Never Mind Development, here's Nirvana

The biggest cash transfer programme in the world continues apace, as subsidies for fuel in India which used to be paid to fuel companies are being redirected into consumer's bank accounts.

Continuing the push to extending coverage under the Aadhaar program, targeting enrollment for 1 billion Indians; as of early February, 757 million Indians had been bio-identified and 139 [million] Aadhaar linked bank accounts created;

...

The heady prospect for the Indian economy is that, with strong investments in state capacity, that Nirvana today seems within reach. It will be a Nirvana for two reasons: the poor will be protected and provided for; and many prices in India will be liberated to perform their role of efficiently allocating resources in the economy and boosting long run growth.

From India's recently published 2014-2015 Economic Survey led by Arvind Subramanian, the government's Chief Economic Advisor (and on leave from CGD) HT: Vinayak Uppal

So what exactly just happened to the economy of South Sudan?

Some analysis from the Sudd Institute: (via John Ashworth)

Barely three months after the oil shutdown, the whole nation started to feel the resultant pinch of economic hardships. Salaries of civil servants were no longer coming regularly and the monthly allowances that used to cushion up the low salaries of the civil servants were discontinued. The dollar appreciated against the South Sudanese pounds and was in unprecedented shortage, forcing the market into an abrupt shock; prices rose; and the purchasing power weakened. As well, violent crimes increased, with armed robbery becoming the order of the day. News about common citizens and business people being shot dead injured, and/or robbed were making headlines on almost daily basis. In a sense, these consequences are attributable to the economic hardships facing the nation.

The State of the Game between Juba and Khartoum

I continue to be fascinated by the nature of the strategic interaction between Juba and Khartoum, without really pretending to understand it very well. As it turns out, Juba's strategy seems to be push ahead with a Kenya pipeline whilst resuming export through North Sudan in the meantime, to give them an alternative option. So what is Khartoum's optimal response to such a move?

A friend suggests that Khartoum's strategy is to continue to create chaos in Jonglei (South Sudan) in order to disrupt future exploration, knowing that a Kenyan pipeline would not be economically viable without further discoveries.

I thought I'd also email someone who is an actual game theory expert, who makes the interesting point that - a little counter-intuitively - it may actually be in Khartoum's interest to encourage the development of a Kenya pipeline, as a way of credibly committing themselves to continued future cooperation on mutually favourable terms.

Paraphrasing the words of the great philosopher Sting, “If Someone Does Not Trust You, Set Them Free“.

The oil deal

I haven't read any coverage yet, so I've just had a quick skim of the actual agreement (available here, HT: Nicki Kindersley). 

As a reminder, pre-agreement North Sudan wanted to charge half of the value of the oil, or around $36 a barrel. South Sudan wanted to pay $1 a barrel. 

It looks like there is a 

- processing fee - $1.60 per barrel

- transportation fee - $8.40 per barrel for one oilfield and $6.50 for the other

- transit fee - $1 per barrel

so a total of $11 or $9.10

plus a Transitional Financial Arrangement (payoff) of an additional $15 per barrel until a total of $3.028 billion has been paid (at production of 180,000 barrels per day this would take just over 3 years).

So - whilst this seems like a good deal for North Sudan in the short run and a good deal for South Sudan in the long run, my main concern is the hold-up problem. What is stopping North Sudan ripping up the agreement in 3 years, demanding a higher cut, and just confiscating oil (again). Here is Tony Venables from Oxford in a paper on these issues;

Even if the purchaser and investor entered an agreement before the investment is undertaken, ex post the purchaser may act opportunistically, breaking the agreement and only offering a lower price ... 

The hold-up problem between states is radically more severe than that within countries because the whole domain of international law is fragile: essentially, the concept of national sovereignty constitutes a barrier to the enforcement of any contract entered into by states.

Thoughts?

Sudan Links

Or rather, John Asworth's Sudan links:

1. An important statement from the UN recognising that the basis for demarcating the border is the 1956 border, not the current de facto border that Khartoum has been pushing as a basis for negotiation.

2. "Has the AU become a pawn in the hands of the Khartoum regime?" A question apparently on the lips of many South Sudanese.

3. An excellent open letter from South Sudanese to Salva Kiir on corruption. Really well written. Members of the international community concerned about corruption might want to start here.

