87 0.03 0.81 0.73 3.81** 3.03** 3.85** 3.84** 0.57 3.21** 0.06 0.05 0.02 -0.02 -0.02 -0.08 -0.08 -0.06 -0.05 0.97 0.74 1.07 0.83 0.64 4.39** 4.40** 4.14** 3.49** INSTITUTIONAL Variables Political Political Constraints Political Constraints*Resource Abundance Economic Property Rights -0.004 0.08 0.07 -0.003 0.160 0.16 -0.14 -0.02 -0.08 -0.07 -0.01 0.003 0.0004 0.26 1.27 1.14 0.42 8.40** 8.38** 2.77** 3.24** 3.29** 2.85** 4.99** 0.66 0.10 0.01 0.010 0.01 0.01 -0.01 -0.01 -0.004 0.004 0.004 1.40 1.25 8.91** 8.88** 3.06** 2.57** 2.20* 4.58** 4.01** -0.01 -0.04 -0.05 0.03 -0.14 -0.13 0.02 0.06 0.06 0.080 0.03 -0.04 .005 0.19 0.81 1.04 2.22* 9.32** 7.22** 0.98 6.17** 5.03** 6.35** 2.35* 3.19** 0.29 n 783 783 783 620 620 620 645 1497 1497 1497 927 927 927 Partial R-squared 0.96 0.96 0.95 0.95 0.95 0.95 0.96 0.88 0.88 0.88 0.98 0.98 0.98 country dummies? yes yes yes yes yes yes yes yes yes yes yes yes yes time dummies? yes yes yes yes yes yes yes yes yes yes yes yes yes Property Rights*Resource Abundance RESOURCE Variables Resource Abundance
  30. 30. Results Summary Natural gas efficiency appears to be driven by other determinants than its abundance – Political constraints the only significant explanator, and only in two models – Investment is the only macro explanation, with more investment leading to greater efficiency Electricity usage more affected by economic than political institutions – A larger government means low electricity efficiency – In the fullest model, property rights means more efficient electricity usage Paper usage is strongly influenced by both political constraints and property rights – Interactions show that these institutions avoid resource abundance inefficiencies Oil efficiency can be explained by political constraints – Enough real-world examples on this: see Russia, Azerbaijan, Saudi Arabia, etc.
  31. 31. Wait! What about ENDOGENEITY! Notorious in macroeconomics, but especially in regards to institutions “Everything causes everything” Correct by instrumenting institutions in a “GMM sense” by: – Lags of institutional variables – Initial level of GDP – Country and time attributes (Becker et. al 1994)
  32. 32. Results: Resource Intensity, Abundance, and Institutions – 3SLS Gas 1 2 Electricity 3 4 5 Paper 6 8 9 Oil 10 11 12 INSTITUTIONAL Variables Political Political 0.46 -1.51 -1.29 0.16 -0.08 0.67 -2.84 -0.35 -4.23 0.11 -0.29 Constraints 0.39 6.13** 1.00 0.42 0.68 1.62 8.09** 4.73** 12.65** 0.89 3.48** Political Constraints*Re 0.16 0.01 0.02 0.06 -0.18 -0.27 0.12 source Abundance 1.58 0.09 0.60 1.83* 7.63** 12.05** 3.76** Economic Property -0.10 0.97 0.94 -0.10 -0.18 -0.22 -0.12 -0.28 -0.09 -0.12 -0.15 Rights 3.60** 4.15** 3.87** 8.50** 4.59** 4.52** 15.01** 4.53** 1.56 13.76** 8.25** Property Rights*Resour 0.09 0.09 -0.01 -0.01 -0.01 0.00 -1.00 ce Abundance 4.48** 4.15** 2.39* 2.65** 2.78** 0.06 2.00* RESOURCE Variables Resource 0.02 -0.59 -0.59 0.0004 0.07 0.06 0.21 0.26 0.27 -0.01 0.11 Abundance 0.24 3.56** 3.53** 0.02 2.47* 1.97* 19.83** 8.34** 9.10** 0.68 3.39** n 783 783 783 620 620 620 1448 1448 1448 927 927 Partial R0.50 0.49 0.49 0.14 0.14 0.14 0.30 0.28 0.31 0.34 0.34 squared Instruments Lag of Property Rights, Lag of Political Constraints, Initial Level of GDP, Country, Year 13 0.10 0.75 0.11 3.54** -0.15 8.40** -0.01 2.29* 0.07 1.88* 927 0.34
  33. 33. Conclusions and Further Research Basic institutional development can help to improve environmental efficiency For the future: – Expand to more natural resources – and refine the ones I have here (point source v. diffuse?) – Other institutional indicators should be analyzed (bureaucratic governance quality?) – Are there specific political institutions that may enter into the equation? – Are there threshold effects? Accounting for government provision of “public” goods versus going too far – Better econometric accounting for endogeneity – Inclusion of world price effects
  34. 34. Thank you! TÄNAN VÄGA!

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