PRELIMINARY VERSION: Please check for an update prior to the seminar on November 29, 2005.
Venezuela after a century of oil exploitation Chapter for the book Venezuela: Anatomy of a Collapse * Osmel Manzano+ Draft for comments. Do not quote or circulate. December 2004
Abstract This chapter reviews the Venezuelan oil sector’s performance and compares it with the performance of the oil sector of similar oil producing countries. Oil fiscal revenue per capita evolution in the last 30 years has resembled that of the Venezuela GDP per capita. After three decades of sustained growth, it collapsed in the eighties and it has not recovered since. The chapter will argue that the main reason for this performance of the oil sector was unchanged policy views in a changing international environment. Venezuelan oil policy was guided by the perception that oil was a temporary activity. This perception justified a policy that tried to get the maximum fiscal revenue from the sector and apply them in other sectors. This view could have been appropriate in the prevailing international context before the price colla pse of the eighties, though not in the context after that event.
* +
This book is being editeid by Ricardo Hausmann and Francisco Rodríguez. Corporacion Andina de Fomento and Universidad Catolica Andres Bello. The autor will like to thanks
Ricardo Hausmann, Francisco Rodríguez and participants of the workshop Venezuela: An atomy of a Collapse for helpful comments and suggestions on a earlier version of this paper. Federico Ortega provided an excellent research assistantship. All reaming errors are mine. The ideas and views expressed on this paper are the solely responsibilit y of the authors and do not necessarily reflect the ideas and views of the Corporacion Andina de Fomento. Comments are welcome at:
[email protected]
1
When analyzing Venezuela’s economic performance it is impossible to not take a look at the oil sector. As shown in Figure 1, even now, the sector represents 80% of exports, thus making it the largest source of foreign currency. It signifies more than 40% of government revenue, and in the past this figure was as high as 70% of those revenues, making it also the biggest contributor to the fiscal sector. Finally, it comprises more than 25% of all economic activity. Figure 1. Importance of Oil in Venezuela 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1955-1964
1965-1974
Oil Exports/Total Exports
1975-1984
1985-1994
Oil Fiscal Revenue/Total Revenue
1995-2002
Oil GDP/Total GDP
Source: Author’s calculations based on MEM (various years) and IMF (2004)
Therefore, it is important to understand the performance of the oil sector as related to the performance of the rest of the economy. Venezuela has been producing oil since the beginning of the twentieth century. At that time Venezuela was one of the poorest countries in the region and oil played an important role in making it one of the richest countries in the region during the seventies. 1 Consequently, a valid question is whether oil also played a role in the collapse of the Venezuelan economy There have been extensive debates about the role natural resources have played in development with different views supporting different policy recommendations. One approach proposes that oil abundant countries should focus economic activities “away” from oil. The main arguments for this diversification strategy are that oil, as well as other natural resources, are sectors with decreasing returns to scale, with few linkages to the rest
1
Rodriguez and Sachs (1999).
2
of the economy, and whose markets are “stagnant”.2 Additionally, there are important theoretical studies on the negative effects of resource booms on the industrial development of resource abundant countries.3 All these arguments led to the concept of the “resource curse”, which implies that resource abundant countries will have a poor economic performance.4 On the other hand, another approach could be to realize that the country has a comparative advantage in the oil sector and would benefit from its development. Recent literature has shown that low growth appears to stem from export concentration, rather than resource abundance.5 Moreover, this line of research has found that “successful” resource abundant countries benefited from their comparative advantage, by developing the sector and using it as a leverage to develop other sectors.6 Some literature on the price and the market of primary products has also raised some doubts on the “stagnant markets” argument,7 additionally literature has argued that resource products are linked to technology and innovation, and therefore a source of productivity growth. 8 It is not the objective of this chapter to test these two views to conclude which one is valid. Instead, the Venezuelan oil sector’s performance will be compared with the performance of the oil sector of similar oil producing countries. Some discussion on the impact of the performance on growth will be made, but mostly the focus will be on the sector itself. Other chapters of this book will also address the performance of the oil sector and its relationship to their study. The chapter is organized as follow. The first two sections will analyze the evolution of the oil sector in general as well as the guiding principles of oil policy, respectively. Section 3 will present the international context in which those policies were made. This will lead to section 4, which presents the chapter’s main argument, which is that unchanged
2
The word “stagnant” is used to argue that the share of primary products in world markets is decreasing
and that their relative prices are also decreasing. Among different authors that championed this idea, the most quoted was Prebisch (1964). 3
This is what is referred to as the “Dutch disease”. See Salter (1959), Krugman (19 87).
