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Half the world’s energy subsidies are in the Middle East and North Africa Region. These subsidies have been criticized on grounds that they crowd out public spending on valuable items such as health, education and capital investment. Egypt for instance spends seven times more on fuel subsidies than on health. Furthermore, the allocation of these subsidies is heavily skewed towards the rich, who consume more fuel and energy than the poor. In Yemen, the portion of fuel subsidies going to the richest quintile was 40 percent; the comparable figure in Jordan was 45 percent and in Egypt, 60 percent.
What would you do if you won a billion dollars? Would you just buy more hamburgers for lunch or pick up some extra pairs of socks? Probably not. You would think bigger: maybe a boat, a mansion, a fancy car – luxury goods. Or you might try to make your life easier with a housekeeper, a driver, a chef – luxury services. This switch in the shopping list is so common that economists have a nerdy name for it: “non-homothetic” preferences. That is, people buy different things when they get more money.
It turns out that this dynamic is relevant for development, as we (Bill Battaile, Richard Chisik, and Harun Onder) found in “Services, Inequality, and the Dutch Disease,” a World Bank Policy Research Working Paper published this year. In particular, countries that see a rapid influx of income following a natural resource discovery – say oil or diamonds – are vulnerable to this pattern in a way that could hinder their overall chances of economic growth.
I’m on my way to the 7th South Asia Economic Summit (SAES) in New Delhi, India. The summit* brings together leading analysts, academics, policymakers, the private sector and civil society from across the region and beyond, who meet to suggest solutions to South Asia’s economic issues and learn from each other’s experiences.
This year’s SAES takes place at a very opportune time. Regional cooperation momentum has been on an upswing. The theme of the summit, “Towards South Asian Economic Union” captures the renewed optimism of moving forward on the regional agenda and generating shared prosperity. Apart from that, the SAES is held between November 7 – 8, only two weeks before the 18th SAARC (South Asian Association for Regional Cooperation) Summit, where heads of state from Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri-Lanka will meet in Kathmandu, Nepal.
The recent acceleration in growth rates across much of sub-Saharan Africa may not be purely commodity-driven, but for many of the region’s economies macro-economic stability is still dependent on prudent management of natural resources. For this reason, a strategic shift is required to shield African economies from commodity boom-burst cycles.
For much of the last half century, the dominant political economy model of natural resource management in Africa was this: states received royalties from mostly private mining companies and then were supposed to invest in public goods such as roads, hospitals, and schools. Private mining companies, for their part, would pick up the slack whenever states failed. Most of the time this happened through corporate social responsibility (CSR) initiatives, as a way of buying the social license needed to operate in specific communities.
This model has proven to be a complete failure in nearly all resource-rich African states, for a number of reasons.
We are living in very exciting times when it comes to renewable energy. All over the world, countries are taking steps to generate more and more of their power from their wind, solar and hydropower resources, among other means of clean energy production. This expansion is not just vital for human and economic development, it’s key to the world’s efforts to tackle climate change. With less than six weeks to go until policy makers gather for the next UN Climate Conference of the Parties in Lima, Peru and as part of a series of events at the World Bank’s annual meetings, we hosted a panel of energy experts to look at what it will take to rise to the renewable energy challenge and address energy poverty.
At a moment when good economic news is in short supply, this week’s observance of World Energy Day provides a chance to celebrate some positive news – positive, at least, from the viewpoint of the world's developed economies, which have lately been struggling to recover from prolonged stagnation.
The recent plunge in global energy prices was a major factor informing a World Energy Day forum on “The Green Side of Energy Security” – convened in Washington on Wednesday by the European Union Delegation to the United States. The plummeting cost of energy, thanks in part to vast increases in oil and natural-gas supplies, is now poised to give advanced economies a much-needed additional stimulus. That's helping dispel some of the gloom that pervaded the economic forecasts at the recent Annual Meetings of the World Bank Group and International Monetary Fund.
Moreover, the current global glut of oil and natural gas also highlights the success of a far-sighted innovation program that has helped strengthen productivity in the energy sector. The success of the 40-year-long U.S. program to create more effective methods of oil and natural-gas production has has transformed the global energy landscape. If those new production methods can be responsibly carried out, in compliance with strict environmental safeguards – and, granted, that’s a big “if” – then the economy will buy some extra time as it seeks to make the transition away from fossil fuels and toward cleaner, greener, more sustainable sources of energy.
The initiative's technological breakthrough epitomizes the creativity that public-private cooperation can unleash when governments and industries, working together, patiently invest to strengthen productivity in specifically targeted industries and sectors.
The worldwide price of crude oil has fallen about 25 percent – from more than $110 a barrel in midsummer to about $80 a barrel this week – thanks to a combination of reduced demand (due to sluggish economic activity in many industrialized countries) and vastly increased oil and natural-gas production. Despite the geopolitical tensions now afflicting several major oil-producing regions, large new supplies of oil and natural gas are projected to continue arriving on the market, maintaining downward pressure on energy prices.
Much of the increased supply has its origin in North America – where “the revolution in American shale gas and ‘tight oil’ is real,” according to energy-policy scholar and historian Daniel Yergin. Writing in the Financial Times this week, Yergin noted that “U.S. crude-oil output is up almost 80 percent since 2008, supplying an extra 3.9 million barrels a day. . . . Canadian oil sands have added another 1 million barrels a day to North American supply over the same period.”
