The Sustainability of Non-renewable Resources Use at Regional Level: A Case Study on Allocation of Oil Royalties

Mauro Viccaro, Benedetto Rocchi, Mario Cozzi, and Severino Romano

Abstract The aim of this work was to assess the socioeconomic impact derived from the oil royalty allocation on regional development, using a multi-sector model based on a Social Accounting Matrix (SAM), appropriately implemented for Basilicata region (Italy), the typical case of a region lagging behind in a developed economy. Our focus was on how political decisions have influenced the economic development of the region and how a different set of choices can be more effective in transforming public receipts into long-term benefits. Results show clearly that in the past the allocation of oil royalties to the regional Government (as a whole 990 million euros) generated a much lower impact than expected, in terms of economic growth and employment. Given the structure of the regional economy, much of the impact of investments and running expenses financed by royalties has maybe been lost outside the regional boundaries. A greater effect on income and employment will not be possible unless resources are redirected towards greater competitiveness of the regional economic system. Better balancing the use of royalties between social expenditure and production investments would probably be the first step towards a strategy of sustainable development of the regional economy.

Introduction

The countries and regions that use a new natural resource, such as an oil deposit, usually see an increase in their financial resources due to the benefits (both direct and indirect) deriving from oil drilling. Their ability in managing these additional resources in a sustainable way influences the future of their entire economy. According to the big push theory (Rosenstein-Rodan 1943; Hirschman 1958), the new source of income should lead to increase public investments, promote growth and result in long-term economic development. However, empirical evidence reveals a negative correlation between the abundance of resources and economic growth, known as natural resource curse (Sachs and Warner 2001). Different studies, concerning not only economic but also political and social aspects, have provided different possible explanations of this phenomenon (Larsen 2006; Torvik 2009; Van der Ploeg 2011). A preliminary economic interpretation of the negative relation between the dependence on the exploitation of natural resources and economic growth is known as the Dutch disease (Torvik 2009; Van der Ploeg 2011). This expression refers to the decline of production activities observed in the Netherlands after a large natural gas deposit was discovered at the end of the 1950s. According to this model, the big inflows of foreign capitals resulting from the export of resources overvalue the actual exchange rate, thus reducing capital and labour for agricultural and manufacturing activities. As a consequence, production costs increase, while the competitiveness and exports of the sectors unrelated to the resource decrease, with a depressing effect on the growth of the whole economy. Two more aspects seem to be the cause of the natural resource curse: (1) the implementation of non-sustainable macroeconomic policies by Governments, due to the abundance of resources (Atkinsons and Hamilton 2003), and (2) the intrinsic volatility of the international market of non-renewable resources (Van der Ploeg 2011).

The planning and implementation of effective policies to contrast this process is a challenge for Governments, not an easy one, especially in developing countries; typical examples are Chad and Brazil where, despite the huge financial resources derived from oil royalties, the living standard of populations has not improved accordingly (Keenan 2005; Pegg 2005; Caselli and Michaels 2013).

Different studies suggest that the appropriate policy to prevent the curse in developing countries is based on the allocation of the financial resources derived from oil-related activities towards policies aimed at promoting productivity, competitiveness and well-being improvement (Levy 2006; Breisenger et al. 2010; Rocchi et al. 2015).

It is worth noting that developing countries are not the unique countries involved by this curse, which may also influence, to a different extent, the regions lagging behind in developed economies that start to exploit a new natural resource, such as oil fields (Rocchi et al. 2015). The negative impact in these cases seems to be mostly due to the following: (1) the opening of the regional economy would result in the loss of most effects derived from the expenditure of royalties out of the regional boundaries; (2) the sudden increase in the export base may conceal the lack of competitiveness of the regional non-oil exporting sectors in relation to the rest of the country, reducing the investments required to improve their competitiveness; (3) part of oil royalties are used in short-term local redistribution policies aimed at reducing the negative effect of the regional economic gap (including unemployment and poverty), but are ineffective in improving the competitiveness of the regional system in the long run. Lastly, if the allocation of these financial resources is not implemented with due appropriateness and transparency, the entailed risks are bribery or rent-seeking behaviours.

To prevent these adverse effects and favour the highest possible outfalls on the areas involved by financial investments based on the use of royalties, the priority for decision-makers is to better focus on the strategic objectives to promote long-term sustainable socioeconomic development, while compensating for the deployment in environmental assets resulting from the exploitation of a non-renewable resource.

The possibility of setting out regional policies, assessing the impact on the main socioeconomic indicators at the local level and monitoring the effectiveness over time is largely dependent on the availability of an adequate territorial information system that should be complete, relevant and coherent both internally and with the national framework (Carbonaro et al. 2001). Different authors (Stone 1961; Seers 1970, 1972) maintain that the most suitable statistical tool, in terms of information bases and economic model, is the Social Accounting Matrix (SAM). As a matter of fact, it has a regional dimension enabling to analyse different economic and fiscal policies within the same country, notably when large internal differences coexist (Thorbecke 1985).

The aim of this work is to assess the socioeconomic impact derived from the allocation of oil royalties on the regional development, using a multi-sector model based on a two-region SAM, specially tailored to Basilicata region, a typical example of a region lagging behind in a developed economy. After describing— via different macroeconomic indicators—the regional economic system (see Sect. 2.1) and the methodology applied to perform the impact analysis based on SAM multipliers (see Sect. 2.2), the allocation of oil royalties is examined from 1997 to 2013, making it possible to implement the model (see Sect. 2.2.1). Results are shown in Sect. 3, and conclusive remarks (see Sect. 4) close the paper.

 
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