4
The empirical study that showed this relationship was Sachs and Warner (1995).
5
Lederman and Maloney (2003). Moreover, Manzano and Rigobon (2001), and Hausmann and Rigobon
(2003) show possible channels that can explain this low growth. 6
Blomstrom and Kokko (2003), and Maloney (2002).
7
Cuddington et al.(2002) found that relative prices seem not to be declining. Chami (2004) raised some
doubts that all commodities are loosing market share in the US market vis -a-vis industrial goods. 8
Wright and Cz elusta (2002).
3
policy views in a changing economic context helps to explain the relatively poor performance of the Venezuelan oil sector. The final section presents the concluding remarks.
1. The evolution of the oil sector Looking at the oil fiscal revenue in Venezuela, it is apparent that its behavior closely resembles the collapse of the Venezuelan economy. As shown in Figure 2, real fiscal income per capita grew more or less steadily up to the early seventies.9 With the different crises in the Middle East in the mid seventies, oil income per capita began to be more volatile and to decrease up to the present. This implies, that oil fiscal revenue per capita in 2002 was 65% lower than in 1976 (the historical high). Moreover, the average revenue per capita in the 90’s was 38% lower than in the 60’s. Figure 2. Oil Fiscal revenue per capita 2500
US$ 2002 per capita
2000
1500
1000
500
2000
1996
1992
1988
1984
1980
1976
1972
1968
1964
1960
1956
1952
1948
1944
1940
0
Source: Author’s calculations based on MEM (various years) and IMF(2004)
In an attempt to understand this decline in fiscal revenues, two factors are typically addressed to determine if they have contributed: income and costs of the oil sector. A look at the evolution of costs in the Venezuelan oil sector will lead to conclude that is has played a minor role. Given the nature of oil production it is expected that as time passes costs will increase because production will be moving towards oil fields that are harder to exploit or of lower quality. As shown in figure 3, oil quality has endured relatively little 9
The spike in 1957 was due to the income generated by the selling of new rights to explore and produce
oil at the end of the dictatorship of Marco Perez Jimenez.
4
change.10 After an improvement in the late forties, it has stayed more or less around the same quality, implying that the average barrel that Venezuela exports continues to be a “medium” crude. This reflects more on the production policy chosen than on reserve composition. Venezuela in 1995 had around 66.3 billion barrels of heavy or “extra-heavy” oil, which represented nearly 70% of the reserves11 . However, the extraction rate of this type of crude is approximately 0.5% while for the medium and light crude it is around 3.5%. Figure 3. Quality of Oil Extracted 29 Light < 30° Heavy < 20°
27
Average API°
25 23 21
Extraction Rates: Light/Med: 3,5% Heavy/ Extra H: 0,5%
19 17
2001
1995
1989
1983
1977
1971
1965
1959
1953
1947
1941
1935
1929
1923
1917
15
Source: MEM (various years)
Of course, it can be argued, that even though the average quality has not changed, the production has moved to fields where extraction is more difficult. As shown in Figure 4, costs have increased, and in the long run the move in the opposite direction of fiscal revenue, implying that they might explain part of its decline. However, looking closely in shorter time spans they do not move always necessarily in the opposite direction to fiscal revenue.
10
The API degrees are a measure of oil quality. The higher the degrees, the “lighter” is the crude, which
implies a higher quality in terms of ease to refine, transport, etc. A “light” crude is one which if 30 or higher degrees API. A “heavy” crude is one that is below 20 degrees API. 11
The composition of Venezuelan reserves is not available in the official statistical yearbook for the
Venezuelan oil sector (MEM, various years ). The author obtained the information provided here from PDVSA in 1995.
