This program is no longer run or housed at CID
Environment & Sustainable Development
Natural Resource Management
Sponsor: AVINA Foundation
Countries: Menorca, Spain; Galapagos, Ecuador; Coiba, Panama; Cayos Cochinos, Honduras
The world’s coastal areas are increasingly threatened by economic and demographic pressure, and fragile marine ecosystems are in decline around the globe. The dramatic collapse of fishing stocks and the disappearance of coral reefs are indicative of the precarious nature of these ecosystems, once considered endless cornucopias. Policy makers face profound challenges in forging a path of sustainable development in coastal areas.
In this project, we addressed the question of sustainable growth in coastal areas with a study of small-island regions, assessing their economic alternatives in the context of the social, institutional and political forces that constrain and shape the management options. We anticipated including in the study four sites where AVINA had aleady been working: Minorca in the Balearic Islands, the Galapagos in Ecuador, Coiba in Panama, and Cayos Cochinos in Honduras.
The economic composition of small islands is tremendously diverse, ranging from the commerce and service-based economies of Hong Kong and Singapore, to the subsistence fishing economies on numerous islands around the globe. The basis for economic activity varies according to the links between coastal and inland areas. The growth of large cities around coastal ports illustrates how ease of transportation and access may be the dominant factor in shaping the economy of coastal areas. Housing and property development along coastal areas generally stems from the population pressure that accompanies trade and commerce in coastal areas. The principal pressures on coastal regions in this case are the by-products of economic activity: erosion and siltation, destruction of marine habitats for development, and pollution of coastal waters. Marine areas adjacent to agricultural land are similarly exploited indirectly, becoming the sinks for the pollution from agricultural runoff. In coastal areas, large manufacturing and commerce industries are rare. Most island and coastal areas are characterized by a heavy dependence on natural resources; in particular, tourism and fisheries are the central economic activities in most marine areas.
The challenges for fostering sustainable development in coastal areas are significant. Increasing evidence suggests that problems that arise through natural resource exploitation are mediated through well-functioning institutions, which are now recognized as a cornerstone of economic development. The rule of law, definition and enforcement of property rights, intermediation of disputes, and shaping of public agencies are just a few of the areas where well-developed institutions are crucial to encouraging private sector growth.
While the symptoms of distress are easily apparent over-fishing, pollution, land degradation and soil erosion, to name a few of the potential problems - we believe that these problems all stem from three fundamental factors: 1) poorly defined property rights and externalities that result from market and institutional failures; 2) the preponderance of public goods in the coastal zone; 3) the variability in yields and vulnerability of coastal resources to natural and man-made impacts. All of these factors are inextricably linked with one another, and amplify the institutional requirements and challenges in marine and coastal areas.
Uncertainty and variability plague the coastal zone. Tourism markets are notoriously volatile, shifting with economic and political crises, whether domestically, regionally or globally. Large natural fluctuations in fish populations arise from natural phenomenon such as El Nino. Managing natural resources in a context of economic booms and busts adds further weight to argument for strong institutions to balance and manage coastal economic systems.
Sustainable development requires effective responses to all of these problems and uncertainties. The complexity of the natural and economic systems of the coastal zones is not matched by the. The notion of integrated coastal zone management (ICZM) arose as a potential solution, whereby new institutions would reflect management needs. While there have been significant advances and successes, in general, the demands of implementing this plan are far greater than the resources and political will available for the task. Of course, institutions require time and resources to develop and operate. Societies must balance the cost of additional intervention with the benefits of enhanced management.
For this project, we carried out a comparative study of the four island economies, examining economic structures and management regimes. The comparative study of markedly different islands provided a rich environment for analyzing trends and diagnosing potential solutions. The first stages relied on studies that assessed possible economic strategies available for these coastal economies and that describe the operation of governance structures. This component was carried out in close collaboration with local institutions and researchers. Sustainability, competitiveness and equity were all important considerations in the economic strategies identified in this stage.
In the second stage, using the information garnered in the first stage, we drew on experiences from around the world in searching for creative and low cost solutions to these development issues. The wealth of knowledge to draw upon ranged from local community responses to central government initiatives.
