Resource-rich Economies Research Articles

Energy consumption, economic policy uncertainty and carbon emissions; causality evidence from resource rich economies

The study uses the World Uncertainty Index to analyze the long-run relationship of economic policy uncertainty and energy consumption for countries with high geopolitical risk over the period 1996–2017. The Kao test shows a cointegration association between energy consumption, economic growth, geopolitical risk, economic policy uncertainty, and carbon dioxide (CO2) emissions. The results based on the Panel Pooled Mean Group-Autoregressive Distributed lag model (PMG-ARDL) show that energy consumption and economic growth contribute to (CO2) emissions. Additionally, there is a significant association between economic uncertainty and CO2 emissions in the long-run. The panel causality analysis by Dumitrescu and Hurlin (2012) shows a bidirectional relationship between CO2 emissions and energy consumption, economic policy uncertainty and CO2 emissions, economic growth and CO2 emissions, but a unidirectional causality from CO2 emissions to geopolitical risks. The findings call for vital changes in energy policies to accommodate economic policy uncertainties and geopolitical risks.

Manufacturing Output and Labour Productivity: Evidence from ECOWAS

The manufacturing sector is one growth enhancing, yet grossly neglected by many resource rich economies in Africa. It is adjudged critical to Africa economies due to its capacity to generate growth, accumulate wealth and tighten the inequality gap. The sector has been growing at a relatively slow rate, particularly due to the occurrence of four extreme inter-connected external shocks: fall in commodity (particularly oil) prices, global economic and financial crisis, and rise in energy and food prices which have worsened regional output and productivity levels. More importantly, the human capital component seems to be one major hindrance. To this effect, human capital channel is examined in this present re-examination. A static panel regression analysis was used to examine the effect of labour (controlled for technology) on manufacturing sector performance in ECOWAS region from 1990 to 2019. The study found that on the average, when controlled for technology, labour productivity significantly influence manufacturing sector in ECOWAS. Specifically, the availability of secure internet servers and individuals’ internet usage were more important and positively stimulate the influence of labour productivity on manufacturing output in the region.

Revisiting resource curse puzzle: new evidence from heterogeneous panel analysis

ABSTRACT This study examines the natural resource curse hypothesize on a panel of 111 countries over the period 1996–2015. Using a range of heterogeneous panel cointegration techniques, it tests the resource curse hypothesis while allowing for cross-section heterogeneity. Specifically, it employs common correlated effects mean group, cross-sectionally augmented autoregressive distributed lag (CS-ARDL), and cross-sectionally augmented distributed lag (CS-DL) techniques. It begins the analysis with a conventional method in which the average value of variables is considered. The conventional approach fails to provide any clear evidence. The CCEMG estimator yields limited evidence supporting the resource curse in the long-run. However, CS-DL and CS-ARDL results show strong evidence for resources as a curse in the short-run, however, the evidence is weak in suggesting any long-run influence of resource-dependence on economic growth. Furthermore, CS-ARDL-based results also show that the effects work with a lag. Overall, we find support for the resource curse hypothesis, suggesting that resource-rich economies tend to grow at a slower rate in comparison to the resource-deprived ones.

Revisiting the nexus of financialization and natural resource abundance in resource-rich countries: New empirical evidence from nine indices of financial development

A great number of studies in the literature that estimates the impact of natural resource abundance on financial development proxies financialization with either domestic credit to the private sector or market capitalization of domestic companies. However, these proxies do not fully respond to the complicated structure of financial development. To fill the gaps in the existing literature, nine indices of financial development proposed by IMF are used in the links with natural resource abundance in resource-rich countries for the years 1980–2017. This study reveals reliable and robust empirical results by employing both traditional and second-generation econometric techniques for the dataset. First, the financial resource curse hypothesis is confirmed for the panel of resource-rich economies because natural resources have negative effects on each of the nine indices. Second, the negative impact of the abundance of natural resources on financialization decreases towards high quantile levels. Last, natural resource abundance has a greater negative impact on financial markets than financial institutions when indices of financial markets are compared to indices of financial institutions. Policy implications are further discussed in this study.

