Natural Resources and Development in the Middle East and North Africa: An Alternative Perspective Daniel Lederman and Mustapha K. Nabli The World Bank Presentation at the Workshop on Natural Resources and Economic Diversification Economic Research Forum November 6, 2009; Cairo, Egypt
To start: Measurement of Natural Resource Abundance Trade based indicators of dependence on natural resources NR exports as a share of total merchandise exports Not strictly positively correlated with abundance in theory Different propensities to consume different goods (which differ across development levels) determine the relationship with abundance A measure of export concentration NR exports as a share of GDP Negatively correlated with abundance when NR sector growth has spillovers on the rest of the economy Net exports per worker Theoretically strictly positively correlated with abundance But negative income effect
Trade Proxies for Natural Resources and Heterogeneity within MENA plus Comparators Country World Bank Regional and Income Classifications Net exports of petroleum per worker (000s USD, annual average 1980 2005) Gross petroleum exports over GDP (annual average 1980 2005) Gross petroleum exports over total merchandise exports Singapore High income: nonoecd 1.825 34.8% 25.1% Bahrain High income: nonoecd 0.773 7.8% 11.0% Jordan Middle East & North Africa 0.509 0.0% 0.2% Morocco Middle East & North Africa 0.100 0.6% 3.5% Egypt Middle East & North Africa 0.048 4.7% 50.1% Tunisia Middle East & North Africa 0.106 9.3% 36.7% Syria Middle East & North Africa 0.188 16.3% 91.1% Yemen (1989 GDP pc) Middle East & North Africa 0.193 27.0% 57.2% Iran Middle East & North Africa 0.587 18.4% 83.6% Algeria Middle East & North Africa 0.952 24.4% 97.7% United Arab Emirates High income: nonoecd 3.846 14.1% 18.8% Oman (2004 GDP p.c.) Middle East & North Africa 4.691 42.2% 92.1% Kuwait High income: nonoecd 7.717 40.8% 94.8% Libya (2000 GDP p.c.) Middle East & North Africa 8.457 60.3% 149.9% Saudi Arabia High income: nonoecd 10.408 52.8% 130.2% Qatar (2003 GDP p.c.) High income: nonoecd 11.628 41.8% 84.7% Venezuela Latin America & Caribbean 1.666 28.7% 110.6% Trinidad and Tobago High income: nonoecd 2.474 38.1% 97.4% Source: Authors' calculations based on data from PWT 6.2 on GDP (PPP adjusted) and World Bank, World Development Indicators for popu from UNCOMTRADE, via World International Trade Statistics (WITS). Petroleum refers to SITC category 33. It includes oil, other petroleum
Arab Countries Classified according to NR abundance Emerging markets, not rich in NR: Egypt, Jordan, Morocco, Tunisia, [Lebanon] Net exports/worker 0.150. Resource rich GCC countries: Kuwait, Oman, Saudi Arabia, Qatar, U.A.E, Net Exports/Worker 1.000. Bahrain is exception but included in this group. Resource rich, labor abundant economies: Algeria, Iraq, Libya, Syria, [Yemen] 0.150 Net Exports/Worker 1.000
The rest of the presentation: What We Care About Resources, level of income and economic growth The level of development versus recent growth Volatility For a given growth rate, volatility reduces welfare Employment Not just about full employment, but also about the structure of employment due to social concerns (e.g., youth unemployment, social and political stability) Sustainability Economic conditions after the last drop of oil Centrality of diversification
1. The Relationship between Net Exports of Natural Resources and GDP per Capita is Positive for Net Exporters Source: Lederman & Maloney (2008)
The Relationship between Net Imports of Natural Resources and GDP per Capita is Positive for Net Importers: There s Gotta Be An Income Effect! Source: Lederman & Maloney (2008)
The Effect of Natural Resources (Imperfect Proxy for Abundance) on Income per Capita For Research: What is the effect of Oil and Minerals across conditional quantiles? Net Exporters by Quantiles Source: Lederman & Maloney (2008, Economia) Net Importers by Quantiles
