Oil production, entrepreneurship, and the allocation of talent

Oil Production, Entrepreneurship,and the Allocation of Talent

Tiago Cavalcanti (University of Cambridge)Kamiar Mohaddes (University of Cambridge & ERF)

Sovereign Wealth Funds: Stabilization, InvestmentStrategies and Lessons for Arab Countries

September 9-10, 2016

Oil Shocks, SWFs, and the Macroeconomy

Our initial task was:

I To assess the macroeconomic impact of SWFs and international shocks inoil-exporting economies;

I To analyze the dynamics of macroeconomic variables to different shocks, ineconomies with and without a SWF.

Our initial approach:

I The GVAR approach enables one to analyse the international macroeconomictransmission of shocks, taking into account not only the direct exposure ofcountries to the shocks but also the indirect effects through secondary ortertiary channels.

I This framework takes into account both the temporal and cross-sectionaldimensions of the data; real and financial drivers of economic activity;interlinkages and spillovers that exist between different regions; and the effectsof unobserved or observed common factors.

The GVAR Methodology

GVAR

VARX (1)

VARX (2)

...VARX (37)

VARX (38)

1- GDP

2- Inflation

3- Interest rate

4- Bond yields

5- Equity prices

6- Exchange rate

1- GDP*

2- Inflation*

3- Interest rate*

4- Bond yields*

5- Equity prices*

6- Exchange rate*

*

Trade Weights

Global

Oil Market

Impulse Response Analysis

Shocks

Country Coverage

Systemic Countries MENA Oil Exporters Latin AmericaChina Algeria∗12 Argentina∗

Euro Area GCC Brazil∗

Austria Bahrain∗2 Chile∗

Belgium Kuwait∗12 Ecuador∗1

Finland Oman∗ MexicoFrance Qatar ∗12 Peru∗

Germany Saudi Arabia∗12 Venezuela∗1

Italy UAE ∗12

Netherlands Iran∗1 Southeast AsiaSpain Libya∗12 Indonesia∗

India KoreaJapan MENA Oil Importers MalaysiaUnited Kingdom Egypt∗2 PhilippinesUnited States Jordan Singapore

Mauritania∗ ThailandRest of Advanced Economies Morocco∗

Australia Syria∗2 Rest of the WorldCanada Tunisia∗2 Nigeria∗1

New Zealand Turkey South Africa∗

Norway∗

SwedenSwitzerland

Impact of a Negative Oil Price Shock on Real Output

Notes: Figures are median impulse responses to a one standard deviation fall in theprice of oil, equivalent to an annualized drop of 51% in year 1 and 45% in year 2,together with the 5th and 95th percentile error bands. The horizon is quarterly.

Impact of a Negative Oil Price Shock on Equity Markets

Notes: Figures are median impulse responses to a one standard deviation fall in theprice of oil, equivalent to an annualized drop of 51% in year 1 and 45% in year 2,together with the 5th and 95th percentile error bands. The horizon is quarterly.

Results from the Global Model

I The results indicate that while oil importers typically face a long-lived rise ineconomic activity (ranging between 0.04% and 0.95%) in response to a U.S.supply-driven fall in oil prices, the impact is negative for energy-exporters (beingon average −2.14% for the GCC, −1.32% for other MENA oil exporters, and−0.41% for Latin America), mainly because lower oil prices weakens domesticdemand as well as external and fiscal balances in these countries.

I Negative growth effects (albeit smaller) are also observed for energy-importerswhich have strong economic ties with oil exporters, through spillover effects.

I In particular, for most oil-importers in the MENA region, gains from lower oilprices are offset by a decline in external demand/financing by MENAoil-exporters given strong linkages between the two groups through trade,remittances, tourism, foreign direct investment and grants. These economies onaverage experience a fall in real output of about 0.28%. For this group, lowpass-through from global oil prices to domestic fuel prices limits the impacton disposable incomes of consumers and profit-margins of firms, and therebycontains the positive effect on economic growth in these countries.

Impact of the Fracking Revolution on Real Output

Notes: Figures are median (blue solid) and median target (black long-dashed) impulseresponses to a one standard deviation fall in the price of oil, equivalent to anannualized drop of 51% in year 1 and 45% in year 2, together with the 5th and 95thpercentile error bands. The impact is in percentage points and the horizon is quarterly.

Impact of the Fracking Revolution on Equity Markets

Notes: Figures are median (blue solid) and median target (black long-dashed) impulseresponses to a one standard deviation fall in the price of oil, equivalent to anannualized drop of 51% in year 1 and 45% in year 2, together with the 5th and 95thpercentile error bands. The impact is in percentage points and the horizon is quarterly.

