Bassem Kamar, International University of Monaco ERF and AFESD Conference Monetary and Fiscal Institutions in Resource-Rich Arab Economies Kuwait, November 4-5, 2015 For more info, please visit www.erf.org.eg Session on: Resource Abundance, Fiscal Dominance and Monetary Outcomes While monetary policy could play a key role in fostering economic growth and short-term stabilization, its implementation in oil rich economies is often complicated by commodity price volatility. This session explores the role of alternative monetary policy regimes on economic performance in resource-based economies, with a particular focus on Arab economies. It also examines the interdependence between fiscal and monetary policies in resource-dependent economies, in particular the fiscal drivers of the choice of the exchange rate regime.

1. Monetary Policy and Economic
Performance in Resource
Dependent Economies
Bassem Kamar, International University of
Monaco
Raimundo Soto, Universidad Católica de
Chile
Economic Research Forum, RIAD Project #2013-035

2. Acknowledgements
“ERF is the conscience of
the Arab region”
Ahmed Galal
ERF 13th annual conference on “Oil - Impact
on the Global Economy”, December 2006,
Kuwait
Conference on “Understanding and Avoiding
the Oil Curse in the Arab World”, January
2012, Kuwait
2

3. Dream team
 Dr. Ibrahim Elbadawi
 Raimundo Soto
 Russell Krueger
 Arto Kovanen
 Mohamed Goaied
 Damyana Bakardzhieva
 Moez Ben Tahar
 Hoda Selim
3

4. Monetary objectives
Inflation Growth Unemployment BoP
Financial
stability
Monetary regimes
Fixed Intermediate FloatingIT
Institutional requirements
Creating units in the
central banks
Training the staff
(capacity building)
Educating the
market
(communication)
Developing
transmission
mechanisms
…
4

5. There is a difference between
DependentDependent
Abundant
DependentDependent
on Oil
and it Matters!
Abundant
5

6. Growth Model
 Abundance
◦ Resource rents positively related to growth (0.5pp in
dev. countries, 1.5pp in oil exporters)
◦ Oil and mineral rents are positively related with
higher growth (effect is higher in oil)
 Dependency
◦ Oil dependency: large, negative, significant effect
of oil rents * exports concentration on growth
Effect of oil abundance on growth is “wiped out” if exported
Algeria: 95% oil and 22% rents, reduce growth by 1.6pp
◦ Mineral rents have positive effect on growth even if
concentrated mineral rents * exports concentration
6

7. Resource abundance
7

8. Resource abundance
Relatively small
8

9. Resource abundance
Very significant in LAC
SSA, and MENA
9

10. Export concentration
 Herfindhal index of export concentration in value
(US$), year by year, by country.
◦ Between 0 and 1, higher=more concentrated
 Database: annual exports (value) from country “i”
to country “j”, classified at 2-digit ISIC level
◦ 196 countries, 1980-2013.
◦ Number of countries changes (split and merge).
10

11. Evidence for MENA countries
Total Resource
Rents (% of GDP)
Herfindahl
Index of Export
Concentration
Algeria 22.2 0.949
Bahrein 31.9 0.533
Egypt 15.0 0.186
Iran 28.8 0.715
Iraq 54.4 NA
Israel 0.4 0.152
Jordan 0.9 0.067
Kuwait 48.3 0.865
Lebanon 0.0 0.076
Libya 40.3 0.946
Morocco 2.4 0.079
Oman 45.7 0.633
Qatar 44.6 0.803
Saudi Arabia 43.1 0.777
Syria 17.2 0.349
Tunisia 7.2 0.124
UAE 26.3 0.345
Yemen 28.4 0.812
MENA Average 25.4 0.495
World Average 8.7 0.265
11

