Post on 29-Aug-2020
AVOIDING THE RESOURCE CURSEThe Economics of Managing Natural Resources
September 2015
Dr Samuel Wills
Department of Economics and Pembroke College
Oxford University
Samuel.wills@gmail.com
https://samuelwills.wordpress.com/
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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
Natural resources often “curse” the countries that discover them. Australia has fared reasonably well, but can do even better
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1. The Parable of Pleasant Isle
2. What is the resource curse?
3. How can Australia better manage its resources?
Natural resources often “curse” the countries that discover them. Australia has fared reasonably well, but can do even better
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1. The Parable of Pleasant Isle
2. What is the resource curse?
3. How can Australia better manage its resources?
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
- Kalgoorlie “Superpit”, Western Australia (Gold)
The interior of Nauru was mined for phosphate (used in fertilizer) from 1907-2000s
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- Nauru, Central Pacific (Phosphate)
... both about the same size...
Eight principles
Phosphate mining caused serious environmental damage
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Phosphate loading cantilevers – destroyed reef
Coral pinnacles left after mining – no agriculture, almost all food imported
In 1990 Nauru was one of the richest countries in the world, but whittled the wealth away through bad investments and corruption
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$120,000
$140,000
1990 2004
Nauru Phosphate Royalties Trust, assets per person (AU$ 1990)
Source: Toatu, 2004
Some of the investments include
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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
…as well as
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• Sports teams
• Failed west-end shows
• Cruise ships that didn’t leave port
…as well as
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• 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…
Nauru’s income is now based on foreign aid, tax haven status and processing refugees….
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Australia’s offshore refugee processing centre.
… on the phosphate plain where my less-than-illustrious athletics career began.
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A portrait of the speaker as a young man
Natural resources often “curse” the countries that discover them. Australia has fared reasonably well, but can do even better
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1. The Parable of Pleasant Isle
2. What is the resource curse?
3. How can Australia better manage its resources?
The resource curse works through six different channels
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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
i. Inflation is caused by spending resource revenues, which distorts the economy
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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%.
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Start of the mining boom
GFC
ii. Volatile income makes it very difficult to budget for the future, and to conduct monetary policy
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Reserve Bank of Australia Commodity Price Index, Jan 2013=100
Source: RBA, 2014
iii. Natural resources are also finite – not always because of exhaustion. This was a problem for Chile in the 1930s, leaving many stranded assets.
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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
iv. Resources also cause the exchange rate to appreciate leading to Dutch disease: the collapse of manufacturing firms
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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
v. In developing countries the political process can also be corrupted by natural resources, as in Ghana in 2012.
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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%
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Oil RevenuesGovernment Employees- Public wage bill ↑150% (!)
vi. The environment can be destroyed by mining, or it can be rehabilitated
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- Bridge Hill Ridge, Myall Lakes, NSW, 1983 and Now
- Nauru, Central Pacific (Phosphate)
Destruction… …or rehabilitation
Natural resources often “curse” the countries that discover them. Australia has fared reasonably well, but can do even better
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1. The Parable of Pleasant Isle
2. What is the resource curse?
3. How can Australia better manage its resources?
In Australia while mining accounts for over 50% of exports it only accounts for 5-10% of GDP (and even less of employment)
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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, %
The Australian economy has been quite well managed throughout the mining boom
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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!
But, we are missing an opportunity. Natural resources generate a lot of profit but most are being sent abroad.
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Australian Average Mining
ForeignShareholders
AustralianShareholders
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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
Best practice from experience around the world involves taxing resource rents and saving the proceeds in a sovereign wealth fund.
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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)
The mining tax (and carbon tax) would also help governments meet their commitment to balance their budgets
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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
Australia is one of the only resource-rich developed countries without a sovereign wealth fund
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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, %
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?
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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
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Countercyclical policy
SWF established
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.
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Economists can’t see into the future – don’t believe any that say they can.…but here’s an educated guess:
Comments and Questions
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The Mining Tax was well designed because it rose and fell with prices and profits, like the PRRT.
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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