4. The Budget Speech. Including details on financing plans. Of a total SSP 6.4 billion budget, 10% is expected to come from domestic non-oil revenues, 15% from reserves, 15% from domestic borrowing, and the remaining 60% from yet to be negotiated international loans and oil/mineral concessions. So, er, good luck with that (and let's really hope that Khartoum will be pressured into making a fair deal on oil soon).

Fuel protests coming in Khartoum?

The Sudanese Minister of Finance Ali Mahmoud told parliamentarians on Wednesday that the austerity measures the government is currently applying are a reflection of the level of “bankruptcy” in state coffers.

In a related context, a Sudanese political analyst has predicted that the ending of fuel subsidies will almost certainly lead to a popular uprising. 

According to Omer Abdel Aziz, a professor of political sciences, there is a likelihood of 95 percent that the decision will spark a popular uprising when it comes into effect. 

Sudanese opposition parties have already vowed to protest against the ending of fuel subsidies.

Sudan Tribune

The size of the fuel subsidy about to be cut in Sudan is $2 billion a year. To put that in context, with a population of about 35 million people, the subsidy is roughly the same size as the one the government tried to cut recently in Nigeria, which was $8 billion a year across 158 million people. The abrupt removal of the subsidy in Nigeria led to widespread protest.

I really don't think it is at all clear that the Southern leadership is facing any more popular pressure than the Northern leadership over the economic implications of the oil shutdown. Hopefully a demilitarized border zone would allow an oil deal to be made.

Also told that a deal on demilitarized border zone not out of question at next round of talks, starting next week #Sudan
— Alan Boswell (@alanboswell) June 15, 2025

South Sudan oil revenue shutdown starting to bite

Here's the latest inflation figures for South Sudan from last Friday - prices jumped 30% between April and May.

I'd be interested to see the figures for Northern Sudan, but last time I checked the Northern stats agency had a much longer delay on releases.

I don't think its necessarily clear yet that the South is feeling the pressure any more than the North (though I'm open to persuasion). In any case, I'm still hopeful that as both sides gradually run out of options (boosting tiny non-oil collections, begging corrupt elites to give back the money they stole...) they will be forced to make that deal and get production going again.

Oh hey I'm on the radio

Talking to Daniel Finnan about South Sudan for Radio France International (English), to be broadcast ALL ACROSS AFRICA tomorrow. With no preparation, and this was my first radio interview, so I hope I didn't say anything too stupid. Short version: I'm still hopelessly optimistic about a deal still being made on the oil pipeline fee.



Listening to your own voice on tape sounds really weird. 

Hold on to your hats

So Juba has decided to stop oil production in South Sudan, in protest of Khartoum theft. Pre-independence, revenues from the South were split 50:50, and Khartoum have basically been trying to continue that by imposing arbitrary fees, asking for up to $30 per barrel (Juba claims that normal prices for pipeline transit fees in other countries are around $1 per barrel).

So now we have a war of attrition. Which side can afford to last out the longest before making a compromise? Who has the largest cash reserves relative to their recurrent spending demands? The numbers are probably not in the public domain, but Khartoum does at least have some other sources of revenue. Revenues in Juba must basically be zero now. But then Juba does probably have a more sympathetic population who seem to be behind the decision, and therefore with perhaps a greater appetite for dramatic spending cuts than citizens in Khartoum. Good luck Juba, and I pray this ends peacefully.

Do chime in if you have any insights.

Update: Alex de Waal notes that if the pipes are shut, it will take 6 months to get oil flowing again. The last chance to come to a deal is apparently Friday when Bashir and Kiir meet in Addis Ababa. 

Which countries are most vulnerable to the resource curse?

A new report by my colleague Dan Haglund suggests it is;

Non-fuel, mineral-dependent countries:

Bolivia, Burkino Faso, the DRC, Ghana, Guyana, Laos, Mali, Mauritania, Mongolia, Papua New Guinea, Tanzania and Zambia.

Fuel-dependent countries: Algeria, Angola, Azerbaijan, Cameroon, Chad, Cote d’Ivoire, Iran, Iraq, Nigeria, Sudan, Timor-Leste and Yemen.

See the full report here or coverage in the FT here.

Blessing or curse? The rise of mineral dependence among low- and middle-income countries 

The Economics of the Nigerian Fuel Subsidy

Are pretty simple. Fuel subsidies are a terrible way of transferring resources to the poor. Economists have rightly been calling for their removal for ages.