12. Evidence for MENA countries
Total Resource
Rents (% of GDP)
Herfindahl
Index of Export
Concentration
Algeria 22.2 0.949
Bahrein 31.9 0.533
Egypt 15.0 0.186
Iran 28.8 0.715
Iraq 54.4 NA
Israel 0.4 0.152
Jordan 0.9 0.067
Kuwait 48.3 0.865
Lebanon 0.0 0.076
Libya 40.3 0.946
Morocco 2.4 0.079
Oman 45.7 0.633
Qatar 44.6 0.803
Saudi Arabia 43.1 0.777
Syria 17.2 0.349
Tunisia 7.2 0.124
UAE 26.3 0.345
Yemen 28.4 0.812
MENA Average 25.4 0.495
World Average 8.7 0.265
Oil producers tend
to be
highly concentrated
12

13. Evidence for MENA countries
Total Resource
Rents (% of GDP)
Herfindahl
Index of Export
Concentration
Algeria 22.2 0.949
Bahrein 31.9 0.533
Egypt 15.0 0.186
Iran 28.8 0.715
Iraq 54.4 NA
Israel 0.4 0.152
Jordan 0.9 0.067
Kuwait 48.3 0.865
Lebanon 0.0 0.076
Libya 40.3 0.946
Morocco 2.4 0.079
Oman 45.7 0.633
Qatar 44.6 0.803
Saudi Arabia 43.1 0.777
Syria 17.2 0.349
Tunisia 7.2 0.124
UAE 26.3 0.345
Yemen 28.4 0.812
MENA Average 25.4 0.495
World Average 8.7 0.265
Some have managed
to diversify exports
Average 1970-2013 13

14. Research questions
 Does it matter if the country is resource Abundant or
Dependent on sustainable economic growth?
 Does it matter for price instability?
 Can the choice of a Monetary Regime influence
growth and inflation in resource abundant and in
resource dependent economies?
14