Natural Resource and GDP per capita in Arab countries Table 1: GDP, GDP per capita, and Population GDP Per Capita, constant 2000 US$ (1960)* GDP Per Capita, constant 2000 US$ (2007) GDP Growth Period GDP (constant 2000 US$) Growth Rate GDP Per capita (constant 2000 US$) Growth Rate Population Growth Rate*** Emerging countries Egypt 432 1,697 1961-2007 5.3 3.0 2.3 Jordan 1,119 2,319 1961-2007 5.4 1.4 4.1 Morocco 647 1,693 1961-2007 4.2 2.1 2.1 Tunisia 625 2,652 1962-2007 5.2 3.3 1.9 Average 706 2,090 5.0 2.5 2.6 Median 636 2,008 5.2 2.6 2.2 Resource Rich Labor Importing (GCC) Bahrain 11,479 16,397 1981-2007 4.3 1.4 2.9 Kuwait 59,183 23,157 1963-2007 2.6-2.1 4.6 Oman 953 10,571 1961-2007 8.8 5.5 3.3 Saudi Arabia 6,976 10,019 1969-2007 4.9 1.0 3.9 Qatar 1981-2007 4.4-1.5 5.9 United Arab Emirates 49,329 26,075 1974-2007 5.5-1.7 7.2 Average 25,584 17,244 5.1 0.4 4.6 Median 11,479 16,397 4.7-0.2 4.3 Average (w/o Oman) 31,742 18,912 4.3-0.6 4.9 Resource Rich Labor Abundant (Non-GCC) Algeria 1,280 2,159 1961-2007 3.6 1.2 2.4 Iraq 717 660 1998-2007 2.5-0.8 3.3 Libya 6,511 7,375 1981-2007 -0.1-2.7 2.6 Syria 477 1,269 1961-2007 5.4 2.2 3.2 Average 2,756 3,601 3.0 0.2 2.7 Median 1,280 2,159 3.6 1.2 2.6 2,246 2,866 Other Resource Rich Countries Iran 981 2,137 1966-2007 4.5 2.0 2.5 Venezuela 5,425 5,784 1961-2007 2.9 0.2 2.7 Average 3,203 3,961 3.7 1.1 2.6 Median 3,203 3,961 3.7 1.1 2.6
Oil Abundance, Income Levels, and Growth in MENA, 1960 versus 2005 (constant U.S. $ of 2000)
GDP per Capita Growth and Oil, 1960 2005
GDP Per capita (constant constantlcu) Growth Rate GDP Per capita (constant LCU) Growth Rate 20.00 15.00 10.00 5.00 0.00 Oil and Growth by Decades in MENA: Not a Stable Relationship 10.00 1961 1970 8.00 1971 1980 y = 0.3082x + 2.4459 R² = 0.0478 y = 0.1622x 2 + 1.8115x + 1.7908 R² = 0.1314 2 0 2 4 6 8 10 12 5.00 Net exports of petroleum per worker (000s USD, annual average 1980 2005) 6.00 4.00 2.00 0.00 Kuwait S. Arabia 2 0 2 4 6 8 10 12 14 2.00 4.00 6.00 8.00 10.00 U.A.E. Oman GDP Per capita (constantlcu) Growth Rate 6.00 4.00 y = 0.2902x 2 2.89x + 4.3825 R² = 0.5556 2.00 Oman y = 0.2502x + 2.9261 0.00 R² = 0.0468 2 0 2.00 2 4 U.A.E. 6 8 10 12 4.00 6.00 8.00 Kuwait S. Arabia Net exports of petroleum per worker (000s USD, annual average 1980 2005) 5.00 1981 1990 1991 2000 4.00 Kuwait S. Arabia y = 0.6453x + 0.0259 R² = 0.5085 Qatar y = 0.0594x 2 0.0509x 0.2645 R² = 0.5435 Net exports of petroleum per worker (000s USD, annual average 1980 2005) GDP Per capita (constantlcu) Growth Rate 3.00 2.00 1.00 0.00 Kuwait y = 0.0682x 2 0.698x + 1.7751 R² = 0.2329 Oman y = 0.0148x + 1.4414 R² = 0.0013 S. Arabia Qatar 2 0 2 4 6 8 10 12 14 1.00 U.A.E. 2.00 Net exports of petroleum per worker (000s USD, annual average 1980 2005)
Issues for Research: First, are issues of measurement of economic growth. Example: Saudi Arabia GNI & GDP - per capita values - Saudi Arabia 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000-1960 1970 1980 1990 2000 2010 GNI per capita, PPP (current international $) GDP per capita (current US$) GNI per capita, Atlas method (current US$) GDP per capita (constant 2000 US$)
Issues for Research: What is the appropriate measure of economic growth: total GDP or GNI, at what prices? Or non hydrocarbon GDP? Is there a negative relationship between natural resource abundance and economic growth? Growth volatility as a research challenge: Focus only on the determinants of the level of GDP per capita, the realization all past growth? Pritchett s mountains and plateau s Why and how does the relationship change over time? If a single determinant e.g., oil price then deep implications for policy and research on growth Is dependence on hydrocarbons different from that on other natural resources? Are there exceptional experiences? The case of Oman?