5
Figure 4. Oil Production Costs. 8 7
US$ 2002/BI
6 5 4 3 2
1999
1995
1991
1987
1983
1979
1975
1971
1967
1963
1959
1955
1951
1947
1
Source: Author’s calculations based on MEM (various years) and IMF (2004)
From 1968 production costs increased showing the impact, as it will be explained later, of a policy that led producers to maximize its extraction rate and not to develop further their oil fields. They also increased because production moved to fields where oil extraction is more difficult. In the eighties costs increased significantly, due to the fact that although production capacity was increased, oil production declined because of OPEC quotas. Therefore, these high costs reflect the cost of maintaining an important spare capacity. In the nineties, when production moved closer to full capacity, costs decreased. Nevertheless, they started increasing again in 1994. However, for those with knowledge about the Venezuelan real exchange rate, it is evident that its constant and pronounced movements should affect the costs of producing oil, in particular in recent years.12 Therefore, production costs, at least in terms of productivity, can explain part of the decline in fiscal income. However, they do not explain it completely. Given the previous facts, it is important then to look at the income side. Figure 5 shows the evolution of real oil exports per capita for Venezuela. The graph shows also the fiscal income. It reflects some of the issues previously discussed about production costs. The distance between exports and fiscal income seems to be widening. However, the key factor that seems to be driving the fall in fiscal revenue is the fall in oil exports per capita. Oil
12
Between 1994 and 2002 production costs increased 98%. However, if they are adjusted by the average
real exchange rate from 1948-2002 (the period of the figure) the increase is only 3%.
6
exports in the nineties were 38% smaller than in the sixties, showing a similar behavior as the fiscal income. Figure 5. Exports and Fiscal Income per capita 3000 2500 2000 1500 1000 500
Real oil exports per capita
1999
1995
1991
1987
1983
1979
1975
1971
1967
1963
1959
1955
1951
1947
0
Real oil fiscal income per capita
Source: Author’s calculations based on MEM (various years) and IMF (2004)
2. What can explain the collapse in exports? Given that the fall in oil exports is the main reason why oil fiscal revenue has fallen, it is important to give a quick look at the factors that drive them. The next two Figures show the evolution of prices and quantities. Oil prices appear to explain part of the fall in oil revenue. The real price of oil in 2002 was 15% lower than in 1976 (and 48% lower than the historical high in 1981). However, this is not the entire history. The average real price of oil in the nineties was 97% higher than in the sixties. Therefore the key variable is production.
7
Figure 6. Average Real Oil Prices. 45 40 35
US$ 2002
30 25 20 15 10 5 2002
1997
1992
1987
1982
1977
1972
1967
1962
1957
1952
1947
1942
1937
1932
1927
1922
1917
0
Source: MEM (various years)
Figure 7. Oil Production 1600
160 140
Per capita
Total
Millions of Barrels
1200
120
1000
100
800
80
600
60
400
40
200
20 2001
1995
1989
1983
1977
1971
1965
1959
1953
1947
1941
1935
1929
1923
0 1917
0
Barrels/h
1400
Source: MEM (various years)
As seen in Figure 7, production increased up until 1973. Right after that, production almost collapsed and it was only after 1986 that it started increasing again. In 2002 oil production was around 3 million barrels a day, still below the level of 1973. Of course this implied an important fall in oil production per capita, represented by the gray line in the graph. Oil production per capita declined from 1962 to 1985. Since then, production per capita has increased, but is still below the average of the period. In 2002 oil production per capita was 31% lower than in 1976 (and 71% lower than the historical high in 1957).