Oil curse, economic growth and trade openness

An important economic paradox in the economic literature is that countries with abundant natural resources are poor in terms of real gross domestic product per capita. This paradox, known as the ‘resource curse’, is contrary to the conventional intuition that natural resources help to improve economic growth and prosperity. Using panel data for 95 countries, this study revisits the resource curse paradox in terms of oil resources abundance for the period 1980–2017. In addition, the study examines the role of trade openness in influencing the relationship between oil abundance and economic growth. The study finds trade openness is a possible avenue to reduce the resource curse, in our sample, trade openness reduces oil curse by around 25%. Trade openness allows countries to obtain competitive prices for their resources in the international market and access advanced technologies to extract resources more efficiently. Therefore, natural resource–rich economies can reduce the resource curse by increasing exposure to international trade.

Measuring the Knowledge-Based Performance Efficiency in the Oil-Exported Countries

The main challenge of natural resource-rich economies is to avoid the resource curse, poor economic growth, weak institutions and corruption through the development of state program, tended to the development of knowledge-based economy. This research evaluates the productivity of the gross regional product in the context of knowledge-based economy indicators taking into account industrial structure and specialization in regional economic. The focus is on the Republic of Kazakhstan as representative of the oil-exported countries. The feature selection analysis was implemented through a panel regression model and in the aim of evaluation of knowledge-based performance of state measures was used Malmquist Productivity Index in DEA. The data set of the research is obtained from the official statistical data of state structures during the period from 2007 to 2017 for the regions of Kazakhstan.

Between stranded assets and green transformation: Fossil-fuel-producing developing countries towards 2055

Climate-related asset stranding refers to the depreciation of assets – such as resource reserves, infrastructure, or industries – resulting from the unanticipated changes, such as the tightening of climate policies. Although developing countries – especially fossil-fuel exporters – may be most concerned by this issue, its analysis in development (economics) has so far been limited. We aim at enhancing the understanding of stranded assets by investigating its relevance in the resource sectors of three case study regions –the Middle East, China, and Latin America. For this, we analyse the regional dimensions of four interdisciplinary global energy scenarios. Specifically, we extract results from a numerical energy model (energy production, energy consumption, electricity generation) for the three regions and introduce a novel index for stranded assets. The index identifies which fossil fuel sector in each region is most prone to asset stranding and should receive the most attention from national and international policymakers. We find that considerable uncertainty exists for the Chinese coal sector as well as the Middle Eastern and Latin American crude oil sectors. We finally put our results into perspective by discussing aspects that are closely related to stranded assets for resource-rich economies such as the uncertainty in global energy and climate policy, the resource curse and diversification, economic resilience, and unequal burden-sharing of climate policy efforts between industrialised economies and latecomers. We conclude that China is more likely to engage in a green transformation than the Latin Americas or, still less, the Middle East.

An integrated approach to electricity sector reforms in the resource rich economies of the MENA

This paper argues that MENA resource-rich economies must go beyond simply replicating the “standard model” of electricity market liberalisation. They need to not only adapt the standard model to their unique contexts but also integrate it with other elements of their energy systems through harnessing complementarities between existing policies. The integrated model therefore includes additional modules: rationalising end user prices, improving energy efficiency, integrating renewables, and collapsing the “silos” between different energy vectors. The success of the extended reform model, however, is crucially contingent upon taking into account three particular factors in its implementation. First, reforming energy prices requires a better understanding of the underpinning logic of subsidies beyond popular justifications around the “social contract” or “political compact”. Second, energy efficiency is a challenging initiative in the MENA region, which the correction of price signals can only partially resolve, due to other factors that influence it, such as path dependency, market failures and consumer behaviour. And third, incentivising investments in renewable energy requires careful design of the balance of roles between the market and government, as renewable support schemes may lead to an increased role for centralised coordination, thereby contradicting the originally intended objectives of electricity market reform.

Impact of market misallocations on green TFP: evidence from countries along the Belt and Road.

