SOME ISSUES IN INTERTEMPORAL ALLOCATION OF DEPLETABLE NATURAL RESOURCES JOSEPH STIGLITZ COLUMBIA UNIVERSITY DECEMBER, 2004

RESOURCE CURSE RELATED TO INSTABILITY OF OIL PRICES –EXACERBATED BY PRO-CYCLICAL LENDING DUTCH DISEASE PROBLEMS RENT SEEKING/CORRUPTION RESOURCE CURSE NOT INEVITABLE WHAT ADVISE CAN BE GIVEN TO COUNTRIES TO AVOID RESOURCE CURSE AND TO ENHANCE LIKELIHOOD THAT RESOURCES WILL BE A BLESSING RATHER THAN A CURSE?

BACKGROUND ISSUES OF THE RATE OF EXTRACTION AND USAGE OF DEPLETABLE NATURAL RESOURCES ARISE IN MANY COUNTRIES –AZERBAIJAN—TWENTY TO TWENTY FIVE YEARS OF SUPPLY. IMF RECOMMENDATION—LOWER TAXES; UNIFORM RATE OF “SPENDING” OUT OF NATURAL RESOURCES –BOLIVIA AND ECUADOR—RESOURCES ARE ABOUT TO COME ON LINE, COUNTRY IN RECESSION; EDUCATION AND OTHER BUDGETS BEING CUT DRASTICALLY TO REDUCE BUDGET DEFICITS SHOULD THEY BE ‘ALLOWED” TO BORROW AGAINST THESE FUTURE INCOMES TO SUPPORT DEFICIT SPENDING

BACKGROUND –NIGERIA—A LONG HISTORY OF SQUANDERED RESOURCES SPENDING OF NATURAL RESOURCE REVENUES LEADING TO CURRENCY APPRECIATION SHOULD IT NOT SPEND ALL OF ITS REVENUES? –CHILE—CREATES STABILIZATION FUND BUT IMF TREATS SPENDING OUT OF STABILIZATION FUNCTION JUST LIKE ANY OTHER FORM OF DEFICIT SPENDING DOES THIS MAKE SENSE? –BANGLEDESH—LIMITED RESERVES OF NATURAL GAS SHOULD IT SELL NATURAL GAS TO INDIA? –CHAD—LITTLE ECONOMIC OPPORTUNITY OTHER THAN OIL BUT CURRENT GOVERNMENT LIKELY TO MISAPPROPRIATE FUNDS

ALSO HOST OF MICRO- ECONOMIC ISSUES DESIGN OF CONTRACTS, AUCTIONS INSTITUTIONAL ARRANGEMENTS TO ENSURE TRANSPARENCY, REDUCE CORRUPTION PROBLEMS EVEN OCCUR IN ADVANCED INDUSTRIAL COUNTRIES –ALASKA CASE

ANALYTIC STUDIES LONG HISTORY DATING BACK TO HOTELLING –MARKET BEHAVIOR DOES NOT CORRESPOND T PREDICTIONS EXTENDED TO OPTIMAL GROWTH CONTEXT BY SOLOW, STIGLITZ, DASGUPTA AND HEAL –SUSTAINABILITY REQUIRES THATAS RESOURCES GET DEPLETED, THERE BE OFFSETTING INCREASES IN CAPITAL –OTHERWISE COUNTRY IS GETTING POORER –TREAT NATURAL RESOURCES LIKE AN ENDOWMENT— HOW SHOULD WE SPEND OUT OF ENDOWMENT –BRINGING OIL FROM BELOW GROUND AND INVESTING IT ABOVE GROUND IS LIKE WEALTH-PORTFOLIO ALLOCATION HOW SHOULD THAT BEST BE DONE? –GREEN GDP ACCOUNTING IMPORTANT TOOL FOR ASSESSING

ANALYTIC STUDIES EXTENDED FURTHER TO INCLUDE PROBLEMS OF UNCERTAINTY (IN AMOUNTS OF RESOURCE, ARRIVAL OF SUBSTITUTES, ETC.), VARIABILITY IN COSTS OF EXTRACTION –SIMPLE RESULT—LOW EXTRACTION COST DEPOSITS SHOULD BE EXPLOITED FIRST STRONG IMPLICATIONS—EFFICIENCY WOULD REQUIRE THAT WE FIRST EXTRACT OIL FROM SAUDI ARABIA OTHER COUNTRIES WOULD BE ABLE TO BORROW AGAINST INCREASING VALUE OF OIL WEALTH IN THE GROUND CLEARLY, GLOBAL MARKET PLACE DOES NOT ACCORD WITH WHAT ECONOMIC EFFICIENCY WOULD REQUIRE