8
Moreover, the average oil production per capita in the nineties was 67% lower than in the sixties. Therefore, to understand the fall in fiscal revenue per capita it is important to study what has driven oil production in Venezuela.13 If we look from the production function side and given the nature of oil production, a capital-intensive sector, a first approach is to look at investment in the sector. As shown in Figure 8, production increases are linked to important increases in investment in the oil sector. The only investment spike that was not associated with production increases took place in the early eighties. However, by that time OPEC was imposing quotas on member countries. Therefore, even though oil production decreased between 1976 and 1986, production capacity in 1986 was around the same level than in 1976. Figure 8. Oil Production and Investment 1600
10000
1400
Thousands of Barrels
6000
1000 800
4000
600
2000
400 0
200
Production
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
1957
1954
1951
-2000 1948
0
Millions of US$ 2002
8000
1200
Investment
Source: MEM (various years)
Consequently, to explain the performance of oil production, investment must be studied. The oil sector has some particular characteristics. As we mentioned, it is extremely capital intensive. Moreover, most of the investment has to be made at the beginning of the project, it is “specific”, and requires a relatively long time to be recovered. 14 Therefore, in addition to the usual determinants of investment (cost of capital, profitability, etc) the sector is
13
Thus far, we have avoided the discussion about the relationship between prices and quantities, which for
some authors is relevant, in particular due to the fact that Venezuela is an OPEC member. We will discuss this issue later. 14
Investment specificity refers to possible alternate use of investments made. For highly specific
investments such an alternate use is hardly possible.
9
sensitive to the institutional rules around it, and in particular to the stability of those institutions. One key institutional rule is the fiscal treatment of the sector. In particular, because of the important “rents” associated with the sector15 , and because, in countries like Venezuela, the government is the owner of the resource and the fiscal system is used to fulfill two tasks: the regular function of collecting fiscal revenues and collection of the rents from the resource. As shown in Figure 9, this distribution of rents between the government and the producers has played an important role in shaping investment. The Figure shows that investment spikes are associated with reductions in the government claim on profits. Unfortunately, there is no available data before 1947, but the key moment that sparked investment in the sector was 1944, when the whole fiscal dealing of the sector was unified with the passing of the Hydrocarbons Law and the Income Tax Code. Before 1944 the fiscal rules were set on a contract-by-contract basis. Figure 9. Investment and Government Claim on Profits 100%
10000 8000
80% 70%
6000
60% 50%
4000
40%
US$ 2002 Millions
90%
2000
30% 20%
0
10%
Government Claim on Profits
1999
1995
1991
1987
1983
1979
1975
1971
1967
1963
1959
1955
1951
-2000 1947
0%
Investment
Source: Author’s calculatio ns based on MEM (various years)
Clearly the conditions created by the laws of 1944, cleared the way for a significant increase in investment in the sector. However, after a democratic government was established in 1958, the government began increasing its claim on profits until the industry was nationalized in 1975. That policy produced a collapse in investment. After the
15
The definition of “rents” might be a subject of debate in the literature on oil taxation. In this paper it is
seen as the remuneration of the natural resource. In Venezuela, these might be substantial in amounts because most of its production is “infra-marginal”, meaning that production costs are below the marginal producer.
10
nationalization, the government reduced the fiscal pressure on the sector to allow the new state enterprise (Petroleos de Venezuela, he reafter referred to as PDVSA) to invest. However when prices collapsed in the eighties it started again to increase its claim on profits and investment fell. In the nineties, the graph shows an increase in investment before a reduction in the government claim on profits in the sector. However, by that time, the industry was already nationalized and the government decided to allow PDVSA to issue external debt to finance a new investment program. Afterwards the government reduced the fiscal pressure.
3. The ideas behind the oil sector policy To understand the conflict between the government and the oil producers, even after nationalization, it is important to review the main guidelines underlying oil policy in Venezuela.16 Since its appearance at the beginning of the twentieth century, oil has been seen as a “temporary” productive sector. Most of the Venezuelan intellectuals from that time warned about the problems that this temporary boom could cause on other productive sectors that later could not have been reverted when oil disappeared -basically using the argument of what currently is referred to in literature as the Dutch disease.17 These led to the two guiding principles of the Venezuelan oil policy: the “preservation” and the “sowing of oil”. The role played by these two principles depended on the administration in control of the government at the time. The preservation principle was based on the notion that oil is a scarce resource of great value and therefore Venezuela has to minimize its extraction in orde r to save it for the future. This principle is mostly associated with democratic governments, and Juan Pablo Perez Alfonzo18 is recognized as the main ideologist behind it. Pro-democratic forces accused authoritarian governments, from the first half of the twentieth century, of “giving away” Venezuelan oil, and it became a relatively successful political platform. Once
16
A good review of the Venezuelan political system and its relationship with oil can be found in Urbaneja
(1992). 17
Alberto Adriani (see for example, Adriani, 1931) was one of the authors that gave the most warnings
about the end of the “agrarian era” for Venezuela, because of the presence of oil. However, other works (for example Mayobre, 1944, and Peltzer, 1944) discussed about the problems of an appreciated exchange rate on the industrialization of Venezuela. 18
See for example Perez Alfonzo (1962). Perez Alfonzo was one of the founders of OPEC and energy
minister of the first administration of the democratic era.