Based on the idea of a "Community of Human Destiny," the Chinese government proposed the "Belt and Road" initiative, and clearly proposed to promote green development and strengthen ecological environmental protection. However, a considerable number of countries are resource-rich economies with serious market misallocations. Using the stochastic frontier analysis (SFA) combined with the directional distance function (DDF) framework, this paper measures the green total factor productivity (GTFP) and its items (i.e., technical change and efficiency change) of 33 countries along the Belt and Road in 1995-2012, and then the impact of market misallocations on GTFP is analyzed. The following conclusions are drawn: (1) The main driving force for GTFP promotion in Asian countries came from technical change, while in European countries, it came from efficiency change. (2) Market misallocations had significantly hindered the GTFP of these economies. Countries with greater market misallocations have smaller GTFP. (3) Results based on counterfactual measures showed that GTFP could be increased by up to 4.04% and the average can be increased by 1.24% after eliminating market misallocations.

Governance, Entrepreneurship and Employment Growth in Africa: Does Resource Richness Matter?

Economic retardation in resource rich economies continues to elicit concerns among economists and development experts. This retardation has been linked to resource endowments and the neglect for institutions of governance in resource rich economies. This paper investigates the effects of governance, financial market development, labor market freedom and human capital on economic performance in resource rich countries in Africa. Using micro level employment growth as a proxy for economic performance and based on OLS model, the study shows that governance and financial market development have a positive and statistically significant relationship with employment growth. Labor market freedom and human capital development exert a negative impact on employment growth. These results imply that good governance, measured by political stability and government integrity provides assurance to investors and entrepreneurs, thus fostering private sector investment in the economy. When the economy is characterized by higher degree of uncertainty as a result of poor governance, investors perceive of higher risk of investment. Consequently, risk-averse investors may hesitate to take economically productive initiatives or may exit the economy altogether. Financial market development encourages growth by enhancing allocative efficiency and flow of finance to productive and nascent entrepreneurs who often rely on external financing. The negative relationship between labor market freedom and employment growth in resource rich countries is counterintuitive. This result could imply that when employers have more freedom to hire and fire due to less government control of the labor market, they become less committed to employees since they find it easy to dismiss them without incurring significant costs. Human capital development could exert a negative influence on employment growth by delaying the joining of and participation in the labor market as potential employees delay seeking jobs to pursue education.

Modelling Elasticity of Non-Oil Tax Revenues to Oil Price Changes: is There U-Shaped Association? Evidence from Azerbaijan

Oil price changes has a great influence on the behaviour of firms in oil exporting countries which displays itself in amount of non‑oil tax receipts of the state budget. Employing FMOLS, DOLS, and CCR cointegration methods for 2001Q1–2015Q4, the study aims to analyse how oil price changes affects non‑oil tax revenues in Azerbaijan. Empirical results altogether provide strong scientific evidence that there is U‑shaped causality from oil price changes to total non‑oil tax revenues , corporate income tax receipts and labour income tax payments , and inverse U‑shaped to non‑oil VAT revenues of the state budget. Results show that firms face with the trade‑off between “produce‑and‑sell” and “import‑and‑sell” as oil price rises. In case of higher price than the threshold level, companies prefer the latter choice. Research findings are highly useful for the public policy decision‑makers in resource rich economies.

Energy security, electricity, population and economic growth: The case of a developing South Asian resource-rich economy

Economic growth and increasing population is driving the demand for energy in developing economies globally including South Asia. Energy security concerns have heightened in these economies, consequently, raising questions in their ability to meet the key sustainable development goals. This paper specifically examines the inter-relationships between energy security captured through the channel of electricity availability based on electricity consumption and economic output in a multivariate framework incorporating the effects of capital formation and population for Nepal, a developing economy in South Asia. Time series econometrics based on the ARDL bounds test approach to cointegration and the Toda-Yamamoto Granger causality tests are used to examine and test for long run equilibrium relationships and causality between 1975 and 2014. We find that there is no long-run relationship between electricity consumption and economic output for Nepal, distinguishing it at the regional level for South Asia. However, a 1% increase in population increases electricity consumption by 4.16% in the long-run. We propose that large scale development of available renewable energy such as hydropower and improvements in energy efficiency will not only strengthen energy security in the long-run but also will help tackling climate change in South Asian developing economies like Nepal.

Re-evaluating the environmental impacts of tourism: does EKC exist?

