Natural Resources in Latin America and the Caribbean: Beyond Booms and Busts?

Transcription

1 Natural Resources in Latin America and the Caribbean: Beyond Booms and Busts? Managing Natural Resource Wealth: Sharing of South- South Experiences Chief Economist Office Latin America and the Caribbean Region The World Bank Johannesburg, South Africa June

2 Beyond booms and busts? 2

3 First, some stylized facts about the economic importance of commodities to set the stage 3

4 The majority of Latin Americans and most of the region s GDP are located in net commodity exporting countries Around 93% of LAC s population and 97% of its economic activity is in countries which are net exporters Share in LAC Population Share in LAC GDP (%) (%) Net Commodity Exporters Countries Number of countries Net Commodity Importers Countries But there is much heterogeneity, and many smaller economies are importers, so shocks have an asymmetric impact across the region Bolivia Ecuador Chile Paraguay Trin. and Tob. Colombia Peru Argentina Mexico Uruguay Brazil Panama Guatemala Costa Rica Nicaragua Dominica Dom. Rep. Honduras Cumulative Change in Terms of Trade 2008q4-2009q4 2001q4-2008q2-40% -20% 0% 20% 40% 60% 80% 100% 120% 140% Sources: World Bank World Development Indicators, UN COMTRADE, and World Bank staff calculations. 4

5 Relative to the rich commodity exporters, LAC is modestly abundant Pasture land Crop land Subsoil assets Natural Capital LAC 0.7 Developed Timber resources Hydrocarbon reserves (barrels p.c) Source: World Bank Natural Capital Database (World Bank, 2006); and British Petroleum Statistical Yearbook

6 but heavily dependent on natural resources, reflecting undiversified output & fiscal revenue structures Primary sector as share of GDP (%) Comm Exports share Total Exports (%) HHI Index - Comm Exports Comm Exports share in GDP (%) 16.5 LAC Developed Comm Revenues share of Total Fiscal Revenues (%) Comm Revenues share of GDP (%) Sources: World Bank World Development Indicators, UN COMTRADE, national authorities, IMF, and World Bank staff calculations. 6

7 The latest commodity price boom was broad-based and long-lasting LAC-7 Economies: Share of Commodities Experiencing a Boom The most comprehensive in terms of the number of commodities it affected and the number of countries it benefited For LAC, it was the longest lasting boom since records have been kept share LAC commodities in boom % Jan-62 May-64 Sep-66 Jan-69 May-71 Sep-73 Jan-76 May-78 Sep-80 Jan-83 May-85 Sep-87 Jan-90 May-92 Sep-94 Jan-97 May-99 Sep-01 Jan-04 May-06 Sep-08 LAC-7 commodity index in boom LAC-7 commodity index in bust Source: World Bank staff calculations based on export commodity price data from Cunha, Prada and Sinnott (2009a, 2009b). Note: The figure represents the share of the LAC-7 economies Top 16 commodities experiencing a price boom for each period of time. Booms and bust in commodity prices were defined following the Bry-Brochan cycle dating exercise. The figure also shows the boom-bust intervals for the overall commodities index. 7

8 China is increasingly important for LAC: direct and indirect linkages have increased Top 3 commodity export destinations for LAC (% of total commodity exports) China has replaced traditional Latin American commodities export markets in importance USA UK Canada USA Japan Germany USA China Japan China 0.2% China 0.8% China 9.8 Indirect links: China s demand for commodities has been an important factor in the substantial buoyancy in world commodity markets Source: World Bank staff calculations using data from UN COMTRADE-WITS. Note: The table present the share of trade for top three trade partners during the 1980s, 1990s and

9 Looking forward, will LAC become the granary and mine of China? Is that a threat or an opportunity? Output Co-Movement Between LAC and China 20 years rolling correlation of the Real GDP Growth Argentina Brazil Chile Colombia Mexico Panama Peru Source: World Bank calculations based on National Authorities data. Note: Solid colors reflect correlation values significant at a 10% confidence interval. 9

10 The natural resource curse hypothesis: much ado about nothing? 10

11 We can t ignore the curse hypothesis some very wise people have believed it! Projects of mining are the projects to which of all others a prudent law-giver, who desired to increase the capital of his nation, would least choose to give any extraordinary encouragement (1776) Adam Smith Ten years from now, twenty years from now, you will see: oil will bring us ruin Oil is the Devil s excrement (early 1970s) Juan Pablo Pérez, Venezuelan Minister of Energy and founder of OPEC Neither now nor in former ages have the nations possessing the best climate and soil been either the richest or the most powerful; but generally among the poorest (1848) John Stuart Mill Oil is a curse. Natural gas, copper, and diamonds are also bad for a country s health (2009) Moisés Naím, Foreign Policy editorin-chief 11

12 But natural resources are associated with higher per capita incomes, so why the fuss? Log total natural capital per capita ECU GUY PRY BOL HND GTM NIC COL PER DOM JAM VEN CHL CRI MEX BRA TTO ARG URY 7 HTI SLV Log GDP per capita, 2008 Source: World Bank Staff estimations based on World Bank data for GDP per capita in 2008 (constant 2000 US$) and natural abundance in Note: Resource abundance is measured by the total natural capital per capita. 12

13 Natural resource curse hypothesis is multifaceted Three valid concerns Productivity/growth trap Institutional/political trap Environmental and social sustainability trap And one red herring Little support for Prebisch-Singer hypothesis that commodity prices are declining 13