An Empirical Growth Model for Major Oil Exporters

I We can utilise the empirical growth model for major oil exportingeconomies recently developed in Esfahani et al. (2014), to empiricallyinvestigate the direct effects of oil revenue shocks for these economies.

I They allow for the possibility that a certain fraction of oil revenues isinvested in the domestic economy via the capital accumulation channel,and show that the long-run output equation for major oil exporters isgiven by

yit − ψi1y∗it = ψi2(eit − pit ) + ψi3oit + ciy + γiy t + ξ iy ,t (1)

where oit is oil revenue in US dollars for country i (oit = qoit × pot ), ciy isa fixed constant, and ξ iy ,t is a mean zero stationary process, whichrepresents the error correction term of the long-run output equation.

An Empirical Growth Model for Major Oil Exporters II

I As discussed in Section 2.1 in Esfahani et al. (2014), the coeffi cient ofthe variables in equation (1) have further restrictions imposed on thembased on economic theory, namely

ψi1 = θi (1− ψi2),ψi2 = ψi3 = αi , and γiy = (1− αi )(ni − θin∗i ) (2)

where αi is the share of capital in output, ni (n∗i ) is the domestic(foreign) population growth rate, and θi measures the extent to whichforeign technology is diffused and adapted successfully by the domesticeconomy in the long run.

I In this relationship, y ∗it , acts as a proxy for global technological progress.

I The diffusion of technology is at par with the rest of the world if θi = 1,whilst a value of θi below unity suggests ineffi ciency that prevents theadoption of best practice techniques, possibly due to rent-seekingactivities and general economic mismanagement.

An Empirical Growth Model for Major Oil Exporters III

I As predicted by the theory, we find that real output for theseven MENA oil exporters in the long run is shaped by:

I (i) oil revenue through their impact on capital accumulation,and

I (ii) technological spillovers through foreign output.

I But not for Norway!I The only driver of growth is technological spillovers.

Is Norway Different?

Iran KuwaitCritical Values Critical Values

H0 H1 Statistic 5% 10% H0 H1 Statistic 5% 10%(a) Maximal eigenvalue statistic (a) Maximal eigenvalue statisticr = 0 r = 1 31.78 26.10 24.04 r = 0 r = 1 32.14 27.17 24.42r ≤ 1 r = 2 8.23 18.41 16.38 r ≤ 1 r = 2 17.83 18.22 16.23(b) Trace statistic (b) Trace statisticr = 0 r = 1 40.00 37.50 34.56 r = 0 r = 1 49.97 37.78 33.83r ≤ 1 r = 2 8.23 18.41 16.38 r ≤ 1 r = 2 17.83 18.22 16.23

Norway Saudi ArabiaCritical Values Critical Values

H0 H1 Statistic 5% 10% H0 H1 Statistic 5% 10%(a) Maximal eigenvalue statistic (a) Maximal eigenvalue statisticr = 0 r = 1 10.08 27.17 24.42 r = 0 r = 1 29.22 27.17 24.42r ≤ 1 r = 2 7.68 18.22 16.23 r ≤ 1 r = 2 19.17 18.22 16.23(b) Trace statistic (b) Trace statisticr = 0 r = 1 17.77 37.78 33.83 r = 0 r = 1 48.39 37.78 33.83r ≤ 1 r = 2 7.68 18.22 16.23 r ≤ 1 r = 2 19.17 18.22 16.23

Notes: VARX*(2,1) models with endogenous variables (y , ep) and the weakly exogenous variables (y ∗ , xo).

An Empirical Growth Model for Major Oil Exporters IV

I These figures clearly show that a negative shock to oil revenuesignificantly reduces real output in all ten OPEC countries, with the fullimpacts of oil revenue changes showing up in these economies quite fast,and peak within 2-3 years in most cases.

I The equilibrium levels of these effects are between 2% and 12%, beingquite heterogenous across the economies, with the largest real outputlosses occurring in three GCC countries (Kuwait, Qatar, and the U.A.E.)where the steady state value of the effect of the oil revenue shock is11− 12%.

I This difference partly reflects the much higher historical volatility of oilrevenues in Kuwait and Libya. The quarterly standard deviation of oilrevenue for Kuwait and Libya is around 42.8% and 37.7% as compared tobetween 20.3− 23.8% for the other countries.

Impact of a Negative Oil Revenue Shock for OPECCountries

Notes: Figures are median generalized impulse responses to a one standard deviationfall in oil revenue, together with 95 percent bootstrapped confidence bounds. Theimpact is in percentage points and the horizon is quarterly.