NEW EXTENSIONS CREDIT MARKET IMPERFECTIONS EXCHANGE RATE EFFECTS STABILIZATION AND EXTRACTION INSURANCE AGAINST PRICE INCREASES

CREDIT MARKET IMPERFECTIONS COUNTRIES CAN’T BORROW AGAINST INCREASING WEALTH IN THE GROUND NECESSITATES EXTRACTING OIL EVEN THOUGH WITH PERFECT CAPITAL MARKETS, IT WOULD PAY TO LEAVE IT IN GROUND

EXCHANGE RATE EFFECTS DUTCH DISEASE FIRST ORDER IMPORTANCE— –APPRECIATION KILLED AGRICULTURE IN NIGERIA, POSSIBLY INDUSTRIALIZATION –PARTICULARLY IMPORTANT BECAUSE THERE IS INEFFECTIVE SOCIAL SAFETY NET EMPLOYMENT GENERATED BY EXTRACTVE INDUSTRIES LIMITED GROWTH POTENTIAL LIMITED

EXCHANGE RATE EFFECTS MONETARY AND FISCAL POLICY SHOULD BE USED TO MOBILIZE DOMESTIC RESOURCES –OF WHAT RELEVANCE THEN IS OIL FOR OBTAINING DOMESTIC RESOURCES? IMPLICATION—OIL REVENUES SHOULD ONLY BE USED TO PURCHASE IMPORTED CAPITAL GOODS –DUTCH DISEASE PROBLEM IS AVOIDED –REST OF REVENUE KEPT ABROAD— GENERATES POLITICAL PROBLEM WHY ARE OUR RESOURCES BEING USED TO HELP SUPPORT FOREIGN ECONOMIES?

INSURANCE AGAINST PRICE INCREASES NO WAY THAT COUNTRY CAN BY LONG TERM INSURANCE AGAINST INCREASES IN PRICE OF ENERGY OWNERSHIP OF OIL/ENERGY RESOURCES PROVIDES PROTECTION IMPLICATION—PRUDENT FOR A RISK AVERSE BANGLEDESH TO RETAIN MORE GAS RESERVES THAN WOULD BE THE CASE IF THE COUNTRY WERE RISK NEUTRAL

STABILIZATION AND EXTRACTION OPTIMAL DESIGN OF STABILIZAITON FUND –EFFICIENT EXTRACTION CAN BE SEPARATED FROM EFFICIENT SPENDING –RATE OF EXTRACTION SHOULD BE SENSITIVE TO PRICE—EXTRACT MORE WHEN PRICE IS UNUSUALLY HIGH (ASSUMING COSTLY STORAGE) –SIMPLE RULES FOR PUTTING MONEY INTO AND OUT OF STABILIZATION FUND

STABILIZATION AND EXTRACTION PRESUMPTION THAT CONSUMPTION SHOULD BE LESS THAN VALUE OF PRODUCTION WHEN PRICE IS HIGH BUT IN FACT MANY COUNTRIES BORROW WHEN PRICE IS HIGH, EXACERBATING DUTCH DISEASE AND VOLATILITY PROBLEMS BUT THERE ARE HIGH RETURNS TO BORROWING WHEN THE ECONOMY IS IN A DOWNTURN –NEED FOR A CHANGE IN IMF STANCE

ISSUES ALSO RELEVANT TO US US NOT LOW COST PRODUCER –ESPECIALLY TRUE FOR ALASKAN OIL –SHOULD THEREFORE POSTPONE EXTRACTION US NOT CREDIT CONSTRAINED –NO JUSTIFICATION BASED ON NEED FOR CASH NATIONAL SECURITY –LIMITED RESOURCE RELATIVE TO USAGE –THEREFORE LIKELY TRADE OFF BETWEEN DEPENDENCE TODAY AND DEPENDENCE IN THE FUTURE –DRAIN AMERICA FIRST POLICY MAKES U.S. MORE VULNERABLE IN FUTURE –DOES NOT MAKE SENSE WITH ANY REASONABLE INTERTEMPORAL SOCIAL WELFARE FUNCTION

CONCLUSIONS RICH RESEARCH AGENDA THOUGH MUCH OF WHAT IS ALREADY KNOWN IS NOT BEING USED MANY PUZZLES—DISCREPANCIES BETWEEN PREDICTIONS OF THEORY AND WHAT HAPPENS— SHOULD MAKE US CAUTIOUS EVEN WITH CURRENT LIMITATIONS ON OUR KNOWLEDGE, THERE IS A STRONG PRESUMPTION THAT THERE COULD BE SIGNIFICANT WELFARE GAINS FROM BETTER INTERTEMPORAL AND CYCLICAL MANAGEMENT OF NATURAL RESOURCES