Aid to Poor Resource Exporting Countries: Which Role Should be Played by Resource Taxation? Presenter: Ruxanda BERLINSCHI, TSE Co-Author: Julien Daubanes, ETH Zurich RES PhD Meeting, London, January 17th -18th 2009

Introduction Heterogenous Oil Endowments Oil Producers: Low or Middle Income Countries per capita GDP in OPEC: $3685 in 2007 Large Inequality levels (Schubert 2002) rich elite vs large populations of poor people Nigeria: 70%<1$/day Oil Consumers: High Income Countries 2006, OECD>58% of world oil consumption

Introduction Heterogenous Oil Taxes Oil Producers: low or negative taxes Venezuela, Iran: oil subsidised Oil Consumers: high taxes G7 taxes=45% of barrel price Bacon (2001): statistically significant difference in taxes between N, S Example: price of Diesel in Nov 2006 (US$ per litter) UK: 1.73 ; France:1.33 Nigeria: 0.66, Venezuela=0.02 =>Distortions in the production of final goods Tax Producer Price Tax Producer Price

Introduction Opposite Revenue Flows Tax Revenues South => North , G7 received from oil taxes $2585 billion 6% of OECD fiscal revenues: from oil taxation Foreign Aid North => South: 2006, the G7 disbursed: Nigeria: $10 billion Algeria: $114 million Ecuador: $94 million Venezuela: $25 million

Contribution Policy proposal that reduces distortions SR: oil revenues (high) SP: labor revenues (low)+aid N: labor revenues (high)+revenues from oil tax-aid Contract between N, SR North Decreases Oil Tax South redistributes to the poor Lower need of Foreign Aid N SR SP Foreign Aid Oil Rents

Literature: Development Economics Foreign Aid Motivations (Alesina and Dollar 2000, Berthelemy 2006) Altruistic Poverty reduction (Collier and Dollar 2002) Growth (Burnside and Dollar 2000, Easterly 2003) Policies (Svensson 2003, Easterly 2005, Kilby 2005) Selfish Political (Alesina and Dollar 2000) Economic (Villanger 2003) Security (Azam and Thelen 2007) This paper: link Aid to Oil Taxation as redistribution instruments for altruitic North

Literature: Resource Economics Exhaustible Resource Taxation Motivations Rent Transfer resource holders => fiscal authorities (Bergstrom 1982) Resource poor country overtaxes (Brander and Djajic 1983) Even with negative externality (Daubanes and Grimaud 2006) This paper: intra national heterogeneity +international altruism

Model: Production Final good produced with Labor and Oil Labor productivity Oil

Model: Markets Model: Markets World Competitive Markets: o Oil o Final Good o Financial Assets Local Competitive Markets: o Labor

The Model: Agents 3 groups: N, SP, SR:

Governments North: represents N o Foreign Aid (lump sum) o Oil Tax (ad valorem) South: represents SR o Oil Tax (ad valorem)

Timing 1. Policies 2. Decentralized Equilibrium 3. Transfers and Consumption Backward Induction

Equilibrium: Firms Final Sector: Extraction Sector:

Equilibrium: Agents

Relative Tax rates affect competitiveness

Absolute tax rates affect revenue split

Revenues as functions of the oil taxes

Nash Equilibrium Policies North : s.t. South :

Nash Equilibrium Policies

Contract Between N, SR on North solves: s.t. participation constraint of SR: Participation constraint binding: internalized

Policies Comparison

Welfare with the Contract N SP SR

Issues Absent from the Model Externalities Only Tax Dynamics matters Markets for Polluting rights Credibility Also applies to Aid Visibility Aid more visible Targeting Easier with Aid

Conclusion Contract improves efficiency and welfare Benefits vs implementation costs?