An Empirical Growth Model for Major Oil Exporters V

I Overall, the results indicate that oil revenue shocks (such as those fromthe low oil price environment we are currently experiencing) have a large,long-lasting and significant impact on these economies’growth paths(through the capital accumulation channel).

I Moreover, the theoretical model for major oil exporters outline above, andthe fact that we could not reject the theory restrictions in (2), togetherwith the impulse responses indicate that these countries will be adverselyaffected whenever the international price of crude oil declines and willbenefit whenever it rises.

I Therefore, macroeconomic and structural polices should be conducted ina way that the vulnerability of the country to oil revenue (not just price)disturbances are reduced; in other words oil revenue volatility, if allowedto affect output volatility, itself could be harmful for economic growth.

An Empirical Growth Model for Major Oil Exporters VI

I The empirical results presented here have strong policy implications.Improvements in the conduct of macroeconomic policies, bettermanagement of resource income volatility, and export diversification canall have beneficial growth effects; as do policies which increase the returnon investment.

I The creation of commodity stabilization funds, or Sovereign WealthFunds in case of countries in the Persian Gulf, might be one way to offsetthe negative effects of commodity booms and slumps, but the evidencefor this seems weak—see also Elbadawi et al. (2016) presented in thenext session.

I Moreover, recent academic research has placed emphasis on institutionalreform (covered extensively in a forthcoming edited volume by Mohaddes,Nugent, and Selim). By establishing the right institutions, one can ensurethe proper conduct of macroeconomic policy and better use of resourceincome revenues, thereby increasing the potential for growth.

Scatter Plots of GDP Growth and Volatility of Oil RevenueGrowth against Volatility of GDP Growth, 1961-2013

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Scatter Plots of GDP Growth Volatility against FiscalPolicy Volatility, 1961-2013

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ArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentina

BrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChile

EcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexico

PeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeru VenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrain

IranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIranIran

IraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraqIraq

JordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordan

KuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwait

LebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanon

OmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOman

QatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudi

YemenYemenYemenYemenYemenYemenYemenYemenYemenYemenYemenYemenYemenYemenYemenYemen

SyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyria UAEUAEUAEUAEUAEUAEUAEUAEUAEUAEUAE

EgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesia

AlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeria

AngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngola

BotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswana LibyaLibyaLibyaLibyaLibyaLibyaLibyaLibyaLibyaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritaniaMauritania

MoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMorocco

NigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeriaNigeria

SudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudan

TunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisia

AzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijan

KazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChina

0.0

5.1

.15

.2.2

5G

DP

Gro

wth

Vol

atilit

y

0 .1 .2 .3 .4Fiscal Policy Volatility

Primary Commodity Exporters

Source: Authors’calculation based on data from World Bank World DevelopmentIndicators (WDI), Penn World Table Version 8.0, and International Monetary FundInternational Financial Statistics and World Economic Outlook databases. These arecross-sectional averages over 1961-2013.

Scatter Plots of Institutional Quality against Fiscal PolicyVolatility, 1961-2013

USAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUK

NorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorway

CanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanadaCanada

TurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkeyTurkey

AustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaAustraliaNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew ZealandNew Zealand

South AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth AfricaSouth Africa ArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaArgentinaBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazilBrazil

ChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChileChile

EcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuador

MexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexico

PeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeruPeru

VenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuela

Trinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and TobagoTrinidad and Tobago

BahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrain



JordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordanJordan

KuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwaitKuwait

LebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanonLebanon

OmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanOmanQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarQatarSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudiSaudi

YemenYemenYemenYemenYemenYemenYemenYemenYemenYemenYemenYemenYemenYemenYemenYemen

SyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyriaSyria

UAEUAEUAEUAEUAEUAEUAEUAEUAEUAEUAE

EgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgyptEgypt IndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaIndonesiaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeriaAlgeria

AngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngolaAngola

BotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswanaBotswana LibyaLibyaLibyaLibyaLibyaLibyaLibyaLibyaLibya

MoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMoroccoMorocco


SudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudanSudan

TunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaTunisiaAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijanAzerbaijan

KazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstanKazakhstan

RussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussiaRussia

ChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChinaChina

4050

6070

8090

Inst

itutio

nal Q

ualit

y


Primary Commodity Exporters

USAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSAUSA

NorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorway

EcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuadorEcuador

MexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexicoMexico

VenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuelaVenezuela

BahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrainBahrain



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4050

6070

8090

Inst

itutio

nal Q

ualit

y


Oil Producers

Source: Authors’calculation based on data from World Bank World DevelopmentIndicators (WDI), Political Risk Services Group, Penn World Table Version 8.0, andInternational Monetary Fund International Financial Statistics and World EconomicOutlook databases. These are cross-sectional averages over 1961-2013.

