31
A VOIDING THE RESOURCE CURSE The Economics of Managing Natural Resources September 2015 Dr Samuel Wills Department of Economics and Pembroke College Oxford University [email protected] https://samuelwills.wordpress.com/ Oxford 1 OXCARRE Oxford Centre for the Analysis of Resource Rich Economies

AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

  • Upload
    others

  • View
    3

  • Download
    0

Embed Size (px)

Citation preview

Page 1: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

AVOIDING THE RESOURCE CURSEThe Economics of Managing Natural Resources

September 2015

Dr Samuel Wills

Department of Economics and Pembroke College

Oxford University

[email protected]

https://samuelwills.wordpress.com/

Oxford 1

OXCARRE O x f o r d C e n t r e f o r t h e A n a l y s i s

o f R e s o u r c e R i c h E c o n o m i e s

Page 2: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

Natural resources often “curse” the countries that discover them. Australia has fared reasonably well, but can do even better

Oxford 2

1. The Parable of Pleasant Isle

2. What is the resource curse?

3. How can Australia better manage its resources?

Page 3: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

Natural resources often “curse” the countries that discover them. Australia has fared reasonably well, but can do even better

Oxford 3

1. The Parable of Pleasant Isle

2. What is the resource curse?

3. How can Australia better manage its resources?

Page 4: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

The story of Nauru captures how badly natural resource management can go wrong

4Eight principles

Nauru: “Pleasant Isle”

Population: 9,300 (2nd smallest)Size: 21 km2 (3rd smallest)GDP p.c.: ~US$5000First European contact: 1798

Page 5: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

- Kalgoorlie “Superpit”, Western Australia (Gold)

The interior of Nauru was mined for phosphate (used in fertilizer) from 1907-2000s

5

- Nauru, Central Pacific (Phosphate)

... both about the same size...

Eight principles

Page 6: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

Phosphate mining caused serious environmental damage

Oxford 6

Phosphate loading cantilevers – destroyed reef

Coral pinnacles left after mining – no agriculture, almost all food imported

Page 7: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

In 1990 Nauru was one of the richest countries in the world, but whittled the wealth away through bad investments and corruption

Oxford 7

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

1990 2004

Nauru Phosphate Royalties Trust, assets per person (AU$ 1990)

Source: Toatu, 2004

Page 8: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

Some of the investments include

Oxford 8

Air Nauru, Yaren Airport• Fleet of 7 aircraft• Seating capacity for 10% of population

Nauru House, Melbourne• Part of international property

portfolio• Sold in 2004

Page 9: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

…as well as

Oxford 9

• Sports teams

• Failed west-end shows

• Cruise ships that didn’t leave port

Page 10: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

…as well as

Oxford 10

• Sports teams

• Failed west-end shows

• Cruise ships that didn’t leave port

A yellow Lamborghini for the police chief……for the island’s one road…… which is a 16 km circle…

Page 11: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

Nauru’s income is now based on foreign aid, tax haven status and processing refugees….

Oxford 11

Australia’s offshore refugee processing centre.

Page 12: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

… on the phosphate plain where my less-than-illustrious athletics career began.

Oxford 12

A portrait of the speaker as a young man

Page 13: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

Natural resources often “curse” the countries that discover them. Australia has fared reasonably well, but can do even better

Oxford 13

1. The Parable of Pleasant Isle

2. What is the resource curse?

3. How can Australia better manage its resources?

Page 14: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

The resource curse works through six different channels

Oxford 14

2. What is the resource curse?

i. Inflation

ii. Volatility

iii. Exhaustion

iv. Dutch disease

v. Corruption

vi. Environmental degradation

The first four can all be solved with a mining tax and a sovereign wealth fund

Page 15: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

i. Inflation is caused by spending resource revenues, which distorts the economy

Oxford 15

Egypt: 14th Century Spain: 16th Century Australia: 21st Century

Mansa Musa (1280-1337):• Emperor of Mali (Timbuktu)• Vast wealth from trading• Muslim: made Hajj pilgrimage to Mecca in 1324• Gave out gold to poor in Cairo, Mecca.• Inflation destroyed economies

