Tag Archives: Mexico

The Sugar Swamp

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(June 25, 2017) —
As the US, Mexico and Canada get ready to begin talks on the re-negotiation of NAFTA – possibly as early as August – governments are giving a lot of attention to one particular product:  sugar.   The outcome will predictably be a sweet deal for the US sugar industry, quite the opposite of Trump promises to “drain the swamp” of disproportionate influence in Washington by special interests. Continue reading

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Escaping the Oil Curse

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Libyans have a new lease on life, a feeling that, at long last, they are the masters of their own fate. Perhaps Iraqis, after a decade of warfare, feel the same way. Both countries are oil producers, and there is widespread expectation among their citizens that that wealth will be a big advantage in rebuilding their societies.

Meanwhile, in Africa, Ghana has begun pumping oil for the first time, and Uganda is about to do so as well. Indeed, from West Africa to Mongolia, countries are experiencing windfalls from new sources of oil and mineral wealth. Adding to the euphoria are the historic highs that oil and mineral prices have reached on world markets over the last four years.

Many countries have been in this position before, exhilarated by natural-resource bonanzas, only to see the boom end in disappointment and the opportunity squandered with little payoff in terms of a better quality of life for their people. But, whether in Libya or Ghana, these countries’ current leaders have an advantage: most are well aware of history, and want to know how to avoid the infamous natural-resource “curse.”

To prescribe a cure, one must first diagnose the illness. Why do oil riches turn out to be a curse as often as they are a blessing?

Economists have identified six pitfalls that can afflict natural-resource exporters: commodity-price volatility, crowding out of manufacturing, “Dutch disease” (a booming export industry causes rapid currency appreciation , which undermines other exporters’ competitiveness), excessively rapid resource depletion, inhibition of institutional development, and civil war.

Oil prices are especially volatile, as the large swings over the last five years remind us. The recent oil boom could easily turn to bust, especially if global economic activity slows.

Volatility itself is costly, leaving economies unable to respond effectively to price signals. Temporary commodity booms typically pull workers, capital, and land away from fledgling manufacturing sectors and production of other internationally traded goods. This reallocation can damage long-term economic development if those sectors are the ones that nurture learning by doing and fuel broader productivity gains.

The problem is not just that workers, capital, and land are sucked into the booming commodity sector. They also are frequently lured away from manufacturing by booms in construction and other non-tradable goods and services. The pattern also includes an exuberant expansion of government spending, which can result in bloated public payrolls and large infrastructure projects, both of which are found to be unsustainable when oil prices fall. If the manufacturing sector has been “hollowed out” in the meantime, so much the worse.

Another pitfall is excessively rapid depletion of oil or mineral deposits, in violation of optimal rates of saving, let alone preservation of the environment.   

Even if high oil revenues turn out to be permanent, pitfalls nonetheless abound. Governments that can finance themselves simply by retaining physical control over the oil or mineral deposits located within their borders often fail in the long run to develop institutions that are conducive to economic development.  Such countries evolve a hierarchical authoritarian society where the only incentive is to compete for privileged access to commodity rents. In the extreme case, this competition can take the form of civil war. In a country without resource wealth, by contrast, elites have little alternative but to nurture a decentralized economy in which individuals have incentives to work and save. These are the economies that industrialize.

What can countries do to ensure that natural resources are a blessing rather than a curse?  Some policies and institutions have been tried and failed. These include, in particular, attempts to suppress artificially the fluctuations of the global marketplace by imposing price controls, export controls, marketing boards, and cartels.

But some countries have succeeded, and their strategies could be useful models for Libya, Iraq, Ghana, Mongolia, and others to emulate. These include: hedging export earnings – for example, via the oil options market, as Mexico does; ensuring countercyclical fiscal policy – for example via Chile’s kind of structural budget rule; and delegating sovereign wealth funds to professional managers, as Botswana’s Pula Fund does.

