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December 2014

The Decline in Oil Prices: An Opportunity

Ivailo Izvorski's picture

A decade of elevated oil prices brought prosperity to many developing countries. Incomes rose, poverty shrank, macroeconomic buffers were rebuilt. The fiscal space for investing more in education and infrastructure increased, resulting in better sharing of prosperity. At the same time, higher commodity prices and surging global demand resulted in much more concentrated exports in all developing oil-rich countries. "Diversifying exports" became a priority for policy makers and development economists around the world. Historical experience and evidence to the contrary from successful resource rich countries notwithstanding, many widely believe that a more diversified export structure should be an important national goal and may well be a synonym for development, a goal that government can target and achieve.  And a more diversified export structure typically meant a smaller share of commodity exports in total shipments abroad or a reduced concentration – as measured by the Herfindahl-Hirschmann index – of exports.

How Well did We Forecast 2014?

Shanta Devarajan's picture

A year ago, we polled Future Development bloggers for predictions on the coming year (2014).  Looking back, we find that many unforeseen (and possibly unforeseeable) events had major economic impact. 

We missed the developments in Ukraine and Russia, the spread of the Islamic State in Iraq, the outbreak of Ebola in West Africa, the collapse in oil prices and their attendant effects on economic growth.  At the same time, we picked the winner of the soccer World Cup, and got many of the technology trends right. Perhaps economists are better at predicting non-economic events.

Here’s the scorecard on the seven predictions made:

All About My Age

Wolfgang Fengler's picture

And Why I’m Much Older than I Thought I was
When my kids became teenagers I began to feel old: I saw myself as fit, healthy and (relatively) young but they, clearly, didn’t and it began to be un-cool to be around them. I’m now in my 40s in a world that is growing older and older (the global life expectancy is now at 72) … so what’s the big deal?

I may be young in absolute terms but definitely not in relative ones! If you’re my age – 43 years – there are 5.1 billion (in a world of almost 7.3 billion) youngsters for whom that’s old. Seen otherwise, you are part of the world's 30 percent oldest people! It was a long time ago that I was in the middle of the global age distribution: today the “median human” is only 29 years old.

Can Pay for Performance Provide the Wrong Incentives?

Tito Cordella's picture

Office workers in a meeting The use of technology to improve productivity continues to evolve. In Modern Times, Tramp had to keep up with the crazy pace of the assembly line; in contemporary public administrations, employees have to comply with what is mandated by monitoring and reporting technologies; in today’s World Bank — I’m exaggerating a bit — we are asked to record everything we do in the multiple Bank systems. A legitimate question to ask is whether the reliance on monitoring and reporting technologies improves service delivery or, instead, whether it forces motivated civil servants or employees to waste time “feeding the beast”.

The Impact of Falling Oil Prices

Birgit Hansl's picture

 Notes from Russia and Kazakhstan

Petrol tanker driving along the rural road in Russia Oil prices tumbled dramatically since July when they reached US$115 per barrel to below US$65 per barrel in recent days. Despite the sharp price decline, OPEC signaled no intention to cut production.  The oil market remains well-supplied and there is demand-driven pressure on oil prices, following weak economic data from the Euro zone and a number of emerging economies, including Turkey, Brazil, Russia, and China which means that the oil price could fall even further and remain low for longer.

The economic prospects of many resource abundant economies are tied to oil prices. Russia and Kazakhstan are two extreme cases. Such dependency translates into volatility of export receipts and government revenues and, depending on the exchange regime, to a decline in the national currency. For Russia, oil and gas provide about 70 percent of its exports and 50 percent of its federal budget. In Kazakhstan, oil revenues constitute about half of government’s total revenues and 45 percent of foreign exchange earnings.

Lessons from Reducing Energy Subsidies

Mamta Murthi's picture
Also available in: Română

A view from Central Europe and the Baltics

Energy subsidies are common throughout the world.  The bulk of subsidies are paid in the Middle East and North Africa where my colleague, Shanta Devarajan, has eloquently blogged about their corrosive impact on economic growth, on employment, on human health and on water conservation.  Where I sit, in Central Europe, many countries are in the process of liberalizing their market for energy and bringing subsidies to an end.  What lessons does the experience of energy price liberation in this group of countries offer to their neighbors in the south?  Based on the work of my colleagues, Nistha Sinha and Caterina Ruggieri, I would draw five lessons.

Budget Rules for Resource Booms - and Busts

Shanta Devarajan's picture

Oil pumps The recent, precipitous decline in oil prices (35 percent so far this year) has revived the question of how oil-exporting countries should manage their budgets.  These countries’ governments rely on oil revenues for 60-90 percent of their spending.  In light of the price drop, should governments cut expenditures, including growth-promoting investment expenditures?  Or should they dip into the money they saved when oil prices were high, and keep expenditures on an even keel? Since oil prices fluctuate up and down, governments are looking for rules that guide expenditure decisions, rather than leaving it to the politicians in power at the time to decide whenever there is a price shock.  The successful experience of Norway and Chile, which used strict fiscal rules to make sure that resource windfalls are saved and not subject to the irresistible temptation to spend, is often contrasted with countries such as Nigeria and Cameroon, which didn’t.

There is No Middle Income Trap

Ha Minh Nguyen's picture

Concerns about the so-called “middle-income trap” have recently emerged among many middle-income countries, particularly after the term was coined in 2007 by two World Bank economists.  Worried that they may become “trapped” at the middle-income level, these countries are seeking a set of policies that can help them achieve strong and sustained growth and eventually help them join the league of high-income countries.

 In our recent paper, we try to shed some light on both issues. First, we do not find that countries are trapped at middle income. “Escapees” – countries that escaped the middle-income trap and obtained a per capita income higher than 50% of the U.S. level – tend to grow fast and consistently to high income, and do not stagnate at any point as a middle-income trap theory would suggest. In contrast, “non-escapees” tend to have low growth at all levels of income. In other words, while the existence of a middle income trap implies that growth rates systematically slow down as countries reach middle-income status, no such systematic slowdown is apparent in the data. Second, we provide some descriptive and econometric evidence for a different set of “fundamentals” that enable middle-income countries to grow faster than their peers. We find that faster transformation to industry, low inflation, stronger exports, and reduced inequality are associated with stronger growth.

Life in the Slow Lane - The Nairobi Grind

Apurva Sanghi's picture

I’ve lived in cities famed for their gridlock: 1990s Bangkok (gridlock was as bad as it could be); Los Angeles (gridlock + pollution); New Delhi (gridlock + pollution + honking galore); Nairobi’s gridlock is surely up there.

But is traffic “bad”? What sort of question is that you ask? Surely, the answer is 'yes', you say: time wasted stuck in traffic, the frustration, the needless idling of vehicles which creates both local (and global) pollution and so on. But let me suggest this: traffic congestion is also a sign of development. In fact, the more vibrant and dynamic the city as Nairobi surely is, the more traffic congestion you might paraphrase Gordon Gekko from the movie Wall Street, “Traffic is…good”!

Jobs or Privileges?

Marc Schiffbauer's picture
Also available in: العربية

Unleashing the Employment Potential of the Middle East and North Africa

The majority of working-age people in MENA face a choice: they can be unemployed; or they can work in low-productivity, subsistence activities often in the informal economy. In particular, only 19% of the working age people in MENA have formal jobs.

The main reason is that the private sector does not create enough jobs. Between 42% and 72% of all jobs are in micro firms in MENA, but these micro firms do not grow. In Tunisia, the probability that a micro firm grows beyond 10 employees five years later is 3%.

Why has private sector job creation been so weak?