There Is No Resource Curse

So says Adam Martin, guest-blogging at Aid Watch:

New research argues that empirical work on the Curse suffers from two interrelated problems. First, it uses dependence (the share of GDP from that resource) and calls it abundance (the stock of a resource in the ground). But dependence in turn depends on institutional quality—if you have sound institutions, natural resources take their place along other industries. If not, natural resources will by default constitute a large share of GDP because poor institutions stifle an advanced division of labor. When you look at cross-sectional data using dependence as a proxy for abundance, it will look like natural resources compromise institutional quality.

That reliance on cross-sectional data is the second major problem. The Curse story does not claim that Nigeria is Britain plus oil, but rather that Nigeria is less democratic than Nigeria would be in the absence of oil. One way to get around this problem is to test whether oil makes country X less democratic using panel data with fixed country effects. That’s fancy econometric speak for taking into account other factors that might make country X more or less democratic—its history, institutions, culture, etc. Fixed effects also allow testing a corollary of the Curse known as the “First Law of Petropolitics”: as oil prices go up, oil-rich autocrats crack down on democracy even more.

Martin highlights, and links to, some of that new research at the link.

There are still fundamental questions at play: if poor institutions are to blame (as alleged by some of that new research and much old research too), that still doesn't tell us why some places have poorer institutional development than others. IR theory offers a few potential explanations:

1. Structural factors make conflict more likely in some places than others. Sometimes this leads to actual conflict, other times the potential for conflict retards the development of a more institutionalized, liberal social order that can encourage more division of labor. Either way, the kinds of institutions that can facilitate development never take root, so development is perpetually stunted.

2. The notion of dependence immediately raises the specter of "dependency theory," according to which LDCs become dependent on their natural resources. Not on the resources themselves, but rather on the technology needed to procure and commoditize those resources. This technology comes from richer states, in whose interests it is to keep LDCs in a downtrodden state and thus keep profiting from them. So LDCs cannot improve their status by participating in the global economy until they are somewhat self-sufficient. These theories were much in vogue in the mid-20th century, but fell out of favor following the rapid development of export-biased economies in Asia and elsewhere and the continued stagnation of isolated economies.

3. Good, old-fashioned, power politics. Those who have it tend to keep it by taking control of lucrative industries, using the proceeds to enrich and insulate themselves from political competition.

Emmanuel recently discussed some of these issues in the context of Nigeria. My take? There is still a lot of work to be done in understanding institutional development and if/how the international community can encourage it.

Not a Good Trend

The above picture is worth a thousand words, but here's some more:

Despite alot of incendiary rhetoric from the Chavez regime over the years, The United States secures alot of its just-in-time supply from Venezuela. (I’m not convinced that the power outages in the country’s grid will actually get the price of oil to 100 just yet). However, it’s instructive that along with geological declines in Mexico, hemispheric supply to the United States remains on a well-established downward path. It appears that Chavez is about to achieve dysfunctional petrostate status for Venezuela.

Via Felix Salmon.

Straight Outta Lagos

This was probably inevitable:

It probably seemed a good idea at the time. But Russia's attempt to create a joint gas venture with Nigeria is set to become one of the classic branding disasters of all time -- after the new company was named Nigaz.

That, of course, being a mash-up of "Nigeria" and Russian energy company "Gazprom" rather than a tribute to "the world's most dangerous group".

I so want to post some YouTube vids here, but alas: this is a family-ish blog. Instead, here's a link.

Via Blattman.

Gasoline

And major news sources have finally realized that gas prices are rising and could affect the pace of the economic recovery: NYTimes and Reuters to name just two. 

This blog once again led the coverage with a post on rising oil prices a week and a half ago. No wonder the newspapers are dying: they're kind of slow. 

Oil is creeping back up.

Gas prices have increased by 20% over the last month (and jumped 90 cents since January), and the price of a barrel of oil has more than doubled since February closing at $66.31 at the end of trading on the NYMEX on Friday afternoon. With the daily news cycle fixated on the appointment of Sonia Sotomayor to the U.S. Supreme Court, the erratic (but, not really) actions of the DPRK and their recent nuclear test, Susan Boyle coming in second on Britain's Got Talent, and of course Prince Harry visiting New York City on his first official U.S. visit, the talk of increasing oil prices has been relegated to the back pages barely getting attention from policymakers and the media. 

This increase comes at a pretty bad time for most Americans. With the unemployment rate hovering at about 9% and the much anticipated summer driving season getting underway, a steep rise in the pump price of gasoline may put a dent in summer vacation plans and family budgets. Granted, oil prices are still half of what they were last summer when they peaked somewhere in the $140-150 a barrel range. But with American families feeling the pinch, a 20% increase in gas prices, especially in only 31 days with future increases expected throughout the summer, may cause Americans to cut spending even more than they already have. 

Analysts were expecting the low cost of gas to provide an incentive for families to hit the road this summer, thereby providing businesses with a stimulus of sorts. The expected increase in spending may not happen, at least not to the level that was expected, which may threaten the slim hope for a recovery beginning in the third quarter. Francisco Blanch, energy strategist at Merrill Lynch, said crude prices are nearing levels where "they could put the embryonic economic recovery at risk." 