The third stage consisted of meetings and workshops to describe potential economic and management strategies to local stakeholders, as well as regional and national governments. The most important and challenging step, the third stage required selling new ideas and educating stakeholders on the potential costs and benefits of alternative visions, in addition to assessing the hard constraints on reforming economic strategies and management regimes.
Sponsor: AVINA Foundation
Countries: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Mexico, Paraguay, Peru, Suriname, Uruguay and Venezuela
Data on stocks, extraction rates, production costs and prices for natural resources are scattered in many sources and some is not available at all because it is proprietary to private firms. This lack of complete information inhibits research efforts. ESD has devoted considerable effort to collecting and collating scattered data from a variety of sources into a consistent database (1950–2000) for all the major countries in Latin America. This extensive database (over 50,000 entries) covers oil and natural gas, mineral resources and forest resources. It contains data on resource stocks, rates of resource extraction (and export), cost, resource commodity prices, etc., and forms a valuable resource for all of CID’s work in support of sustainable development.
The natural resource database consists of 21 Excel workbooks. The data were compiled for the purpose of calculating resource rents, which in turn were used to estimate changes in the values of natural resource stocks. They pertain to three categories of natural resources: fossil fuels, metal ores and roundwood.
Metal Ores (228 KB zipfile containing Excel data files)
Roundwood (177 KB zipfile containing Excel data files)
Fossil Fuels (140 KB zipfile containing Excel data files)
Part of the Andean Competitiveness Project (ACP)
Project Summary & Conclusions
Natural resources exert a profound influence on the economies, institutions and politics of the Andean region, and will continue to shape the prospects and direction of development in the region for many years into the future. The debate over whether this is a blessing or a curse will continue. Although this debate often strays into varying degrees of abstraction, this aspect of the development of the Andean region is too important to overlook. There are unquestionably advantages and disadvantages associated with natural resource abundance. In general, these potential costs and benefits are easy to identify, yet much more difficult to quantify.
For this study we looked into the issue of natural resource dependence in Bolivia and Venezuela. The difference between these two countries provides a broad range of experiences from the spectrum of natural resource dependence. In Venezuela, the fossil fuel sector comprises approximately 25% of GDP, 60% of government revenue and 70% of exports, dominating the economy like few others in the world. The long bittersweet relationship of Venezuela with petroleum has left policy makers with some profound challenges and difficult political trade-offs in their attempts to revitalize the Venezuelan economy. With its rising exports of natural gas, Bolivia is embarking on its second major episode of natural resource reliance in recent times, after the mining booms of the previous several decades.
The challenge for integrating non-renewable resource extraction into a strategy of vibrant economic growth is well studied. When seen in a positive light, the challenge has been portrayed as 'sowing the oil', putting fossil fuel revenues to work to impel growth in other sectors of the economy and converting natural capital into physical and human capital in an effort to secure a solid foundation for long-term sustainable growth. The now legendarily poor economic performance of natural resource rich countries has put into question the benefits of natural resource wealth. In this gloomier light, we are left to ponder the grimmer task of promoting growth in other sectors of the economy despite the existence of the natural resource sector.
We address three issues related to natural resource dependence, Dutch disease, volatility and income distribution, comparing and contrasting these aspects in Bolivia and Venezuela. To address these complex issues we constructed computable general equilibrium (CGE) models for Bolivia and Venezuela. The CGE models were based upon social accounting matrices (SAM) for each country. The advantage of the CGE modeling approach is its strength in assessing intersectoral linkages, both in production and consumption, including the impact of relative price shifts and trade, and in mapping income flows. We ran these models in a recursively dynamic fashion to address capital accumulation and various price paths for fossil fuels.
The first question we addressed in this project was that of Dutch disease, where strong exports of natural resources leads to an appreciation of the real exchange rate, thus hurting other export and import-competing sectors of the economy. Dutch disease resulting from natural resource revenues is not necessarily a problem as producers can adjust to the new economic context and the economy as a whole can put to use the resource rents into productive ends. Our analysis demonstrated how Bolivia and Venezuela should benefit from a rise in fossil fuel sales, even if a large portion of the resource rents is channeled into consumption or squandered in inefficient projects.