Finally, some promising ideas have virtually never been tried at all: linking bonds to oil prices instead of dollars, to protect against the risk of a price decline; choosing Product Price Targeting as an alternative to either inflation targeting or exchange-rate targeting, to play the role of anchor for monetary policy; and distributing oil revenues on a nationwide per capita basis, to ensure that they do not wind up in elites’ Swiss bank accounts.

Leaders have free will. Oil exporters need not be prisoners of a curse that has befallen others. Countries can choose to use their resource bonanzas for the long-term economic advancement of their peoples.

 

[This column originally appeared at Project Syndicate.  Comments can be posted there.]

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Some Big Ideas from Small Countries

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     Two decades ago, many thought the lesson of the 1980s had been that Japan’s variant of capitalism was the best model, that other countries around the world should and would follow it.   The Japanese model quickly lost its luster in the 1990s.  

     One decade ago, many thought that the lesson of the 1990s had been that the US variant of capitalism was the best model, that other countries should and would follow.   The American model in turn lost its attractiveness in the decade of the 2000s.   

     Where should countries look for a model, now, in 2010?  Many small countries on the periphery have experimented with policies and institutions that could usefully be adopted by others.  

     A panoply of innovations has helped Chile to outperform its South American neighbors.   Chile’s fiscal institutions – structural budget balance with the parameters estimated by independent expert panels — insure a countercyclical budget.  They are among the mechanisms that are particularly worthy of emulation by other commodity exporting countries, to defeat the Natural Resource Curse.  

     Costa Rica in Central America and Mauritius in Africa each pulled ahead of its peers some time ago.  Among many other decisions that worked out well for them, both countries have foregone a standing army. The result in both cases has been histories with no coups, and financial savings that can be used for education, investment, and other good things.  Singapore achieved rich country status with a unique development strategy.  Among its many innovations were a paternalistic approach to saving and use of the price mechanism to defeat urban traffic congestion (now emulated by London). 

     Some small advanced countries also have lessons to offer.   New Zealand led the way with Inflation Targeting, along with many liberalization reforms in the late 1980s.   (Perhaps its Labor Party should even be given credit for pioneering the principle that left-of-center governments can sometimes achieve economic liberalization better than their right-of-center opponents.)   Ireland showed the importance of Foreign Direct Investment.  Estonia led the way in simplifying its tax system by means of a successful flat tax in 1994, followed by Slovakia and other small countries in Central/Eastern Europe and elsewhere (including Mauritius again).   

     Mexico pioneered the idea of Conditional Cash Transfers (the OPORTUNIDADES program — originally PROGRESA, launched in 1998).  CCT programs have subsequently been emulated by many developing countries.  This was two revolutions in one:  (1) the specific idea of making poverty transfers contingent on child school attendance (which has been emulated even in New York City) and (2) the methodological idea of conducting controlled experiments to find out what policies work or don’t work in developing countries (which has fed into the exciting Randomized Control Trials movement in development economics).  Also in the 1990s, largely thanks to the leadership of President Ernesto Zedillo, Mexico adopted non-partisan federal electoral institutions that were subsequently in 2006 able to resolve successfully a disputed election.   (In contrast, it turned out in November 2000 that the United States had no mechanism to resolve such disputes, other than the preferences of political appointees.)  Mexico undertook health reform in 2004.  More recently, President Felipe Calderon has shut down the entrenched electric utility and pursued much-needed reforms in tax, pension, and other areas.

     In highlighting some very specific institutions that could be usefully applied elsewhere, I don’t mean to suggest that they can be effortlessly translated from one national context to another.   Nor do I mean to suggest that these examples are entirely responsible for the success of the economies identified.  (Indeed a few of these countries have recently been wrestling with severe problems.)  But a country doesn’t have to be large like the United States to serve as a model for others.  Small countries tend to be trade-dependent, and open to new ideas.  They are often more free to experiment than are large countries. The results of the experiments include some useful lessons.

[TV interview on BNN.]

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