14 Commodity price volatility magnifies other problems 80 Annual changes in Real Price Indexes High price volatility Exacerbates Dutch Disease and rent-seeking Creates fiscal and output instability Depletes real wealth Standard deviation of annual percentage change Natural resource revenues Non-natural resource revenues Argentina Colombia Chile 1970 Ecuador 1972 Mexico 1974 Peru 1976 Tri. & Tob Venezuela 1980 Bolivia Raw materials Metals Beverages Food Energy MUV Source: World Bank staff calculations based on data from the World Bank World Development Indicators and the IMF International Financial Statistics. 14

15 So, how serious are these 3 traps? And how have they affected Latin America and the Caribbean? 15

16 How serious is the threat of a growth trap? Some evidence seems to say quite serious Enclave production in many countries in the past, with few linkages and minimal employment generation Via a strong currency (Dutch Disease), commodities can displace industries where potential spillovers are higher (Hausmann, Rodrik) But. Careful econometric evidence contradicts early finding of a curse effect Many high-income countries developed by exploiting natural resources Commodity sectors can be of high productivity with much innovation Many cases of linkages & upgrading with significant employment effects Bottom line: issues are more complicated than commonly thought, with much space for policies to determine outcomes 16

17 Case study of metals illustrates potential of commodity sectors LAC metal market share along the value chain (in percent) Much potential for upgrading: high degree of intra-industry trade implies product differentiation. Share of LAC in global trade of metals has expanded over time, due to both inter-product upgrading and intra-product quality improvement. Value-added metals worked metal products increased eightfold in LAC since Worked Share Worked Quality Unwrought Share Unwrought Quality Ore Share Ore Quality 17

18 Commodity riches can pose downside risks to institutional development High rents can feed rent-seeking behavior and institutional capture Revenue dependence is often associated with reduced tax effort and low accountability Patronage + rent-seeking => rent dissipation through inefficient public spending Important example in LAC: energy subsidies are about 2% of GDP Possible institutional trap: enclaves generate low demand for institutional improvement Energy subsidies as a share of GDP, 2005 (in percent) Costa Rica Guatemala Mexico Trinidad & Tobago Paraguay Nicaragua Colombia Guyana Argentina Bolivia Ecuador Venezuela Suriname Source: Olade (2007) 18

19 Two institutional dimensions in which LAC seems to suffer less from the resource curse than other regions No systematic effect in undermining democracy But some recent backsliding in quality of democracy in hydrocarbon producing states No systematic tendency for increased large-scale violent conflict in resource-rich states Fewer secessionist movements in LAC perhaps because these were worked out over the longer history of independence Institutions in many LAC countries are improving, but trend towards greater decentralization may create special problems 19

20 Over-exploitation of common property resources can destroy environment and create social tension Large-scale Mining Air-borne particulates Water pollution from mine discharge Failure of containment of tailings & waste Over-use of surface or ground water Small-scale artisanal Mercury pollution (est. 200 tons p.a. in LAC) Problems exacerbated by lack of tenure Hydrocarbon production Waste pits contaminated with oil or drilling mud Un-remediated spills Discharge of untreated produced water Installations decommissioned or abandoned without proper planning Flaring of associated gas Smelter La Oroya in Junin, Peru, where emissions and tailings have had serious health impacts, now being remediated

21 Managing commodity abundance and commodity price volatility It s all about saving, insurance, and good regulation 21

22 Long term savings needed to convert natural capital into other forms of wealth Sad reality: savings negatively correlated with resource rents Too much of the rent is consumed, not invested Harsh reality: difficult to save High social discount rate, given pressing development needs Difficulties in organizing collective action in inter-temporal horizon The pace of local investment of LT savings matter to avoid Dutch Disease Save part of windfall abroad Adjusted net saving (% of GNI) HND MEX DOM ARG GTM NIC BRACOL PER VEN CHL BOL ECU Non-renewable resource rents (% of GNI) TTO 22

23 And short term volatility requires other strategies Self protection: reduce income volatility through diversification Tradable sector diversification: avoid excessive real appreciation through saving and gradual local investment of windfall Don t forget to nurture the goose that lays golden eggs! Diversification of commodity production also reduces income volatility Fiscal revenue diversification Buffer adverse impact on the poor through targeted transfers Market insurance to hedge price volatility Market for hedges and insurance products is incomplete, especially for the long-term but emerging successful experiences in hedging (Mexico, Panama) Political and legal risks hinder the use of market instruments 23

24 Self insurance (saving) to smooth fiscal spending and act counter-cyclically Many stabilization funds have failed because it is hard to resist political pressure to spend unduly during the boom. Chile s experience shows that saving out of windfalls (to use in downturns) can have economic and political pay offs Approval Ratings of Government Lehman Brothers 30 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Chile Ecuador Bolivia Venezuela 24

25 Address environmental and social problems with up-front actions and new tools Reduce environmental impact: Reduce social impact: Don t subsidize environmental destruction! Take advantage of market-based approaches (tradable permits, PES) Use strategic environmental assessments Build local government and civil society capacity to help enforce environmental regulations Grant secure land title in advance of large projects Educate residents to avoid unrealistic expectations Strengthen local capacity to negotiate Promote transparency (EITI) Avoid resettlement if possible 25

26 Thank you! 26