11
democracy was instituted, it became a main guideline for the different administrations, and gave way to the “no-more-concessions” policies as well as the eventual nationalization. This principle of preservation resulted in policies that increased the government claim on profits from the sector. As seen in Figure 9, once the democratic era started, the government’s claim in oil profits increased and it almost reached 100% in the years prior to the nationalization. The argument was that since oil is such a valuable commodity of limited availability, the government, as the owner of the resource should maximize its share of the rents generated by the sector. The instrument used to achieve this goal was the tax system through two different options: the income tax and the royalties.19 The “sowing of oil” implied that given that oil is a temporary activity, the income coming from such activity should be invested in other sectors of the economy to diversify it. Its name came from an editorial published in 1936 by Arturo Uslar Pietri, an influential writer and intellectual. This principle guided authoritarian as well as democratic governments. One element, which differentiated them, was that democratic governments viewed investment in human capital (education, health, etc) as one of the ways in which oil could be “sowed”. In summary Venezuelan oil policy was guided by the perception that oil was a temporary activity. This is particularly true for the democratic era, when the collapse of oil production took place. This perception justified a policy that tried to get the maximum fiscal revenue from the sector and apply them in other sectors.
4. The international context Finally, before addressing the relationship between oil policy and oil sector performance, it is important to focus on the developments in the international oil market during this period. A comprehensive analysis is not the focus of this chapter but rather a brief review of relevant facts to this topic.20 One of the facts that played an important role in the oil markets in most of the twentieth century was the conflict between oil companies and oil abundant countries. At the
19
Also, to generate more income tax, there was the rule of “the fiscal value of exports” which was the
price of oil that had to be used to calculate the income tax, fixed by the government at levels usually higher than the market price. Later, well after the nationalization, this figure was eliminated but the “dividends” from PDVSA were used as another way to collect taxes from the sector. 20
A review on the way economic thought evolved during the second half of the twentieth century can be
found at the collection of papers written by M.A. Adelman (Adelman, 1993).
12
beginning, when oil was discovered and before countries realized their potential as oil producers, companies more or less operated in an environment relatively free of conflict. Nevertheless, as countries realized the importance of oil in world markets, the potential rents that the sector could generate and their own possibilities as producers, they started to demand more from the sector. 21 Eventually, the major oil producing countries, from the less developed countries, organized themselves and created the Organization of Petrole um Exporting Countries (OPEC). These countries started increasing their claim in oil income, created their own national oil companies (NOC), established production quotas, and, in some cases, even nationalized their oil sector. Given this situation, investment was driven away from the oil sector, and therefore little effort was made in exploring additional oil reserves and the market tightened. As seen in Figure 10, oil extraction increased progressively from 1960 and peaked in the seventies up to around 4% implying that the level of reserves by that time could only sustain 25 additional years of production, giving the impression that oil was running out. In this context, two successive crisis in the Middle East (the Yom Kippur war and the Iran-Iraq war) created disruptions in oil supply and prices reached a historical high that we saw earlier in Figure 6. Figure 10. Oil Extraction Rate 3,8% 3,6%
Extraction rate (%)
3,4% 3,2% 3,0% 2,8% 2,6% 2,4%
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
2,2%
Source: Author’s calculations based on EIA (2004)
21
The historical moment when a country realized its potential as a producer, varied from country to
country. It depended on its own oil production history. However, on average, it happened between the forties and the sixties.