"There's way too much optimism about a driving season lift," said Tom Kloza, chief oil analyst for the Oil Price Information Service, who believes that higher prices, in conjunction with the recession, will dampen the typical summer travel surge. Kloza said the impact will be especially painful in economic "sore spots" like California, Florida, Arizona and the rural South.

So, why have prices jumped so much lately? Well, OPEC announced further output cuts a few weeks ago but decided not to touch production at it's most recent meeting, although not all member countries are complying with the aforementioned cuts. These cuts are having an impact on oil prices, although the impact may be less than most expect because of the cheating going on. US supplies have dwindled recently, a sign that demand may slowly be increasing. (We know how this supply-demand function affects the price of oil. For PoliSci and Econ students, see Oatley's IPE text or Krugman and Obstfeld's International Econ text for an in depth explanation.) 

There is also talk from analysts and politicians of increased speculation in the oil market as of late. Bernie Sanders of Vermont is calling for federal regulators at the Commodity Futures Trading Commission to crack down on speculators arguing that "rising oil prices during a global recession, while demand has eased, is a very unusual moment. There is more oil sitting around than ever before, so there is no supply problem. U.S demand is the lowest it's been in at least a decade. What we are looking at now is not the fundamentals of the economy. What we are looking at is speculation on Wall Street."

The flip-side to this argument is that these ups and downs in the oil market are simply market reactions to future expectations. Expectations of increased future demand may be driving the increases in oil prices, which is to be expected if you believe the recent words of Summers and Bernanke and the talk of the beginning of a recovery in the third and fourth quarters of 2009. (Although I will point out that the definition of a recovery varies across academia and the policy world.) Most see recovery as merely the return of economic growth even if growth is painstakingly slow (somewhere in the .1-.2% of GDP region). This slow positive growth may not justify such a dramatic increase in oil prices. As always, the best explanation combines all of these factors and describes the rise in oil prices as a function of creeping demand, dwindling supply, market expectations, some speculation, OPEC output cuts and even the political environment in oil-producing states. 

Small Change in Cuban Cabinet...

Cuban President Raul Castro moved today to consolidate his power and control over the island nation by reassigning cabinet ministers left over from his older brother's reign, and replacing them with new ministers he believes are more in line with his vision for the future of Cuba. Raul is no stranger to experimentation and is well known to be more sympathetic to capitalist reforms of the beleaguered Cuban economy than Fidel. 

With the Cuban economy hamstrung by the world economy, Raul Castro may have decided it is time for him to make reforms of his own without worrying about second-guessing by his brother or his brother's allies, she said.

Vicki Huddleston, who led the Interests Section during the administrations of Presidents Bill Clinton and George W. Bush, and is a visiting scholar at the Brookings Institution in Washington, speculated that the changes could portend the government once again allowing private enterprise to flourish in Cuba.

Raul made these changes:

Felipe Perez Roque, the 43-year-old foreign minister, was replaced by his deputy, Bruno Rodriguez Aprilla.

Carlos Lage Davila, an economist, lost his job as Cabinet secretary, but no mention was made of removing him from his other post as vice president of the Council of State.

Lage, who helped guide the nation through its "special period" of dire economic times in the aftermath of the dissolution of the Soviet Union and the loss of billions in subsidies, was replaced by Brig. Gen. Jose Amado Ricardo Guerra.

Last year, Raul legalized the purchase of cellular phones, home computers, DVD players, and other technological goods as well as lifted the bans on renting hotel rooms in Cuban resorts. He did this even though Cubans themselves can not afford these goods on their own, but that's another story. 

Cuba relies heavily on imports of Venezuelan oil, food and other goods to keep their economy somewhat alive. However, with the steep drop in oil prices over the last 8 months, Venezuelan aid has begun to dry up as Hugo Chavez has faced budget shortfalls and a myriad of other domestic problems at home. His ability to financially support Cuba may be fading, and seeing this happen before his eyes, it seems that Raul Castro has decided that something must be done to get the Cuban economy moving or face the possibility of domestic turmoil in the near future. 

So what new reforms could he be considering? Here are a few that I think are on the table: 

1) Liberalize certain portions of the Cuban housing sector, especially in major cities. An underground market in apartment trading has sprouted over the last decade or so in Havana and by liberalizing the housing market, the government could seek to extract resources from housing transactions rather than allowing the trades and transactions to take place under the table. If you want to read more about the underground market for housing in Havana, this is a terrific article. 

2) Increase the fee on currency exchanges within the country. The government takes 10% out of each exchange of American dollars for Cuban dollars at this point in time. Increasing this to 15-20% and simultaneously hoping that the US raises the ceiling on remittances would be another way to extract resources.

3) Open up certain sectors such as oil and natural gas exploration, agriculture and manufacturing up to partnerships with foreign firms. Cuba has already done some of this, teaming up with German and Norwegian oil exploration companies, to explore a relatively large underwater oil field that was found off of the island's northern coast. This was mainly done because Cuba does not have the technology nor the capacity to do it by herself. Allowing certain public/private partnerships in carefully selected industries would increase government revenues and spur some economic development.