2. Growth Volatility Natural resource abundance is associated with high growth volatility This affects welfare through its effects on: Average growth Uncertainty These effects are due to: Hysteresis effects on policy When temporary shocks result in long lasting policies Uncertainty affects private investment and savings decisions: the usual channel affecting growth itself How relevant for oil economies with small private sectors?
Volatile Growth over Time by Decades
Volatile Measured Productivity Growth by Decades
More globally, Growth Volatility and Natural Resources, 1980 2005: Not a Clear Relationship GDP per Capita Volatility 0.1.2.3.4 ALBR GEO BIH RWA AZE GNB TJK COG TKM DJI UKR KGZ KAZ LBN ETH ZWE EST TZA CUB TTO HRV MDA ARE BDI ERI MOZ RUS FJI URY BGR CAF SOM ARG CIV BTN BWA CMR IRN JOR KHM CHL BHR KOR LTU CPV FIN ARM BLR CRI BRA BEN BFA CYP CZE GHA HKG DOM GMB IRL HUN MAR LSO MWI MLI MDG NER PER SVK SLE PNG ROM PAN NIC MNG GAB ISRCOM BGD CHN GIN IDN NGA PHL POL SEN UGA TGO ZMB SYR YEM VEN SGP SVN NAM MRT MUS THA TUR SDN MKD BOL ECUDZA CAN BEL CHE AUT ESP DNK GRC LVA HND LKA JAM MEX OMN PRT JPN KEN NPL EGY FRA GTM IND MYS ITANZL NLD PRY SLV SWE USA SWZ PAK TUN GBR VNM COL ZAF AUS KWT SAU NOR QAT 0 5 10 15 20 Net Exports of Minerals and Petroleum per Worker (000s USD) Source: Lederman and Xu (in progress) GDP per Capita Volatility 0.1.2.3 BEL SGP JPN ALB LBR GEO BIH RWA AZE GNBTJK TKM DJI KGZ UKR KAZ ETH LBN ZWE TZA EST CUB HRVMDA BDI ERI MOZ RUS FJI URY BGRCAF SOM ARG CIVBTN CMR IRN JOR KHM BWA PER SVK CPV LSO MLI SLE PNG ROM GHA CHL KOR LTU MWI TGO NER SYR YEM MAR FIN HKG CZE BFA ARM BLR CRI DOMBRA GMB HUN IDN CYP IRL MKD ISR LVA COM HND LKA MDG MNG NGA PAN NIC PHL POL SEN UGA ZMB SVN NAM MRT THA TUR SDN MUSWZ BEN JAM BGD CHNGIN MEX PRT SLV BOLECU CHE DNK GRC KEN NPL EGY AUTFRA ESP GTMIND MYS SWEUSA ITA NZL PRY NLD PAK TUN GBR VNMZAF COL -1.5-1 -.5 0.5 Net Exports of Minerals and Petroleum per Worker (000s USD)
Volatility and Natural Resources: The Structural Connection Export-Revenue Concentration 0.2.4.6.8 1 NGA IRN BWA COM MRT YEM GAB BDI MLI GIN BEN TJK BFA AZE COG VEN ARE CUB ETH RWA OMN GHA SOM ZMB TKM GNB CAF SLE NER MOZ SYR KAZ BHR DZA CPV GMB MWI JAM CMR MNG LBR ECU MUS SWZ UGA PNG ARM ERI DJI PRY GUY LSO KGZ HUN FJI DOM HND NPL SDN RUS TZA KHM TGO NAM PAN CRI SLV NIC CIV MDG MMR BTN EGY COL BOL CHL TTO ISRGTM KEN ALB MEX MDA LKA SEN ZWE BGD VNM IDN CYP PHL TUN GEO PER JOR BIH BELIRL LVA MAR PAK SGP URY MYS LBN ARG JPNSVK AUS FIN KOR ESPEST NZL BLR HRV MKD POL IND ZAF CAN BGR BRA CHE DEU HKG PRT GRC LTU SVN SWE CZE ROM THA TUR UKR CHN AUT FRA USA DNK YUGBR ITANLD LBY KWT SAU NOR QAT 0 5 10 15 20 Net Exports of Minerals