Impact of Negative Shocks for Kuwait

GIRFs based on Model A(a) Oil Revenue (ort) (b) Foreign Output (y ∗t )

GIRFs based on Model B(a) Oil Revenue (ort) (b) Foreign Output (y ∗t ) (c) Global Equity (eqt)

Impact of Negative Shocks for Kuwait II

GIRFs based on the Model with Public Sector GDP(a) Oil Revenue (ort) (b) Foreign Output (y ∗t ) (c) Global Equity (eqt)

GIRFs based on the Model with Private Sector GDP(a) Oil Revenue (ort) (b) Foreign Output (y ∗t ) (c) Global Equity (eqt)

QuestionsI What other measures can be taken to reduce these economies exposureto oil revenue volatility?

I Could differences in labor compensation (e.g. wages and pensions) andlabor legislation (e.g. job security) between private and public workersgenerate important loss in aggregate productivity of the GCC countries?

I What are the effects of an overpaid public sector on: (1) level of outputper capita, (2) productivity, and (3) government finances.

I What are the implications of oil revenues?

I does it crowd out non-oil tradable sector?I ...

I Improving the allocation of resources might have potentially very largeeffects in the long run, but is it in the interests of the ruling elite?

Motivation: Composition of GCC Labour Market 2012

ECONOMIC DIVERSIFICATION IN THE GCC

INTERNATIONAL MONETARY FUND 8

Figure 1. GCC: Economic Structure

Sources: United Nations Statistics Division; and country authorities.1 U.A.E. exports excludes re-exports.2 Kuwait data are 2011; U.A.E data are unavailable for publication.

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Hydrocarbon Dependence in the GCC, 2013

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Nationals: Public Nationals: Private

Expats: Public Expats: Private

Composition of GCC Labor Market, 2012 2

Source: IMF SDN (2014).

GCC Public Sector vs Private Sector Jobs

I According to IMF SDN (2014):I 7 million jobs were created in the GCC5, of which 5.4 millionwere in the private sector;

I 88% of new private sector jobs were filled by foreign workers(around 85% being low skilled);

I nationals on the other hand filled 70% of public sector jobs.

I This is going to be diffi cult to maintain: it is estimatedthat 1.2-1.6 million GCC nationals will join the labor force!

Motivation II: Cross-Country EvidenceTitle Introduction Model Quantitative Exercises Conclusion

Motivation: Cross-country evidence

Fact 1. A large proportion of the labor force works in the public

sector and there are important di�erences across countries.

Chapter 5 Employment in general government and public corporationsEmployment in general government and public corporationsVersion 1 - Last updated: 24-Jun-2011

2000 2008

Norway 29.5 29.3

Denmark 29.7 28.7

Sweden 27.7 26.2

Finland 22.2 22.9

France 21.8 21.9

Hungary 20.4 19.5

Estonia 17.3 18.7

Luxembourg 16.1 17.6

United Kingdom 16.8 17.4

Belgium 16.8 17.1

Canada 15.9 16.5

Israel 17.3 16.5

Australia 15.1 15.6

OECD32 15.2 15.0

Ireland 15.4 14.8

Slovenia 14.3 14.7

United States 14.8 14.6

Italy 15.3 14.3

Czech Republic 12.8 12.8

Spain 12.2 12.3

Portugal 13.6 12.1

Netherlands 12.7 12.0

Austria 13.5 11.4

Turkey 9.4 11.0

Slovak Republic 8.6 10.7

New Zealand 10.1 9.8

Poland 10.8 9.7

Switzerland 9.9 9.7

Germany 11.1 9.6

Chile 9.6 9.1

Mexico 10.9 8.8

Greece 6.8 7.9

Japan 7.7 6.7

Korea 5.7

Russian Federation 20.2

South Africa 8.9

Brazil 8.6

21.1 Employment in general government as a percentage of the labour force (2000 and 2008)

Japan: Employment is not classified according to SNA definition and are substituted by direct employment by central or sub-central governments.

Data for Iceland are missing.

Data for 2000 for Korea are missing and this country is not included in the average (OECD32).

Data for Australia, Chile and United States refer to the public sector (general government and public corporations)

Government at a Glance 2011 - © OECD 2011

Source: International Labour Organization (ILO), LABORSTA database. Data for Turkey are from the Ministry of Finance and the Turkish Statistical Institute. Data for Japan for employment are from the Establishment and Enterprise Census. Data for Korea were provided by government officials.