Notice that I have focused mostly on areas where the Cuban government can extract more revenue for their projects. Don't expect massive overhauls of the economic system, the establishment of private property,  or the sudden appearance of small businesses anytime soon. Raul's main goal is to consolidate his power. He will only implement those policies that enhance this goal, rather than seek to increase Cuba's growth and prosperity for the benefit of the populace. He is weary that the growth of a middle class and wealth among the citizenry would be a threat to the Communist experiment that has consumed the island for the last fifty years. 

P.S. Cuban VP Carlos Lage also just so happens to be one of my great-uncles. Interesting connection I know. At least he is still VP and didn't get completely canned, so if I fail my regression and game theory mid-terms this week, hopefully he knows who the hell I am and can offer me a job because I know I won't be able to find one in the US!

How Low Will It Go?!

The price of oil tumbled further today, settling at $43.67, it's lowest close in nearly four years.

So the question is, how much lower will it go?

Live by the crude, die by the crude

The NY Times has a nice article on how collapsing oil prices are starting to affect the ambitions of Hugo Chavez, Mahmoud Ahmadinejiad, and Vladimir Putin. As oil prices sky-rocketed, these leaders found plenty of cash for building international alliances and shoring up domestic support through lavish social spending programs. This domestic support in turn provided these leaders with the flexibility to pursue more aggressive foreign policies with the hopes of expanding their international influence, particularly in opposition to the U.S. But it now appears that they may have over-reached: inflation is over 30% in both Venezuela and Iran, and the Russian stock market has dropped by two-thirds in recent months. Meanwhile oil prices, and thus revenues, continue to decline. If the trend continues, these leaders may have to start making hard choices between populist domestic social programs and expansionary foreign policy.

Even so, there are still some signs that the relative economic power of the U.S. may be in decline. European leaders have been at the forefront of the response to the financial crisis, and some of the U.S. government's actions are partially explained by international concerns (e.g. the Fannie/Freddie conservatorship was necessary because of heavy Chinese investment; the AIG bailout had major international implications). And does anyone remember the strong words the U.S. had for China regarding currency manipulations? There've been crickets coming from that corner for awhile.

Still, as Daniel Drezner notes, it doesn't appear that any other country is quite ready to fill the U.S.'s shoes:

However, this interdependence cuts both ways. Because of its slowing growth, China has no choice but to continue purchasing dollar-denominated debt in order to goose its export earnings. As for Russia, $500 billion in reserves has not prevented the crash of its own equity markets.

The bottom line seems to be this: the U.S. may be incapable of continuing to run the international finance system entirely on its own as it has done since the end of WWII, but the rest of the world is incapable of controlling the system without the U.S. So the story may not be de-coupling, as some had thought; Indeed, we may see more interdependence rather than less in the near future.

Petrodollars '00 Style

Petrodollars played a key role in the genesis of the Latin American debt crisis during the 1970s. Today's NYT examines how oil exporters are using their windfall from the current oil price rise. How big a windfall, you ask? "In 2000, OPEC countries earned $243 billion from oil exports, according to Cambridge Energy Research Associates. For all of 2007 the estimate was more than $688 billion, but that did not include the last two months of price spikes." On average, oil exporters are earning $1.8 billion per day.

Seems that oil exporters are pursing a more diversified investment strategy today than they did during the 1970s; rather than deposit the funds in Citibank, they are now buying big shares of Citigroup (Abu Dhabi is now the single largest share holder). More broadly, "the oil-rich nations are...investing more in real estate, private equity funds and hedge funds, analysts say, and increasingly they are investing the money on their own, bypassing the major financial institutions of the United States and Europe."

Interestingly, oil exporters, like China, are a bit uncertain about what to do in response to a weakening dollar. Some advocate shifting out of dollar-denominated assets in response to the falling dollar; others fear that shifting into euro-denominated assets will cause the dollar to weaken further, thereby reducing the value of the dollar-denominated assets they have accumulated.

"Back to the Future?"

In a world in which the prevailing trend is to bend over backward to attract foreign direct investment, Hugo Chavez works across the grain by nationalizing the last privately-managed oil field in Venezuela. "The companies ceding control included BP PLC, ConocoPhillips, Exxon Mobil Corp., Chevron Corp., France's Total SA and Norway's Statoil ASA. All but ConocoPhillips signed agreements last week agreeing in principle to state control, and ConocoPhillips said Tuesday that it too was cooperating."

One must wonder what impact this will have on Venezuelan oil output. According to the IHT, "Multinationals pumping oil elsewhere in Venezuela submitted to state-controlled joint ventures last year because they were reluctant to abandon the profitable operations...Since those takeovers, Venezuela's overall output has declined by close to 4 percent, or 100,000 barrels a day, with some companies complaining they have not been paid for the crude they have been pumping. "I expect to see a repeat of that in the Orinoco," he said.

One must also wonder about the underlying motivations--is Chavez is really in this to help the poor, or to help himself?