But maybe just maybe, rather than heeding the Economist magazine's call to "End them at once!", it might have been a good idea to think about the adjustment costs that might exist to an overnight doubling of petrol costs, and also to consider another way of transferring resources directly to the poor in which they might actually notice. Putting those savings straight back into the government coffers for some kind of nebulous infrastructure spending just doesn't cut it.

The Roman Catholic archbishop of Abuja and former head of the Christian Association of Nigeria observes that the subsidy is a tiny resource transfer to the Nigerian people, who otherwise receive little or nothing from the current political economy. It is, therefore, morally justified, “no matter what the World Bank says.” (via John Campbell)

Oh economics, and your Kaldor-Hicks efficiency...

Revolution and the Resource Curse in the Middle East

Chris Blattman quotes Arvind Subramanian (writing in the FT)

Even if the people of Libya and Bahrain join those of Egypt and Tunisia in overcoming their cursed political systems, the economic manifestations of their rent curses will remain.

The case for the resource curse certainly sounds persuasive, but I just don’t think the evidence is really there any more, with more and more recent studies debunking it. As Charles Kenny writes in Foreign Policy,

The curse is the type of counterintuitive idea that makes for a great newspaper op-ed. Nonetheless, the curse is also the kind of counterintuitive idea where intuition may have been right to begin with.

To the extent that it does exist, the curse is not destiny, and movement towards more open societies is the best way of fighting it.

Hold tight Bahrain, hold tight Libya.

UPDATE: I found the link to some of the main research disputing the claims

Wisdom on Oil in Sudan

The excellent John Ashworth (who should really start a proper website) writes:

Oil has the potential to destabilise the two new countries, North and South Sudan. The economies of both countries rely heavily on oil revenue; the South more so than the North, but nevertheless it is a significant percentage of the North's national income. If the North does not receive adequate oil revenue, its economy will suffer, and it is not in the interests of the South to have a northern neighbour with a collapsing economy. Worse still, if the North were to retaliate by refusing to allow southern oil to be exported via its pipeline, the South would have virtually no income, and both countries could potentially become bankrupt and unstable.

Thus at first glance Pagan Amum's statement that there will be no sharing of oil revenue ("The notion of sharing wealth will not be there. There is no continuation, whether 50 percent or anything") gives cause for concern. It appears to contradict statements by SPLM last year that there would be a revenue-sharing agreement.

However there is room for manoeuvre when he continues, "There’s going to be an agreement on the South continuing exporting its oil through the pipeline in Northern Sudan and to Port Sudan, and the South will be paying pipeline fees for transportation... We may be paying a transit fee". Southerners may not like the idea of "sharing" their wealth with a separate country, but may find it easier to accept a simple commercial transaction which is a normal process elsewhere in the world - to pay for the use of the pipeline and also to pay a transit fee. These "commercial" fees would of course have to add up to an amount which Khartoum finds acceptable, so after some hard bargaining it would be no surprise if it came close to the existing 50% in real terms. One area where the South will benefit financially is that they will now control the oil revenue; it is widely believed that Khartoum is currently giving them less than their true 50% share.

While searching for new export routes will definitely benefit the South (especially if routes can be found which are both economically and practically feasible within a reasonable time frame), it would not be beneficial for the North, and could thus be a destabilising factor in relations between the two newly independent countries.

Thankfully I don’t think alternative routes are at all economically viable, a new pipeline through Kenya would be prohibitively expensive. But don’t let that stop Southern politicians dangling Kenya as a bargaining tool.

7 ways to overcome the natural resource curse

A new survey article by Jeffrey Frankel at Harvard concludes with a list of promising ideas for overcoming the natural resource curse and achieve good economic performance.

1. Indexation of oil contracts - Contracts between oil companies and governments could easily (but usually don’t) have explicit clauses to deal with global price volatility - sharing the downside and upside risk.

2. Hedging of export proceeds - Simply buy insurance against low oil prices, like the Government of Mexico has done. Easy.

3. Denomination of debt in terms of oil - i.e. promise to repay a quantity of oil rather than a dollar amount. This insures the borrowing government and transfers the price-risk to the lender.