15. GROWTH INFLATION
Panel GMM, 1970-2013
Number of countries=125
Number of observations=778
Panel GMM, 1980-2013
Number of countries=138
Number of observations=423
Table3
Econometric Results: Growth in per capita real GDP
xplanatory Variable (1) (2) (3) (4) (5)
ransitional Convergence
nitial GDP per capita
n logs)
-3.899***
(0.357)
-3.815***
(0.355)
-3.922***
(0.371)
-3.940***
(0.356)
-4.002***
(0.352)
yclical reversion
Initial output gap)
-2.796
(2.911)
-1.891
(2.917)
-1.789
(2.917)
-3.164
(2.902)
-1.497
(5.708)
tructural policies and institutions
ducation
secondary attainment, in logs)
3.231***
(0.778)
3.019***
(0.772)
3.340***
(0.784)
2.501***
(0.805)
2.900**
(1.311)
rade Openness
% of GDP, in logs)
3.927***
(0.519)
3.844***
(0.515)
4.139***
(0.516)
3.678***
(0.523)
4.088***
(0.672)
apital Account Openness
Chinn and Ito index)
0.249**
(0.133)
0.269**
(0.133)
0.300**
(0.134)
0.209
(0.134)
0.290
(0.202)
overnment Burden
gov. consumption % of GDP, in logs)
-0.947*
(0.541)
-0.849
(0.536)
-1.020*
(0.534)
-0.941*
(0.538)
-1.052
(1.176)
nfrastructure
telephones per capita, in logs)
0.530**
(0.293)
0.577**
(0.292)
0.429
(0.302)
0.438
(0.294)
0.534
(0.433)
olitical Participation
democracy index)
0.142**
(0.059)
0.148**
(0.059)
0.153**
(0.059)
0.098*
(0.060)
0.168**
(0.083)
overnment Accountability
checks and balances index)
0.007**
(0.003)
0.007**
(0.003)
0.006**
(0.003)
0.010***
(0.003)
0.006*
(0.003)
tabilization policies
rice Instability
CPI inflation rate)
-0.048
(0.031)
-0.048
(0.031)
-0.033
(0.031)
-0.067**
(0.032)
-0.029
(0.200)
ystemic Banking Crisis
frequency of years in crisis)
-2.376***
(0.469)
-2.389***
(0.466)
-2.320***
(0.465)
-2.441***
(0.468)
-2.312***
(0.526)
xternal Conditions
erms of Trade Shocks
growth rate of terms of trade )
5.320***
(1.498)
4.272***
(1.572)
4.460***
(1.590)
5.548***
(1.602)
4.697**
(2.205)
dditional Controls
atural Resource Rents
% of GDP)
-
0.057**
(0.022)
- - -
il Resource Rents
% of GDP)
- -
0.065**
(0.031)
-
0.137***
(0.050)
atural Gas Resource Rents
% of GDP)
- -
-0.059
(0.057)
-
-0.059
(0.074)
oal Resource Rents
% of GDP)
- -
0.298*
(0.177)
-
0.268*
(0.164)
Mining Resource Rents
% of GDP)
- -
0.128***
(0.048)
-
0.125***
(0.48)
orestry Resource Rents
% of GDP)
- -
-0.078
(0.067)
-
-0.089
(0.0127)
il Exporter
dummy)
- - -
-5.058***
(1.602)
-
il Exporter*Oil Resource Rents
nteraction term)
- - - -
-0.115*
(0.064)
onstant
30.840***
(3.006)
29.725***
(3.000)
28.518***
(3.041)
33.046***
(3.075)
32.149***
(5.966)
argan test
erial correlation test of order1
erial correlation test of order 2
118.09***
-5.06***
-0.52
124.69***
-5.19***
-0.64
136.59***
-5.01***
-0.52
109.06***
-5.00***
-0.52
137.64***
-4.96**
-0.49
Table 5
Econometric Results: Normalized Inflation Rate
(1) (2) (3) (4) (5)
Inflation Experience
High Inflation 0.624***
(0.031)
0.650***
(0.032)
0.637***
(0.031)
0.637***
(0.031)
0.678***
(0.032)
Hyperinflation 0.829***
(0.045)
0.830***
(0.044)
0.841***
(0.044)
0.857***
(0.047)
0.801***
(0.044)
Lagged Dep. Variable 0.077***
(0.023)
0.076***
(0.024)
0.087***
(0.023)
0.076***
(0.023)
0.058**
(0.023)
Development Levels
Real per capita GDP -0.019***
(0.006)
-0.011*
(0.006)
-0.014**
(0.006)
-0.017***
(0.007)
-0.011*
(0.006)
Financial Development -0.013
(0.013)
-0.009
(0.007)
-0.012*
(0.007)
-0.012
(0.008)
-0.012*
(0.007)
Institutional Variables
Trade Openness 0.014
(0.014)
0.016
(0.013)
0.009
(0.003)
0.006
(0.013)
0.019
(0.013)
Capital Account Openness -0.013***
(0.003)
-0.013***
(0.004)
-0.010***
(0.003)
-0.007***
(0.002)
-0.013***
(0.004)
Monetary Regimes
Inflation Target -0.025**
(0.011)
-0.028**
(0.011)
-0.026**
(0.012)
-0.026**
(0.011)
-0.030**
(0.011)
Fixed Exchange System -0.037***
(0.010)
-0.034***
(0.010)
-0.039***
(0.010)
-0.042***
(0.010)
-0.039***
(0.013)
Floating Exchange System 0.039***
(0.012)
0.031***
(0.012)
0.031***
(0.012)
0.029***
(0.012)
0.046***
(0.012)
Additional Controls
Government Budget Balance 0.002***
(0.001)
0.002*
(0.001)
0.001
(0.0007)
0.001*
(0.001)
Terms of Trade Shocks 0.002***
(0.001)
0.002***
(0.001)
0.001
(0.001)
0.002***
(0.0005)
0.001
(0.001)
Oil exporter -0.200*
(0.116)
-0.161
(0.114)
Resource Rents 0.003***
(0.001)
Oil Rent 0.003***
(0.001)
Natural Gas rent 0.003***
(0.001)
Mining rent 0.000
(0.001)
Coal rent -0.003
(0.003)
Forestry rent 0.002
(0.001)
Oil exporter * Fixed exchange 0.012
(0.021)
Oil Exporter * Floating Exchange -0.085***
(0.030)
Constant 0.246***
(0.051)
0.190***
(0.051)
0.189***
(0.052)
0.211***
(0.057)
0.191***
(0.050)
Sargan Test
Serial correlation test of order 1
Serial correlation test of order 2
32.98
-2.49***
-1.50
29.21
-2.41***
-0.82
31.61
-2.20**
-0.87
32.59
-2.36***
-0.84
29.09
-2.36***
-1.09
Thanks Diaa Nooreldin 15

