Energy issues and challenges in emerging economies.

Kalyuzhnova, Yelena

The management of oil and gas revenues, which are volatile, unpredictable, and ultimately exhaustible, offers important opportunities, but can also greatly complicate economic policy making. In his introduction to the economic theory of the supply of oil, Banks emphasised that 'the world of oil market is drastically different today to what it was 25 years ago' (Banks, 2004, p. 32). Without doubt these changes raise new challenges and new research questions for economics, among them the effect of corruption in resource-rich economies, the problem of diversification of the economies away from the oil and gas dominance, and also their vulnerability to fluctuations in the world oil prices. The current symposium aims to bring into the discussion these challenges and to identify possible implications for economic policy making.

In the first paper of the symposium Yelena Kalyuzhnova, Ali M. Kutan, and Taner Yigit argue that allowing businesses to act more efficiently by easing regulations is a useful step in reducing corruption, which ultimately will lead to establishing a better political regime and will make an impact on a corruption ranking. The authors discovered some important linkages between the resource-abundance proxies and socio-economic variables, proving some methodological insight into modelling corruption and growth in resource-rich countries with applications to different investment and ownership settings. Through econometric analysis the authors came to the following finding that corruption is not only a threat for economic growth but also a great threat to the economic development and standard of living over time in energy resource-rich countries.

The latter is not the only problem that governments in resource-rich economies are facing to date. The problem of diversification is increasingly becoming a policy agenda for the governments of these countries. 'The rationale here is two-fold: a more diversified economic structure is desirable because it will secure the economic stability of the country and its economic growth. In addition it will reduce corruption and rent seeking behavior which is directed towards the resource sector, providing a more complex structure of the economic functioning of the country as well as more opportunities for the population to engage in business' (Kalyuzhnova, 2008).

The second paper in the symposium is devoted to this problem. In this, Richard Pomfret exploits the possibilities of using energy resources in the process of diversification based on the Kazakhstani experience. Since the end of the 1990s Kazakhstan has had one of the fastest growing economies in the world. Economic growth has been driven by high oil prices, new oilfield discoveries, and improved pipeline access to the world markets. The government has made it an important objective to diversify the country's economic base with the goal of becoming one of the 50 most competitive economies in the world.

Richard Pomfret focuses on public policy towards agriculture. Prior to independence in 1991, agriculture was a major sector in the Kazakhstani economy, and Kazakhstan was a substantial grain exporter. Support for producers shifted from being highly positive in the late Soviet era to being negative after independence, mainly as a result of neglect rather than positive policy choices. The paper presents detailed producer support estimates for Kazakhstan's farm sector. The average shift has been substantial, especially for livestock farmers. Quantification of price distortions supports the Kazakhstani government's claim that it has used its energy resources with the purpose of promotion of the agricultural sector.

To help moderate the impact of oil revenues on the business cycle and also to contain the effects of Dutch disease--as well as saving for future generations--many oil-producing countries are setting up oil funds and other such investment vehicles. Countries with large mineral resources can benefit from appropriate investment for the future and the government has an important role to play in this regard. At the same time, the economic performance of many oil exporters has been disappointing, even to the extent of prompting some observers to ask whether oil is a blessing or a curse (Auty and Mikesell, 1998; Auty, 2006; Gylfason, 2001; Kalyuzhnova and Kaser, 2006; Sachs and Warner, 1995, etc). For example, about two-thirds of Caspian's and Russian economies are driven by the oil and gas industry and state spending.

In the final paper of the symposium Koen Schoors, Bruno Merlevede, and Bas van Aarle develop and estimate a small macroeconomic model of the Russian economy. The model takes into account the impact of the oil price, the exchange rate, private sector confidence, and fiscal policy on economic performance. The model explains Russia's economic history in the post-1994 period. The results suggest that the Russian economy is vulnerable to downward oil price shocks. The authors substantiate two mechanisms that mitigate the economic effects of oil price shocks, namely the stabilisation brought by the Oil Stabilisation Fund and the Dutch disease effect. Although the stabilisation fund could be considered a potentially good thing in mitigating risks, as the authors stress the central problem is the lack of clear and transparent rules on how the excess funds should be used. In general, state spending is very dependent on revenues from the oil and gas industry. Resource-rich emerging countries might face new economic challenges if the oil and gas industry and state spending stop growing or decline. Oil wealth, mineral wealth, and state spending may be mixed economic blessings for emerging economies (Kalyuzhnova, 2006).

All the papers of the symposium thus highlight challenges that can typically confront policy-makers in resource-rich emerging market economies. The leitmotif running through them is that well-designed policies can make a crucial difference in unlocking potential gains from natural resource endowment, while flawed policies may deepen distortions and seriously damage the prospects for economic growth. In particular, effective regulatory approaches to addressing corruption are essential to trigger changes in international ratings and lay the domestic foundations for sustainable growth. Policies for diversification, in turn, must focus on facilitating private sector expansion, and avoid giving rise to distortions--as has sometimes been the case in agriculture, for example. In setting the right framework for balanced growth, oil funds can be a valuable instrument, but only with the right conditions as regards governance and transparency. And policies, yet again, are crucial in unlocking local content by exploiting activities that are complementary to energy production. Energy endowment is a given; but whether it ends up as a blessing or a curse depends crucially on the quality of decisions made by policy-makers, and the transparency of the frameworks they put in place. That is the common message of this symposium, which consists of papers presented at a session organized for the Association for Comparative Economic Studies Meetings in January, 2008.

REFERENCES

Auty, R. 2006: Transition to mid-income democracies or to failed states? In: Auty, RM and de Soysa, I (eds). Energy, Wealth and Governance in the Caucasus and Central Asia: Lessons not Learned. Routledge: London and New York.

Auty, R and Mikesell, R. 1998: Sustainable development in mineral economies. Oxford University Press: Clarendon.

Banks, FE. 2004: Beautiful and not so beautiful minds: An introductory essay on economic theory and the supply of oil. OPEC Review 28(March): 27-62.

Gylfason, T. 2001: Nature, power, and growth. CESinfo Working Paper No. 413.

Kalyuzhnova, Y. 2006: Overcoming the curse of hydrocarbon: Goals and governance in the oil funds of Kazakhstan and Azerbaijan. Comparative Economic Studies 48: 583-613.

Kalyuzhnova, Y. 2008: The economics of the Caspian oil and gas wealth: Companies, governments, policies. Palgrave Press: Basingstoke (forthcoming).

Kalyuzhnova, Y and Kaser, M. 2006: Prudential management of hydrocarbon revenues. Post Communist Economies 18(2): 167-187.

Sachs, J and Warner, A. 1995: Natural resource abundance and economic growth. NBER Working paper No. 5398, December.

YELENA KALYUZHNOVA

The Centre for Euro-Asian Studies, The University of Reading, Whiteknights, PO Box 218, Reading RG6 6AA, UK. E-mail: y.kaluyzhnova@reading.ac.uk

Comparative Economic Studies (2009) 51, 161-164. doi:10.1057/ces.2008.47