and Petroleum per Worker (000s USD) GDP per Capita Volatility 0.05.1.15.2.25 TKM ALB GEO TJK BIH GNB DJI KGZ UKR KAZ ETH LBN EST ZWE TZA HRV MDA ERI MOZ RUS YEM URY KHM BGR ARG BTN BWA MLI PNG CAF PER CMR ROM SVK LSO JOR TGO SYR CHL MWI CIV PAN LTU POL GHA KOR MAR SEN UGA SVNTUR NAM CPV FIN CZE CRI BRA BFA ARM GMB MRT HKG THA PHL HUN BLR DOM IDN MDG SWZ IRL MUS MKD MEX BEN CHN GIN ISR HNDLKA BOL LVA ECU COM GRC PRTMYS SLV PRY KEN BGD AUT BEL DNK GBRCHE EGY NLD SWE TUN USA NZL FRA ESP ZAF GTM JPN PAK IND ITA COL VNM AZE ZMB SDN NIC RWA 0.1.2.3.4 Terms of Trade Volatility IRN Terms of Trade Volatility 0.1.2.3.4 NIC SDN RWA AZE ZMB GNB BIH CMR UGA GEO CIV TJK BGD KAZ YUG SYR RUS GHA TZA MWI UKR KGZ CPV ETH IND VNM ECU GMB MOZ BEN PAK PER MDG ARM BFA BLR JORIDNKENEGY DOM NAM TGO LVA SLV BOL CAF BRAARG LKA CHL ERI PNG CZE BGR JPN ZWE SEN ALB MEX COL GTMCRI GUY LSO MLI HND ESP PHL THA ZAF URY GIN MAR ITACHN ROM TUR KOR MKD SVKMYS MDA PRY MUS FRAFIN CHE DEU LTUNZL POL USA LBN GRC PRT SVN AUT DNK GBR HKG EST HUN HRV BEL IRL TUNISR PANKHM SWE SWZ NLD BTNDJI TKM COM MRT YEM BWA 0.2.4.6.8 1 Export-Revenue Concentration (Root of Herfindahl) IRN Source: Lederman and Xu (in progress)
Research Agenda: Volatility and growth Is high and relatively stable growth possible with high dependence on oil: How did Oman do it? A case study. Is the impact of volatility different depending on the extent of NR wealth? How to achieve less volatility of growth in already rich economies? Frankel: Commodity currencies assessed via simulations Optimal savings and investment rules for sovereign wealth funds and fiscal policy (especially in emerging resource rich economies)? Engel: optimal versus practical rules assessed via simulation
3. The Challenge of Employment Generation It is not only about growth of income, but about quality jobs for a rapidly increasing labor force Labor force increasingly educated and feminized Major differences between labor abundant and nonlabor abundant countries GCC labor markets: markets for national and for migrant workers Non GCC labor markets: high unemployment, especially among the youth
Labor Force Growth
Employment Issues for Research: Does NR resource wealth create perverse incentives regarding work (high reservation wage?) and education (low incentives for private citizens to invest in education)? Is this related to actual current income or potential wealth? Are current labor market policies consistent with the creation of quality jobs? Big public sectors with high wages and benefits Immigration of unskilled workers (in GCC) Assuming no diversification in tradables, what is the potential for employment generation in non tradables?