4. Chile-style fiscal rules - Chile managed to save its copper boom and spend its way through the global recession by having an independent fiscal panel make assessments of the medium-term price and output gap - and tell the government how much they were allowed to spend.

5. A monetary target that emphasizes product prices - If the Central Bank has greater political independence than government coffers, monetary policy could be geared towards building up higher-than-otherwise-desirable stocks of foreign currency reserves - in order to ensure the savings aren’t raided.

6. Transparent commodity funds - The challenge is in the transparent part.

7. Lump-sum distribution - Last but not least, my favourite. Just give people the money.

Scott Adams on BP

As I mentioned in an earlier blog, I bought some BP stock recently because I liked the odds that the top engineers and scientists in the solar system, with unlimited funding, presumably somewhat freed from management meddling, could plug a hole. And yes, I averaged down.

I also assumed that the liberal media's coverage of the oil damage would depress the stock more than necessary. It's a catastrophe, no doubt, but even catastrophes have levels. I'm betting the financial damage will be very, very, very bad and not very, very, very, very bad.

This is also a test of my theory that you should buy stocks in the companies that you hate the most. In general, you hate the companies that have the most power. And BP is the frickin' Death Star of companies. They're in the process of destroying an entire region of the world and there's still no talk of cutting their next dividend. I admire them in the same way I admire the work ethic of serial killers. There's an undeniable awesomeness about BP. I hate BP, but I still want to have their baby.

Note: Do not take stock advice from cartoonists who want to have babies with oil companies.

on dilbert.com

A change.org campaign for oil transparency

Dear rovingbandit.com,

In 2008, Chevron paid more than $40 billion to the governments of countries around the world - most of it entirely in secret.

Chevron drills for oil in places where millions of families struggle on less than $1 a day. That $40 billion could have supported schools, health care and food programs - so where did it go?

Chevron knows exactly how much it paid to each country. But they won't say. And without any information on these secret payments, poor communities can't demand their fair share - to send their children to school, create jobs and escape poverty and hunger.

Tell Chevron to open the books on its secret payments so that the world can follow the money and help put it toward real development.

In less than a week, Chevron will hold its annual shareholder meeting. This is our moment to demand that Chevron finally come clean. Greater transparency and accountability will stabilize countries and help Chevron in the long run.

Chevron won't even provide a basic accounting of how much money goes to each country - so there's no transparency, no accountability, and no way for poor people to call for their fair share.

That means people whose lands are yielding up billions of dollars in oil revenues still face chronic hunger and poverty. It means some officials remain free to enrich themselves with no public oversight. This makes it hard for citizens and watchdog groups to follow the money and keep officials honest.

Our partner, Oxfam America, has met with Chevron multiple times, but they keep refusing to disclose. So they have filed a shareholder proposal for Chevron's May 26th annual meeting, by which shareholders can exercise their rights and ask Chevron to open the books on its secret payments - and in partnership with Oxfam America we're also making it easy for people like you to put direct pressure on Chevron.

Other oil and mining companies disclose this information, and Chevron should join them - especially since more transparency will actually help Chevron in the long run by stabilizing countries. If the company agrees to change its policies, it could be a watershed moment across the oil, gas, and mining industries.

Tell Chevron to stop the back-room deals that open the door to corruption and keep people in poverty.

Chevron advertises itself as a protector of the planet. So why isn't it agreeing to let the public see what it pays to foreign governments?

With your help, we can pressure Chevron to make a real change in its policies - and help millions of poor people in the process. Please share this alert with your friends and family.

Thank you,

- The Change.org team in partnership with Oxfam America

Whither the Resource Curse?

The backlash is coming!

Apparently, economists are now discovering that getting more money doesn’t always make you poorer.

Who woulda thought it!

What we seem to have experienced over the past few years is a massive smart-arsed-economist Freakonomics-syle “counterintuitive finding”-obsession FAIL.

Yes, free money accruing to governments (resources or aid) probably doesn’t do much for their accountability, but does this governance effect really outweigh the free-money effect? Are the institutional effects of free-money so damaging that free money makes countries poorer? Or are we just trying too hard to be clever and “counterintuitive.”?

(As a final aside - the resource/aid/free-money curse only exist when the money is flowing to the government. Giving oil revenues or aid directly to poor people rather than to their governments is obviously logistically more difficult, but ameliorates this problem entirely).

The Challenges of Budgeting in Oil-dependent Economies