A potential problem, closely related to Dutch disease, that may arise is where the manufacturing export sector – which is hurt by the appreciated real exchange rate – provides a basis for strong productivity growth. In this case, there are externalities associated with Dutch disease that will reduce growth. Based on our simulations for Bolivia and Venezuela, we find no evidence that this externality is enough to explain poor growth in natural resource rich countries, even where there is a large disparity in total productivity growth between the tradable and non-tradable sectors.
The process of adjusting to Dutch disease is complicated, however, by the volatility that results from a reliance on international fossil fuel markets. The results of our models confirm the serious challenge that policy makers face. In Venezuela, the elasticity of real exchange rate in respect to the international price of oil is in the range of 0.5 to 0.8. In Bolivia, the impact is less severe with an elasticity of approximately 0.1, but still result in substantial shifts in the composition of the economy. This volatility translates through relative price changes to all parts of the economy. These price shifts present numerous problems for producers, complicating planning and investment decisions and entailing short-term debt payment and cash flow problems that put otherwise viable enterprises out of business.
Fiscal policy and foreign borrowing interact with Dutch disease, either easing or exacerbating the relative prices changes, depending on the policy choices made by governments. Simulations also confirm the deleterious impact of pro-cyclical government borrowing and fiscal policy. Using future petroleum income as a guarantee for expanding international borrowing exacerbates the swings in the real exchange rate that accompany volatility in international oil prices. Government revenues derived from the taxation of profits is also very sensitive to fuel prices. This endangers the efficiency of government spending, makes it difficult to maintain prior investments, and sets the stage for meeting unsustainably high current expenditures with deficit spending.
Using the modeling framework developed for this project, we also assessed the performance of various types of stabilization funds in reducing volatility in Bolivia and Venezuela, and the cost of maintaining such a fund. For Bolivia, which does not currently have such a fund, we show that the aggregate costs of operating a fund are quite small, on the order of 0.1% of GDP per year. This is very small compared to the benefits that are expected to result from the reduced volatility. We quantified the reductions in volatility, both in the real exchange rate and in government revenues and for a variety of contexts, and find them to be substantial. As a result of our work, we recommended the creation of a stabilization fund for Bolivia and present a framework for the fund. For Venezuela, we assessed the impact of the existing rules for the fund and compare its performance against other configurations. Again, we found that the cost of operating the fund is quite small and conclude that maintaining a fund is worthwhile. The results of the study demonstrated how the contingent rules currently in place may not reduce volatility as expected. We proposed and tested alternative fund rules that we believed would perform better in achieving the stabilization objectives of the fund.
The distributional impacts of natural resource exports are an important empirical question that is well suited for analysis in a general equilibrium framework. In Bolivia, the results indicate that a natural resource boom can raise incomes for the all the major household categories, contributing both to economic growth and poverty alleviation. However, the wealthier segments of society do benefit relatively more, adding to income inequality. This disparity becomes more pronounced in less optimistic scenarios where a portion of fossil fuel revenues are allocated to inefficient investments. In this case, the poorest segments of Bolivian society may experience declining real wages as a result of the natural gas boom. This analysis echoes the historical record observed in Venezuela where all segments of society generally benefit in boom periods, but the prominence of petroleum appears to contribute to greater inequality.
A defining aspect of natural resource economies is the increasing share of resource rents as a component of national income, much of which is channeled through the government. This increases the consequence of government activities with profound implications for distributional policy and poverty alleviation. We concluded that a combination of fiscal discipline, a stabilization fund, which reinforces fiscal discipline, and rigorous monitoring and appraisal of public investments can improve the efficiency and effectiveness of government expenditures, contributing to human capital formation and stronger growth.
Andersen, Lykke E. and Robert Faris. "Natural Gas and Income Distribution in Bolivia." Prepared for the Andean Competitiveness Project. (2002)
Andersen, Lykke E. and Robert Faris. "Reducing volatility due to Natural Gas Exports: Is the answer a Stabilization Fund?" Prepared for the Andean Competitiveness Project. (2002)
Clemente, Lino, Robert Faris and Alejandro Puente. "Natural Resource Dependence, Volatility and Economic Performance in Venezuela: the Role of a Stabilization Fund." Prepared for the Andean Competitiveness Project. (2002)