The study investigates the long-run impact of tourism development on ecological footprint by employing the time-varying coefficient cointegration approach (TVC), in addition to the conventional cointegration techniques in the case of Azerbaijan for the period of 1996–2014. Based on the TVC estimation results, the coefficient of tourism development, which is the income elasticity of environmental degradation, was found to be time invariant. The paper uses energy consumption, trade, urbanization, and institutional quality indicators as control explanatory variables. The estimation results revealed that trade and energy consumption have statistically significant and positive impact on ecological footprint, while the coefficients of the other explanatory variables were found to be insignificant. Both the conventional estimation methods and the TVC concluded that, for the relationship between ecological footprint and tourism development, the EKC hypothesis is not present in Azerbaijan. Policy implications for the resource-rich economies have been discussed.

Natural Resource Abundance (Black Gold) and Investment in Human Capital in the Context of Saudi Arabia

A number of studies have suggested that an abundance of natural resource gives rise to what is known as ‘Dutch disease’, and also distorts the quality of institutions. In contrast, this paper examines whether plenty of natural resource crowds out human capital in the context of Saudi Arabia using the VECM model. The study investigates this relationship at the country level rather than through panel or cross-section data as is the case in most other studies. The results show that natural resources have a positive effect on human capital. The presence of natural resources and their rents enable investment in education. This, in turn, facilitates the building of human capital. The link between education and human capital accumulation is complex and more investment in education does not automatically lead to more human capital accumulation. To conclude, it is incorrect to assume the harmful effect of resources on human capital in all resource-rich economies, without a detailed examination of country specific historical data. Keywords: natural resource curse, transmission channels of curse, human capital, growth, education, Dutch disease, Saudi economy, unit root and cointegration tests, VAR model. DOI : 10.7176/JESD/10-22-10 Publication date: November 30 th 2019

Growth with Deadly Spillovers

Empirical studies show that pollution is one of the world’s most significant causes of premature death. However, despite its importance macroeconomics still largely neglects this negative externality. To fill the gap, we build a model where productivity growth, emissions, mortality and fertility are all endogenous. Primary production exploits natural resources and generates emissions that increase total deaths. Unlike conventional pollution externalities, deadly spillovers affect the path of economic activity and the associated level of welfare through multiple channels - consumption and fertility choices, labor supply, incentives to innovate. They can also undermine development even for damage elasticities below unity. The reason is that the response of the mortality rate to population change is not only state-dependent but also generates mortality traps - equilibrium paths leading to population implosion. Differently from poverty traps triggered by low income per worker, mortality traps threaten resource-rich economies with low population. Subsidies to primary production reduce long-run population capacity and expand the mortality trap. Discoveries of natural resource endowments bring the economy closer to population implosion and may as well expand the trap.

Natural resource dependence and economic growth: A TOPSIS/DEA analysis of innovation efficiency

Countries with a low level of innovation are prone to challenges of resource-based development such poor economic growth, weak institutions and corruption, political instability, and generally poor living conditions for the populace while the elite leave in affluence. This paper examines how promotion of innovation in natural resource-rich economies can potentially insulate them from the resource curse. It uses Data Envelopment Analysis (DEA) based on Technique for Order of Preference by Similarity to Ideal Solution (TOPSIS) in analyzing the innovative capabilities and readiness of natural resource-rich economies so that they don't fall into the trouble zone of the resources. The study investigates innovation efficiency challenges as a new perspective to the resource curse literature and notes that countries that do not have high innovation performances present low potential to improve their innovation efficiency and development. It concludes that high economic dependency on natural resources' exports or poor political stability could lead countries to fall into this trouble zone, especially the countries that are mostly dependent on oil exports if they do not innovate.

The Effect of Real Exchange Rate on Trade Balance in a Resource-Rich Economy: The Case of Mongolia

For resource-rich developing economies, the effect of real exchange rate depreciation on trade balance may differ from the standard findings depending on country specific characteristics. This article employs vector error correction model to examine the effect of real exchange rate on trade balance in Mongolia, a resource-rich developing country. Empirical results show that exchange rate depreciation improves trade balance in both short and long run. In particular, the well-known Marshall–Lerner condition holds in the long run; however, there is no evidence of the classic J-curve effects in the short run. The results suggest that the exchange rate flexibility may help to deal effectively with current account deficits and exchange rate risk. JEL Classification: C32, C51, F14, F32

Adjustment to negative price shocks by a commodity exporting economy: Does exchange rate flexibility resolve a balance of payments crisis?