Curse of Moctezuma (1520)• Spanish Empire extracted gold and silver from Latin America• Amounted to (1990 USD) $1.5 trillion in 16th Century• “Everything is dear in Spain except silver”

Western Australia (2003-)• Price of iron ore rose 13x from 2003-2011• Vast investment and employment in mining in WA• Average inflation nearly 0.5% above Aus avg. since 2003

Inflation distorts the relative price of things, and transfers wealth from lenders to borrowers. So important that the RBA’s main purpose is to keep inflation stable at 2-3%.

Page 16: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

0

20

40

60

80

100

120

140

160

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Start of the mining boom

GFC

ii. Volatile income makes it very difficult to budget for the future, and to conduct monetary policy

Oxford 16

Reserve Bank of Australia Commodity Price Index, Jan 2013=100

Source: RBA, 2014

Page 17: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

iii. Natural resources are also finite – not always because of exhaustion. This was a problem for Chile in the 1930s, leaving many stranded assets.

Oxford 17

0

200

400

600

800

1000

1200

1400

1600

1800

1900 1910 1920 1930 1940

Chilean Nitrate

Synthetic Ammonia

Reserves left at current production

Chilean Nitrate

Australian Resources

Haber Process Discovered

Natural Gas: 85 yearsIron Ore: 90 yearsCoal: 160 years

Stranded Assets

IF: Global warming kept to 2OCTHEN: 60-80% of listed firms’ coal, oil and gas reserves are unburnable

Stranded assets

Page 18: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

iv. Resources also cause the exchange rate to appreciate leading to Dutch disease: the collapse of manufacturing firms

Oxford 18

60

70

80

90

100

110

120

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

Australia 2000s

Holland 1970s

Australia’s real exchange rate appreciated dramatically in the 2000s… …contributing to the collapse of the Auto industryAustralian real exchange rate index

• Large North Sea Gas deposits discovered (1959)

• Real exchange rate appreciated

• Other sectors became uncompetitive

• Unemployment rose – Gas extraction doesn’t employ many people

Page 19: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

v. In developing countries the political process can also be corrupted by natural resources, as in Ghana in 2012.

Oxford 19

Ghana is one of the best-managed countries in Africa and made a modest oil discovery in 2007. My colleagues at Oxford and I helped design their law in 2011.

The Law(PRMA 2011)

The Practice

Oil Revenues

Government Investment

Government Spending

Stabilisation Fund

Heritage Fund

Ghana had Presidential elections in 2012:

50%

20%

20%

10%

Oil RevenuesGovernment Employees- Public wage bill ↑150% (!)

Page 20: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

vi. The environment can be destroyed by mining, or it can be rehabilitated

Oxford 20

- Bridge Hill Ridge, Myall Lakes, NSW, 1983 and Now

- Nauru, Central Pacific (Phosphate)

Destruction… …or rehabilitation

Page 21: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

Natural resources often “curse” the countries that discover them. Australia has fared reasonably well, but can do even better

Oxford 21

1. The Parable of Pleasant Isle

2. What is the resource curse?

3. How can Australia better manage its resources?

Page 22: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

In Australia while mining accounts for over 50% of exports it only accounts for 5-10% of GDP (and even less of employment)

Oxford 22

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Agriculture

Education

Public Admin

Utilities and Telecoms

Manufacturing

Health

Construction

Trade

Mining

Food and Accom.

Services

Source: ABS, 2014; Edwards, 2014

The mining boom is only thought to have added 3% to GDP over 2003-2011.

Industry share of Australian GDP, 1974-2014, %

Page 23: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

The Australian economy has been quite well managed throughout the mining boom

Oxford 23

-1

0

1

2

3

4

5

6

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Australian GDP growth rate, 1984-2014, %

Source: ABS, 2014

“The recession we had to have”

GFC

2-4% growth despite the GFC!

