Oil Spill Economics - Banking - Lecture Slides, Slides of Banking and Finance

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overview

1. Introduction

2. Nigeria vs. Ghana

3. Real risks

4. Human rights

5. Norway vs. Ghana

6. Golden opportunity

From Oil to prosperity

• Ghana’s total annual revenue flows from oil could become quite large, reaching - 100-200% of Ghana’s 2008 GDP - 250-500% of its 2008 merchandise exports
• Even so, the authorities are aware that abundant oil wealth does not constitute a one-way ticket to seventh heaven - They are eager to avoid replicating the 40-year experience of Nigeria next door - So let’s begin in Nigeria

The nigeria story

• Nigeria’s per capita GDP grew more than twice as fast in 1960-70, as it did thereafter despite the colossal export revenue boom of the 1970s and beyond - Why did growth slow down?
• Some time ago, Ms. Nenadi Usman, then Nigeria’s finance minister, told the Financial Times : “Oil has made us lazy” - She was not referring to Ghana’s farmers - No, she meant the generals and their friends

Ghana and Nigeria 1980-

Per capita GNI (USD at PPP)

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2500 Nigeria Ghana

Ghana and Nigeria 1980-

Per capita GNI (USD at PPP)

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2500 Nigeria Ghana

Democracy

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10 Nigeria Ghana

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The nigeria story

• Many other oil-rich countries have a similar tale to tell as Nigeria of conflict, corruption, and economic stagnation, in varying proportions - Algeria, Angola, Gabon, Iraq, Iran, Libya, Mexico, Equato rial Guinea, Saudi Arabia, Sudan, Venezuela, and many more
• Why?
  • That‘s what oil-spill economics is all about

The risks are real

• Oil spills manifest themselves in several different ways - Upswing in export earnings following an oil discovery tends to strengthen the currency, reducing the profitability of other export and import-competing industries - This is the Dutch disease - An overvalued currency hampers growth like an undervalued currency boosts growth; think China - Due to fickle prices, booming oil exports often lead to volatility in exports and GDP - Volatility is not good for growth

The risks are real

• Low taxes and generous transfers and subsidies, even if they amount to only a small fraction of each citizen’s fair share of the nation’s oil wealth, tend to weaken popular demand for democracy
• Abundant oil tends to imbue policymakers with a false sense of security and blind them to the need for building up human resources and social capital, including democracy, key ingredients of growth

oil and human rights

• Natural resources belong to the people
  • A people’s right to their natural resources is a human right proclaimed in primary documents of international law and enshrined in many national constitutions - Article 1 of the International Covenant on Civil and Political Rights states that “All people may, for their own ends, freely dispose of their natural wealth and resources …” - Article 1 of the International Covenant on Economic, Social and Cultural Rights is identical

oil and human rights

• Here fee is a better word than tax
  • Fees are levied in exchange for providing specific services such as a permission to harness a common property resource
  • Therefore, resource taxes should rather be referred to as user fees or depletion charges
• The people’s right to their natural resources grants the government the legal authority to claim the oil rent on behalf of the people

oil and human rights

• Accrual of natural resource rents to the government presupposes representative democracy and, hence, by international law, the legitimacy of the government’s right to dispose of the resource rents on behalf of the people - This principle is, e.g., acknowledged in the Iraqi constitution of 2005 which proclaims that “Oil and gas are the property of the Iraqi people in all the regions and provinces” - By international law, this proclamation presupposes democracy

oil and human rights

• Ghana‘s constitution from 1992 is unambiguous concerning the rights of the nation to its natural resource wealth, stating that - “Every mineral in its natural state in, under or upon any land in Ghana, rivers, streams, water courses throughout Ghana, the exclusive economic zone and any area covered by the territorial sea or continental shelf is the property of the Republic of Ghana and shall be vested in the President on behalf of, and in trust for the people of Ghana.” - Any misappropriation of resource rent would contravene the constitution

Three equivalent methods

• Three analytically equivalent ways for the people

as rightful owner to claim the rents

1. Auctions on a fair and level playing field

• Beware corrupt access of some to bank loans

2. User fees

• Need trial and error to find the equilibrium

3. Payment to every adult as in Alaska

• Why not also children? Might encourage fertility ;-)
• Perhaps a good way to go ahead is a mix of all

three methods