Graham A. Davis

Learning to love the Dutch disease: Evidence from the mineral economies

Abstract Recent literature proposes that a booming minerals sector may not only lead to Dutch disease effects, it may also be a development curse. Mineral economy case studies have tentatively confirmed this “recourse curse thesis”. This paper examines the long-run economic and development performance of a more general grouping of mineral-based economies, and finds little corroborating evidence.

Estimating volatility and dividend yield when valuing real options to invest or abandon

The opportunity to invest in or abandon a project can in principle be valued using real options techniques. In practice, option pricing has as inputs the volatility and dividend yield of the project, which are in most cases not observable via market data. Current methods of estimating these parameters are largely ad hoc, introducing potential error into the valuation process. This paper uses simple production models to formalize concepts for estimating project volatility and dividend yield in single stochastic variable option models, and provides an example of how these estimates can be used in a real option valuation exercise.

The Resource Drag

Between 1995 and 2001, Jeffrey Sachs and Andrew Warner published a series of influential empirical studies examining mining and energy’s role in economic growth. Their principal finding was that economies heavily dependent on extractive activity in 1971 grew more slowly than comparable non-extractive economies over the next 19 years. This result has been deemed ‘the resource curse’. The result is generally robust across differing country samples and across extended sample periods. Many have sought to explain the phenomenon, but without unified success. Sachs and Warner suggest that crowding out of a sector or activity with production externalities is the most likely explanation. This paper demonstrates that the relatively slower growth in mineral and energy economies may simply reflect a resource drag whereby optimally managed per capita resource production does not grow substantially over time and hence introduces a drag on the measured growth of per capita economic output. If the resource curse is indeed only a resource drag, this has implications for trade and industrial policies implemented on the presumption that there are growth-reducing market failures associated with mineral and energy production.

The minerals sector, sectoral analysis, and economic development

Abstract Sectoral analysis, a new branch of political science, alleges that mineral extraction creates a socio-political climate that promotes inflexible statism, which in turn leads to substandard development performance. The theory, that mineral economies underperform bureaucratically and economically, is said not only to hold in a post-dictive sense for the mature mineral economies, such as Zambia, but also in a predictive sense for the newer mineral economies, such as Ecuador. This essay reviews and assesses this hypothesis in the light of the empirical evidence comparing mineral production, state capacity, and economic performance. It finds that the sectoralist view is supportable only in selected cases, and is not a general result.

On Using Current Information To Value Hard-Rock Mineral Properties

We reformulate the Hotelling valuation principle to take into account the special production characteristics of hard-rock minerals. The data requirements of the revised model are still parsimonious, but the resultant valuations are some 40 below those produced by the Hotelling valuation principle. Our valuation equations are also user-friendly, allowing the valuer to specify price and cost expectations that need not comply with the Hotelling rule. Empirically, our model provides estimates of market value for producing mineral properties that are more accurate than those produced by the Hotelling valuation principle.

Valuing mineral reserves when capacity constrains production

Abstract We add a capacity constraint and heterogeneous reserves to the Hotelling Valuation Principle. This produces a more general version of the principle that is more consistent with empirical valuations, while retaining the underlying relationship between net price and reserve value.

Replicating Sachs and Warner’s Working Papers on the Resource Curse

Abstract This article reports on my attempt to replicate Sachs and Warner’s 1995 and 1997 resource curse working papers. The 1995 paper is not replicable for lack of a data archive. Pure replication of the 1997 paper is achieved. Statistical replication determines that the proposed institutional causes of the resource curse are not robust to country sample. Scientific replication shows that findings of a resource curse are not sensitive to different measures of resource intensiveness, though they are sensitive to estimation technique. Typographical errors in the published paper reveal the value of researchers making both their data and code available.

Extractive Economies, Growth, and the Poor

There is mixed evidence regarding the relationship between the extractive intensity of economic activity and the level of human development. Some studies find that mineral- and energy-intensive economies have higher levels of development than economies without a substantial extractive sector, whereas others find that they have lower development levels. Those that find the negative relationship commonly infer that there are ongoing, dynamic effects at work, such as an erosive effect of resource wealth on institutional quality, or a structural shift that reduces manufacturing employment and, with this, manufacturing’s special development-enhancing impacts. These studies also infer that the lower development levels equate to negative impacts on the poor. Even in growing extractive economies, the poor are thought to be made worse off as a result of the extractive activities. None of these studies, however, specifically examines how growth spells in extractive economies affect the poor in those economies. This chapter examines this relationship via a simple comparison of a series of growth spells in extractive and non-extractive economies. It shows that the poor in growing extractive economies are as likely or more likely to benefit from that growth than are the poor in growing non-extractive economies. Thus, there is no evidence that positive growth in extractive economies is any worse for the poor than positive growth in non-extractive economies. What hurts the poor in any economy is negative growth, and resource extraction is bad for the poor only if it increases, for whatever reason, the frequency of negative growth in an economy.

Strike When the Force Is with You: Optimal Stopping with Application to Resource Equilibria

Optimal investment in a nonrenewable resource project occurs when the rate of increase of the projects forward value falls to the force of interest. This stopping rule yields a financial interpretation of resource quality as being a property of the project rather than of individual units of reserves. It also leads to re-interpretations of (a) rent as the present value of the project rather than of units of reserves and (b) Hotellings insight as, not a rule for the path of rents, but an equilibrium algorithm for price. The analysis is extended to sequential development of pesticides, antibiotics, and forests.

Valuing mineral stocks and depletion in green national income accounts

This paper investigates the theory and practice of adjusting national income and product accounts for the stock and depletion of mineral assets. These green income adjustments can have a significant impact on the accounts of mineral-based developing economies and the macroeconomic policies that might be derived from these accounts. We propose that the popular methods used to adjust the accounts for the impacts of mineral assets and depletion are upwardly biased, and we present alternative stock valuation and depletion formulas that are empirically supported variants of the formulas currently in use.