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Figure: Public sector employment as a share of total employment.Source: International Labour Organization (ILO), LABORSTA database.

Motivation III: Public-Private Wage Gap

I In most countries there exists a public-private wage gap.

I In some of these countries a large fraction of this wage gap isnot explained by differences in observed characteristics (e.g.,education and experience).

I Depalo et al. (2013) - Public-Private wage gap in Spain andPortugal is about 43 and 36 percent, respectively. In Portugalabout half of this gap is not explained by differences inobservable characteristics, while in Spain this same figure is2/3.

I For Britain, Postel-Vinay and Turon (2007) show that thereexists for similar workers a positive average public premiumboth in income flows and in the present discounted sum offuture income flows.

I According to IMF (2013), the average public sector wages inthe GCC are several times that of the private sector.

Motivation IV: Public-Private Pension Gap.I The pension system is also different between private andpublic workers.

I America: Public-sector workers can expect a pension linked totheir final salary; not a common practice in the private sector.

I Britain: Pensions in the public sector are based on thefinal-salary (defined-benefit plan) and the pension of privatesector workers rely on defined contribution schemes.

I Brazil has a very unequal pension system: General regime forprivate sector workers: Mandatory PAYG system which coversall private workers up to a ceiling of approximately US$ 1,800.Public sector regime: Workers can retire with full salary (ifthey are 65 years old & contributed for 35 years).

I In the GCC there are also substantial non-wage benefits.

Motivation V: Public-Private Institutional GapI The OECD (2011) report, Government at a Glance, showsthat many countries have labor legislation which translates inmore secured jobs in the public than in the private sector.

I Clark and Postel-Vinay (2009) construct indicators of theperception of job security for 12 European countries. Theyfind that after controlling for selection into job types, workersfeel most secure in public sector jobs and such jobs areperceived to be by and large insulated from labor marketfluctuations.

I In Brazil, civil servants are guarantee life tenure after threeyears probation period (there are no performance evaluationmechanisms, so rarely an employee is not awarded tenure).

I In general GCC public sector jobs are more secure and workinghours are substantially better.

GCC and Labor Productivity

I "Moreover, even with strong growth, average laborproductivity growth has been weak or negative and totalfactor productivity growth for the overall economy and for thenon-oil economy has been negative, with only Saudi Arabiaexperiencing slightly positive Total factor productivity (TFP)growth in the non-oil sector (IMF 2013).

I For Saudi Arabia: "employment is increasingly shifting towardsectors with relatively low productivity (for example,construction and non-government services)." (Fayad andRasmussen 2012)

Goal

I Construct a GE model of development with heterogeneousagents (labor productivity, managerial ability & wealth) andoccupational choices (workers, civil servants & entrepreneurs).

I Calibrate the model to one of the GCC countries (and maybecontrast with Norway).

I Pure counter-factual exercisesI Study the quantitative effects of public-private institutionaland earnings gaps on (mis)allocation and output.

I Study the effects of limiting government employment.I Study the effects of oil revenue (crowding out?).

Related Literature

I Occupational choice models of development: Lucas (1978),Banerjee and Newman (1993), Galor and Zeira (1993)

I Large and growing literature on misallocation anddevelopment (Restuccia and Rogerson (2013) provide anoverview)

I None of the articles in this review study the misallocationeffects of the public-private earnings and institutional gaps;

I Related to our work is Hsieh, Hurst, Klenow and Jones (2013).They investigate the aggregate productivity gains in the USthat can be attributed to decreases in labor marketdiscrimination towards African-Americans and women;

I Jaimovich and Rud (2013) study how an oversized publicsector can be an equilibrium outcome and the implications oneconomic performance. They use a static model and theanalysis is qualitative.

Hsieh and Klenow (2009), QJE: Findings

Hypothetical Gains from Equalizing Productivity (Hsiehand Klenow, 2009)

Task Ahead

I A large body of evidence shows that for many countries thestructure of wages and pensions and the labor law legislationare completely different for public and private employees.This is very much so for the GCC countries

I We have developed a framework to study the quantitativeimplications of a large public sector as well as the role of oilrevenue.

I We will illustrate that:I public-wage premium can generate important output losses.I differences in the pension system can also generate importantoutput losses.

I oil revenues can have an important effect on the incentivestructure.

I We will also look at different channels: shutting down theentrepreneurial sector etc.

Economy & Finance

Oil production, entrepreneurship, and the allocation of talent