The energy revolution is poised to deliver a powerful, positive economic impact: As industries and consumers pay less for oil and natural gas, they’ll receive the equivalent of a tax cut – with Yergin estimating its benefit at about $160 billion a year, just for the U.S. economy. Such a stimulus, if it helps buoy economic activity in Europe as well, will boost economies that have been mired in what threatens to become long-term “secular stagnation.”
For motorists who are now paying less at the gasoline pump – and for home-heating-oil and natural-gas consumers who are awaiting their first chilly-season heating bills – the oil-price plunge and natural-gas glut may seem like an economic deus ex machina.
Step by step, consider how this process delivered today's energy abundance.
- What inspired the arrival of these new energy supplies? New technologies and techniques – “hydraulic fracturing” and “horizontal drilling” – have helped coax once-inaccessible oil and natural-gas deposits out of underground rock formations.
- And how were those techniques developed? Through well-targeted innovation programs that were initially funded by government agencies.
- After government-funded R&D had proven the new technologies' promise, the new industrial methods were eagerly applied by innovators in the energy industry.
- Connect the dots: This revolution was brought to you by far-sighted, government-inspired investment initiatives that helped a strategically-chosen sector of the economy promote competitive industries and innovation.
- OK: Let's come right out and say it: This marks a triumph of industrial policy.
There: We actually said the fateful phrase: "industrial policy."
That always-somewhat-ambiguous term, "industrial policy," may have fallen out of political favor nowadays -- but there's no real reason to shrink from the idea, even though it's currently fashionable to use a euphemism like "innovation initiative" or "competitiveness strategy."
It's true, as skeptics suggest, that it's difficult to get industrial policy right. Public-private investment programs can be complex to design and sustain: In this case, it took about 40 years of experimentation and evolution to achieve the energy program's goals. Yet, when this initiative was launched in the energy-starved 1970s, various approaches to industrial policy were being vigorously pursued by many economies, large and small. (Yes, even the United States -- and even under conservative governments, as illustrated by the Ford Administration's pursuit of this program.) Put in its historical context, this example of 1970s-style industrial policy succeeded in delivering, at last, its long-promised payoff in productivity.
Piloted during the Ford Administration and ramped-up during the Carter Administration, this effort hailed from an era when repeated oil shocks were raising fears that the industrialized world would be threatened by oil-rich countries’ production cuts and price increases. Pragmatic R&D efforts on alternative oil-production methods were methodically pursued by the U.S. Department of Energy (DOE) and the U.S. Bureau of Mines, drawing on crucial technological insights from the taxpayer-supported network of national research laboratories.
Once that initial government-funded research had laid the foundation for new technologies and techniques, the private sector stepped in and played its indispensable part. A public-private partnership through the Gas Research Institute helped perfect the new techniques, while pro-innovation tax policies granted favorable federal tax treatment for investors’ R&D commitment to the energy sector. A champion of the new technologies, George P. Mitchell, evangelized for hydraulic fracturing and horizontal drilling, even when skeptics scoffed. Researchers at the Breakthrough Institute assert: “Where Mitchell proved invaluable was [in] engaging the work of government researchers and piecing together different federally-developed technologies to develop a commercial product.”
As newly resource-rich countries grapple with how to manage their resources well, questions arise on how governments can channel natural resource revenues into smart investments, as well as lessons learned from past experiences. At a Flagship event preceding the Annual Meetings, panelists came together to discuss “Making Extractives Industries’ Wealth Work for the Poor.”
If managed well, revenue from resources such as oil and gas in Tanzania and Mozambique, iron ore in Guinea, copper in Mongolia, gas and gold in Latin America, oil, gas, bauxite and gold in Central Asia, can contribute to sustainable development. When poorly handled they can present long-term challenges for governments, communities and the environment.
The panelists included Marinke Van Riet, International Director, Publish What You Pay; Ombeni Sefue, Chief Secretary of Government, Tanzania; Samuel Walsh, Chief Executive Officer, Rio Tinto; and Tan Sri Nor Mohamed Yakcop, Deputy Chairman, Nasional Berhad, Malaysia. The session was moderated by renowned energy expert Daniel Yergin, Vice-Chairman, IHS, and bestselling author of The Quest: Energy, Security, and the Remaking of the Modern World.
Everyone agrees that enhanced transparency—on payments, revenues, royalties and taxes—is essential to success in developing countries to turn earnings from oil, gas and mining into economic growth and poverty reduction. But that’s just the first step.
The idea of “Inclusive growth” and how to achieve it was talked about a lot in the days ahead of the 2014 World Bank-IMF Annual Meetings. Among the solutions on the table was a new initiative that could help unlock billions of dollars for infrastructure and improve the lives of many.
About 1.2 billion people live without electricity and 2.5 billion people don’t have toilets. Some 748 million people lack access to safe drinking water. The Global Infrastructure Facility (GIF) announced by World Bank Group President Jim Yong Kim this week hopes to lower these numbers by developing a pipeline of economically viable and sustainable infrastructure projects that can attract financing.