Page 24: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

But, we are missing an opportunity. Natural resources generate a lot of profit but most are being sent abroad.

Oxford 24

0

10

20

30

40

50

60

70

80

90

100

Australian Average Mining

ForeignShareholders

AustralianShareholders

Federal Taxes

State Royalties

Labour

• Foreign Share Ownership:- Aust Avg: 50%- Mining: 80%

• Federal Taxes:Fell from 52% to 19% of profits as mineral prices rose.

• Domestic ownership concentrated:- Aus: 6 mining

billionares- Norway: None

Source: Edwards 2014, Black Kirkwood 2010, Clark, Greagg, Leaver 2011

Revenue breakdown, Mining industry vs Australian Average, 2011

Details

Page 25: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

Best practice from experience around the world involves taxing resource rents and saving the proceeds in a sovereign wealth fund.

Oxford 25

Resource curse channel Effect of mining tax and SWF

i. Inflation

ii. Volatility

iii. Exhaustion

iv. Dutch disease

v. Environmental degradation

vi. Corruption

• Takes demand out of the economy

• Smoothes resource revenues in budget

• Saves for future generations

• Lowers the exchange rate

• N/A

• May make it worse (easy to raid)

Page 26: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

The mining tax (and carbon tax) would also help governments meet their commitment to balance their budgets

Oxford 26

Budget Surplus = Tax - Spending

Mineral Resource Rent Tax• Tax ↑: little effect on production

Carbon Tax• Tax ↑: Few distortions, reduces incentive to pollute• Spending ↔

Direct Action• Tax ↓• Spending ↑: a double-whammy on the budget

Page 27: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

Australia is one of the only resource-rich developed countries without a sovereign wealth fund

Oxford 27

0 10 20 30 40 50 60 70

MexicoMalaysiaAustralia

ColombiaNorway

PeruChile

Russian FederationUnited Arab Emirates

EcuadorAlgeria

QatarVenezuela

Trinidad and TobagoKazakhstan

Brunei DarussalamAzerbaijan

OmanKuwait

Saudi Arabia

Resources as a share of GDP, Top 20 developed countries, %

SWFNo SWF

Resources as a share of GDP, %

Page 28: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

Norway discovered oil in 1969 but only built support for a SWF after oil prices fell in the late 80s, causing a recession. Will Australia be the same?

28

Norway’s oil production (‘000 bpd), revenues (USD, ‘000 per day) and fiscal balance (% GDP)

Source: BP Statistical review of world energy, 2013, OECD, 2013

0

50000

100000

150000

200000

250000

300000

0

500

1000

1500

2000

2500

3000

3500

4000Production (LHS)Revenue (RHS)

Discovery

-5

0

5

10

15

20Fiscal Balance (% GDP)

Countercyclical policy

SWF established

Page 29: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

How will Australia’s mining boom develop in the future?

• Talk that the mining boom is coming to an end

– Not true

• Will feel like the mining boom is ending:

– Prices will fall: more supply

– Investment phase will end

– Employment in the mines will fall

– Exchange rate will fall – QE ending abroad

– Production phase: sending 80% of profits abroad

• In 2-3 years Australia will be better placed to re-introduce a mining tax

– Lower prices, so immediate impact on miners will be less

– Less visible role of mining in popular press, etc.

Oxford 29

Economists can’t see into the future – don’t believe any that say they can.…but here’s an educated guess:

Page 30: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

Comments and Questions

30

Page 31: AVOIDING THE RESOURCE CURSE - WordPress.com · 2015. 9. 9. · • Muslim: made Hajj pilgrimage to Mecca in 1324 • Gave out gold to poor in airo, Mecca. • Inflation destroyed

The Mining Tax was well designed because it rose and fell with prices and profits, like the PRRT.

Oxford 31

Barrow Island would have shut in the 90s under pure royalties. Instead it still produces small amounts of oil today

BHP and ESSO approached the government to apply the PRRT in 1990, after previously holding out

Source: Emerson, 2014

- Barrow Island, WA - Bass Straight LNG