Benedikt Goderis

Commodity Prices, Growth, and the Natural Resource Curse: Reconciling a Conundrum

Currently, evidence on the ‘resource curse’ yields a conundrum. While there is much crosssection evidence to support the curse hypothesis, time series analyses using vector autoregressive (VAR) models have found that commodity booms raise the growth of commodity exporters. This paper adopts panel cointegration methodology to explore longer term effects than permitted using VARs. We find strong evidence of a resource curse. Commodity booms have positive short-term effects on output, but adverse long-term effects. The long-term effects are confined to “high-rent”, non-agricultural commodities. We also find that the resource curse is avoided by countries with sufficiently good institutions. We test the channels of the resource curse proposed in the literature and find that a substantial part of it is explained by high public and private consumption, low or inefficient total investment, and an overvalued exchange rate. Our results fully account for the cross-section results in the seminal paper by Sachs and Warner (1995).

Natural Resource Booms and Inequality: Theory and Evidence

Surprisingly little is known about the impact of natural resource booms on income inequality in resource rich countries (Ross, 2007). This paper develops a theory, in the context of a two sector growth model in which learning-by-doing drives growth, to explain the time path of inequality following a resource boom. Under the condition that the nontraded sector uses unskilled labor more intensively than the traded sector, we find that income inequality will fall in the short run immediately after a boom, and will then increase steadily over time as the economy grows, until the initial impact of the boom on inequality disappears. Using dynamic panel data estimation for 90 countries between 1965 and 1999, and exploiting variation in world commodity prices to identify resource booms, we find evidence in support of the theory, especially for oil and mineral booms. We also find that uncertainty about future commodity export prices significantly increases long-run inequality.

Does Aid Mitigate External Shocks

This paper investigates the role of aid in mitigating the adverse effects of commodity export price shocks on growth in commodity-dependent countries. Using a large cross-country dataset, we find that negative shocks matter for short-term growth, while the ex ante risk of shocks does not seem to matter. We also find that both the level of aid and the flexibility of the exchange rate substantially lower the adverse growth effect of shocks. While the mitigating effect of aid is significant in both countries with pegs and countries with floats, the effect seems to be smaller for the latter, suggesting that aid and exchange rate flexibility are partly substitutes. We investigate whether aid has historically been targeted at shock-prone countries, but find no evidence that this is the case. This suggests that donors could increase aid effectiveness by redirecting aid towards countries with a high incidence of commodity export price shocks.

Prospects for Commodity Exporters: Hunky Dory or Humpty Dumpty?

Those low-income countries that export non-agricultural commodities are in the midst of a resource transfer. It is undoubtedly the biggest opportunity for transformative development that these societies have experienced, dwarfing both aid and previous commodity booms. To get it in proportion, in 2004 commodity exports from Sub-Saharan Africa accounted for 146 billion US dollars or 28 percent of the region’s GDP, while aid amounted to 5 percent of GDP. Compared with the boom of the 1970s many more countries are beneficiaries: the push to diversify sources of supply has resulted in exploitable discoveries in places that were previously political no-go areas. Further, whereas the boom of the 1970s was conjured up by the OPEC cartel, this one is grounded in Asian growth and so is intrinsically less precarious. In this paper we draw on a range of new research that provides a prognosis of prospects, a diagnostic of likely problems, and prescribes an agenda for international action. The paper is organized around these three objectives.

Human Rights Violations after 9/11 and the Role of Constitutional Constraints

After 9/11, the United States and its allies took measures to protect their citizens from future terrorist attacks. While these measures aim to increase security, they have often been criticized for violating human rights. But violating rights is difficult in a constitutional democracy with separated powers and checks and balances. This paper empirically investigates the effect of the post-9/11 terror threat on human rights. We find strong evidence of a systematic increase in rights violations in the United States and its ally countries after 9/11. When testing the importance of checks and balances, we find that this increase is significantly smaller in countries with independent judicial review (countermajoritarian checks) but did not depend on the presence of veto players in the legislative branch (majoritarian checks). These findings have important implications for constitutional debates on rights protection in times of emergency.