What potential alternative labor market policies? Negative income taxes for nationals Conditional cash transfers to supplant public employment Randomized trials and conditional cash transfers in rich economies with large public sectors How big do they need to be to incentivize private employment? To incentivize further investments in human capital? i.e., transforming oil wealth into human capital and innovation
4. Sustainability Issues The horizon for exhaustion of the hydrocarbon resource varies significantly among countries Some countries have already faced or are currently facing this transition: Bahrain, [Dubai], Syria, Yemen
Sustainability Issues for Research Sustainability via portfolio diversification: where should saved revenue from NR be invested? Within country or abroad Which assets abroad (real assets, financial assets) Where? Geographical distribution? Which institutional mechanisms to use for achieving such objectives? Start by taking stock of actual behavior of various countries. What kind of economic diversification at home for long term sustainability? Investing in human capital, science and technology Investing in tradables vs non tradables (with temporary subsidies) How to recycle the savings from NR income for productive investment?
5. The centrality of Diversification Diversification is central to: Achieving higher economic growth Reducing volatility of growth Creating jobs Sustaining in the long term the higher income and wealth
Diversification in Arab countries
Diversification in Arab countries
Diversification Issues for Research Take One: Macro and Structural Change Policies If Dutch disease, is fiscal restraint enough (by reducing domestic absorption), or how big? Structural policies for diversification: Can they work in small open oil economies? Successful picking winners policies could be counter productive (Easterly, Resheff & Schwenkenberg 2009) Estimating social benefits of IP, e.g., educational services and exchange rate policies and IP are related
Exchange Rate Protection and Infant Industries: An Illustration of NR Driven Appreciation and the Scope for Successful IPs AC, P a c b AC with apprec. AC* o D AC without apprec. Q
Diversification Issues for Research Take Two: Structural Change Policies IP as Science &Technology policy in rich countries The structure of fiscal expenditures Investments in trade facilitation (or reducing production and transport costs for exports) with overtime fiscal implications Investments in self renewing capital Education and training But these investments might be less selfrenewing than
Diversification Issues for Research Take Two: Structural Change Policies Innovation: Past ideas or innovation breeds more innovation as in Romer type endogenous growth models: Flow of Knowledge = a*lnr&d + b*ln(stock of Knowledge) Estimating parameters a and b, but allowing for heterogeneity across types of countries (e.g., high income NR abundant, low income NR abundant) could be instructive
Engineering Exchange Rate Protection (Depreciation) for a Given Fiscal Balance: Questions for Research Sovereign Wealth Funds and rules Some might be better than others, but do we know what savings and investment rules work best? Foreign exchange interventions Does sterilization work in small open economies? Capital controls Are they needed to make sterilized intervention work? Large literature on whether they work in small open economies. Is it relevant for MENA? For the GCC?
Summary of Proposed Research Agenda with Diversification as the Central Theme 1. Volatility and Growth (are inextricable) Measurement Effects of NRs (allowing for heterogeneity) Revisit concept of long run growth determinants when growth is volatile: levels versus growth rates Case study of Oman Optimality of fiscal and monetary rules and corresponding institutions (Frankel, Engel) Study the role of diversification (case studies and econometrics) 2. Employment a priority Policy options and evaluations (income taxes, CCTs)
Summary of Proposed Research Agenda with Diversification as the Central Theme 3. Pro Diversification Structural Policies The structure of fiscal expenditures (investments) and their effectiveness Qualitative evaluation of recent experiences in subsidizing non oil activities (e.g., educational services) The scope for exchange rate protection (macro policies) Study (quantitatively or qualitatively) the scope for Science and Technology subsidies in oil economies (focus on Romer s parameters and case studies) 4. Sustainability and the Transition Case studies: Bahrain? Focus on the evolution of productive diversification, employment and the maturation of formerly infant industries (i.e., any examples where new self sustaining industries have emerged)