Negative commodity price shocks can induce balance of payments crises in resource dependent economies. Governments often react by intervening against currency depreciation as, for example, in the case of Papua New Guinea in response to the commodity price shocks of 2014. We develop an original theoretical model to analyze the balance of payments impact of a commodity price shock under alternative exchange rate regimes: a flexible rate regime and a fixed rate regime with foreign exchange rationing. The balance of payments consequences are shown to depend on the elasticity of exports and imports with respect to the exchange rate. For the Papua New Guinea case, we estimate export elasticities for a variety of commodities (gold, silver, copper, oil, coffee, cocoa, copra, copra oil, palm oil, rubber, tea, logs, and marine products) as well as for imports. The results indicate that the Marshall-Lerner condition is satisfied for this resource-rich economy, implying that exchange rate flexibility may be practicable. We implement our calibrated model to conduct a counter-factual simulation and find that with a flexible exchange rate, foreign reserves would have been 20 percent higher three years after the shock than they were under the actual policy of exchange rate stabilization. In light of this, we argue the merits of greater exchange rate flexibility.

Advancing renewable energy in resource-rich economies of the MENA

Abstract As much of the world pushes ahead with the deployment of renewable energy, resource-rich MENA economies are lagging behind. This paper contends that while the main obstacles to deployment of renewables are grid infrastructure inadequacy, insufficient institutional capacity, and risks and uncertainties, the investment incentives lie on a policy instrument spectrum with two polar solutions: (i) the incentive is provided entirely through the market (removing all forms of fossil fuel subsidies and internalising the cost of externalities); or (ii) the incentive is provided through a full government subsidy programme (in addition to the existing fossil fuel subsidies). However, there is a trade-off between the two dimensions of the fiscal burden and political acceptance across the policy instrument spectrum, which implies that the two polar solutions themselves are not easily and fully implementable in these countries. We propose a new dynamic combinatorial approach (partial subsidy programme and partial fossil fuel price adjustment) that gradually moves towards market-based incentive provision over the medium to long-term where energy subsidies are eventually phased out. The approach balances fiscal sustainability with political stability, enabling the gradual scaling up and development of markets for renewables.

MACROFINANCIAL RESPONSIBILITY OF CENTRAL BANKS: THEORETICAL FOUNDATION AND INSTITUTIONAL DILEMMAS

Introduction. Prediction that price stability as well as inflation targeting in commodity rich countries is very fragile typically based on logical relation between commodity prices fluctuations and macroeconomic instability. But in the same time, while counter-cyclical instruments appear, commodity prices shock should be taken as supply shock. Thus, inflation instability in resource rich countries should be taken as consequences of macroeconomic mismanagement. Purpose. The purpose of the paper is to validate rejection of fatalism in negative influence of resource richness on price stability. Also it is important to show that inflation targeting regime compatible with large commodities export. In the same time it is necessary to take into account political regime as a supporting factor of adoption that regime of macroeconomic policy that is consistent with price stability. Results. It is proved empirically that commodity abundance per se is not in conflict with price stability. We rich such conclusions basing on simple multifactor regression model that combine macroeconomic policy regime dummies (maturity of inflation targeting, sovereign wealth fund in operation, central bank independence, exchange rate regime) and structural features of the resource rich economies like commodity export, economic complexity, financial depth, democracy. On example of 68 resource rich countries it is shown that price stability parameters (mean inflation, 1999-2017 and standard deviation of it) are not in undoubtfull relation with fraction of nonmerchandise export, but they are in opposite relation with inflation targeting and sovereign wealth funds dummies. Resource endowed countries are not homogenous from political regime point of you. Such regime is important driver of macroeconomic policy choice. Advanced democracies are likely to choose inflation targeting, flexible exchange rate and central bank independence, while wealthy autarkies are likely to prefer fixed exchange rates and sovereign wealth funds. It is mean that price stability is not just vulnerable to commodity factor but is to unstable political regime under which it is hard to implement counter-cyclical regime of macroeconomic policy. Conclusions. Commodity wealth is not precondition to price instability. But political regime is important activate that type of macroeconomic policy regime that consistent with low and stable inflation. By the structural features Ukraine is closer to democracies with mean level of economic complexity and financial depth. Due this inflation targeting regime is more appropriate meaning priority of price stability and exchange rate flexibility.