Monetary Policy and Oil Price Surges in Nigeria

The management of oil revenues is the past, present and future of macroeconomic policy in Nigeria. As Paul Collier describes (Chapter 2), the long history of fiscal mismanagement of oil booms in Nigeria saw the Central Bank of Nigeria’s ability to pursue a coherent monetary policy severely circumscribed. Without the sup-port of a disciplined and broadly predictable fiscal stance, the Central Bank was unable to make credible commitments to an inflation target or, indeed, to any other intermediate target such as the money supply or the exchange rate. Monetary policy could not reliably anchor inflation expectations. Since the turn of the century, however, the landscape has started to change. Harnessed to a stronger political commitment, the successful consolidation in the financial sector concluded at the end of 2005 and the de facto unification of the foreign exchange markets in early 2006, measures such as the Fiscal Responsibility Bill, currently working its way through the legislature, are laying the foundations for improved fiscal management of oil revenues. As a result, and for possibly the first time in its history, the prospects now exist for genuinely ‘independent’ Central Banking in Nigeria. It now makes sense to consider monetary policy playing a more central role in short-rim macrneconomic management in Nigeria.

The Effect of Monetary Policy on Exchange Rates during Currency Crises: The Role of Debt, Institutions, and Financial Openness

This paper examines the effect of monetary policy on the exchange rate during currency crises. Using data for a number of crisis episodes between 1986 and 2004, we find strong evidence that raising the interest rate: (i) has larger adverse balance sheet effects and is therefore less effective in countries with high domestic corporate short-term debt; (ii) is more credible and therefore more effective in countries with high-quality institutions; iii) is more credible and therefore more effective in countries with high external debt; and (iv) is less effective in countries with high capital account openness. We predict that monetary policy would have had the conventional supportive effect on the exchange rate during five of the crisis episodes in our sample, while it would have had the perverse effect during seven other episodes. For four episodes, we predict a statistically insignificant effect. Our results support the idea that the effect of monetary policy depends on its impact on fundamentals, as well as its credibility, as suggested in the recent theoretical literature. They also provide an explanation for the mixed findings in the empirical literature.

Currency Crisis, Monetary Policy, and Corporate Balance Sheet Vulnerabilities

This paper studies how the exposure of a countrys corporate sector to interest rate and exchange rate changes affects the probability of a currency crisis.To analyze this question, we present a model that defines currency crisis as situations in which the costs of maintaining a fixed exchange rate exceed the costs of abandonment.The results show that a higher exposure to interest rate changes increaes the probability of crisis through an increased need for output loss compensation and an increased efficacy of monetary policy in stimulating output.A higher exposure to exchange rate changes also increases the need for output loss compensation.However, it lowers the efficacy of monetary policy in stimulating output through the adverse balance sheet effects of exchange rate depreciation.As a result, its effects on the probability of crisis is ambiguous.

Currency Crises, Monetary Policy and Corporate Balance Sheets

Abstract This paper studies how the exposure of a country’s corporate sector to interest rate and exchange rate changes affects the probability of a currency crisis. To analyze this question, we present a model that defines currency crises as situations in which the costs of maintaining a fixed exchange rate exceed the costs of abandonment. The results show that a higher exposure to interest rate changes increases the probability of crisis through an increased need for output loss compensation and an increased efficacy of monetary policy in stimulating output. A higher exposure to exchange rate changes also increases the need for output loss compensation. However, it lowers the efficacy of monetary policy in stimulating output through the adverse balance sheet effects of exchange rate depreciation. As a result, its effect on the probability of crisis is ambiguous.

Currency Crises, Monetary Policy and Balance Sheet Vulnerabilities

This paper studies how the exposure of a country’s corporate sector to interest rate and exchange rate changes affects the probability of a currency crisis. To analyze this question, we present a model that defines currency crises as situations in which the costs of maintaining a fixed exchange rate exceed the costs of abandonment. The results show that a higher exposure to interest rate changes increases the probability of crisis through an increased need for output loss compensation and an increased efficacy of monetary policy in stimulating output. A higher exposure to exchange rate changes also increases the need for output loss compensation. However, it lowers the efficacy of monetary policy in stimulating output through the adverse balance sheet effects of exchange rate depreciation. As a result, its effect on the probability of crisis is ambiguous.