16. Growth Model
 Convergence
◦ Initial level of per capita GDP
 Cyclical reversion
◦ Output gap at period start 
 Stabilization policies
◦ Price instability (inflation) 
◦ Systemic banking crises 
 External conditions
◦ Terms-of-trade shocks 
◦ Period-specific shift 
 Integration with the world
economy
◦ Trade openness 
◦ Capital account openness 
 Structural policies and
institutions
◦ Human capital 
◦ Government burden 
◦ Infrastructure 
◦ Political participation 
◦ Government accountability. 
 Natural resources
◦ Resource abundance
◦ Resource dependency
 Monetary regimes
◦ Fixed exchange regime
◦ Floating exchange regime
 Interactions
16

17. Inflation Model
 Inflation experience
◦ Inflation inertia 
◦ Episodes of hyperinflation 
 External conditions
◦ Terms-of-trade shocks 
 Integration with the
world economy
◦ Trade openness 
◦ Capital account openness 
 Institutional variables
◦ Government accountability 
◦ Government quality 
◦ Development level 
◦ Financial development 
 Natural resources
◦ Resource abundance
◦ Resource dependency
 Monetary policy
◦ Inflation targeting 
◦ Exchange rate regimes 
17

18. GCC Inflation
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
1980-1984 1985-1989 1990-1994 1995-1999 2000-2004 2005-2009 2010-2014
INFLATION COMPARISON
BHR KWT OMN QAT SAU ARE LIC MIC HIC
18

19. Populous countries’ inflation
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
1980-1984 1985-1989 1990-1994 1995-1999 2000-2004 2005-2009 2010-2014
INFLATION COMPARISON
LIC MIC HIC DZA SDN YEM
19

20. Summary of monetary results
Monetary targets /
Monetary regimes
GROWTH INFLATION
Flexible vs
Intermediate ER
Lower Higher
Fixed vs Intermediate
ER
Slightly higher
(because it cancels the
negative impact of
inflation on growth)
Lower
IT vs Intermediate ER Lower
OIL-DEPENDENT EXPORTERS ONLY
Flexible vs
Intermediate ER
Higher Slightly higher
(but less than for other
countries)
Fixed vs Intermediate
ER
IT vs Intermediate ER

21. Overall summary of the results
 Floating regimes are inferior both in
terms of growth and inflation
 Oil dependency lowers growth
 No alternative monetary regime is
clearly superior to intermediate
regimes for dependent countries
 Our comprehensive models allow us
to test many other relations to flesh
out the role of oil dependency
21

22. Monetary objective
Growth
Non-oil
Growth
Non-oil
Export
Growth
Diversification
(less
dependency)
IMF 2013, 2014, 2015
Targeting competitiveness
22

23. Targeting
competitiveness
Inflation Exchange rate
Operational target =
Real effective
exchange rate
Monetary Regime
Equilibrium based on
Fundamentals
IT Frameworks ER Interventions
23

24. Theoretical foundation of
competitiveness targeting
 John Williamson – Basket, Band, Crawl
(1999, 2000, 2007)
 Morris Goldstein - Managed Floating
Plus (2002)
 Dani Rodrick - Second Best Institutions
(2008)
24

25. Institutional requirements
 2 detailed case studies – GCC and populous
countries
 GCC – perfect timing before implementing
the union and after the currency is
implemented
 Populous – including detailed
methodologies for the estimations in order
to implement the monetary regime (Sudan
and Yemen later when the conflicts settle
down); Algeria is a perfect case now
25

26.  Technical questions – Raimundo Soto –
all glory for the paper should go to
him
 Thank you
26