13
Given these circumstances, oil-importing countries took important measures to increase energy efficiency in order to reduce their dependence on oil. As shown in Figure 10, the number of barrels needed to generate 1,000 dollars of GDP increased up to 1974. However, after the price peaked in 1980, due to the measures taken by consuming countries, the barrels needed have fallen 30% from that year up to today. Most remarkably, half of that decline happened between 1980 and 1986. Additionally, oil companies started to increase their search for oil outside of OPEC. Figure 11 shows that after the first price increase in the seventies, drilling activity reached the highest levels of the last 30 years. The average for active rigs in the period between 1975 and 1985 was 102% higher than the rest of the period. As a result, by 1986 an additional 175 billion barrels were added to world oil reserves compared to 1980. This figure represents a 27% of the reserves available in 1980. Of those new additions, 55% were outside OPEC, mostly in the North Sea. Figure 11. Energy Use. 1,4 1,3
1,1 1,0 0,9 0,8
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
0,7 1960
Barrels of Oil used to generate US$1000 of GDP
1,2
Source: Author’s calculations based on EIA (2004) and World Bank (2004)
14
Figure 12. Drilling Activity. 6000 5500 5000
Active drills
4500 4000 3500 3000 2500 2000 1500
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1000
Source: Baker Hughes (2004)
In summary, the increase in oil efficiency helped curb oil demand, while the increased effort in exploration led to increase in oil supply. These two facts were the main causes of the price collapse of 1986. That year, the price fell around 50% in nominal terms, and the Venezuelan basket barely averaged above US$ 10.
5. Unchanged policy views in a changing international context In this final section, it will be argued that oil exports collapsed due to a changing international context, which did not take into consideration appropriate or necessary policy measures. The principles, described before, that guided Venezuelan oil policy could have been appropriate in the prevailing international context before the price collapse of the eighties. As mentioned before, by 1980 it seemed that the world was running out of oil as it was becoming more and more dependant on it -as shown by the amount of barrels needed to generate a dollar of GDP-. It could be argued that this situation may have been a selffulfilling prophecy, due to the increasing fiscal pressure on oil producers caused by the belief that oil would become scarce. Moreover, with the benefit of some hindsight, nowadays it could be argued that it was a non-sustainable self-fulfilling prophecy. In any case, for Venezuela it implied that even though oil production per capita were 62% lower in 1980 compared to 1958, exports per capita were109% higher. Nevertheless, in 1986 the perception was completely different. By then, it was clear that, even though oil is considered a non-renewable resource, the world could become more efficient in its use. Furthermore, if prices are high enough its supply could be increased, not
15
only with the help of new technology, but also because oil fields with higher cost of development and operation would become profitable. This was clear even for the biggest producer in OPEC, Saudi Arabia that, by then, decided to stop being the “swing” producer of the organization. 22 Under these circumstances, different oil producing countries took different approaches. In this section the actions taken by some oil producing countries will be analyzed. According to Energy Information Administration (2004), in 1986 there were oil reserves in 67 countries.23 Of those countries 39 have a relatively complete set of statistics. Moreover, of those 39 countries not all can be considered oil abundant, as it will be argued later. On the other hand, oil is a business with a long-term horizon as well as it is the study of growth, the objective of this book. From 1986 to 2001 there are only 15 years, which prevents the possibility of having various periods for each country to analyze. Therefore, simple correlations will be used to show the big patterns followed by oil producing countries and to compare them with Venezuela’s evolution. A first look at the economic performance and the relationship with oil production for the 39 countries mentioned before shows no relationship at all, as shown in Figure 13. However, there are different countries in this sample. Some oil-producing countries are net oil importers, such as the United States and most European countries. It is expected that policy decisions as well as the impact of the oil sector on the whole economy would be different in these countries compared to oil abundant countries, such as Venezuela. To create a sample of oil abundant countries two criteria were used. First the index used by Maloney (2002), based on net oil exports per capita, was constructed.24 This index attempts to capture a country’s specialization in oil exports. However, it might well be that though a country is currently exporting oil, its future as an oil exporter is less promising because it has less reserves, such as the United Kingdom in 1986. Therefore, a second index was constructed dividing oil and gas reserves by the GDP. This reflects the “potential” of the sector. With these two indexes, the sample was split by the median value.
22
The agreement between OPEC members was that all members but Saudi Arabia will have a constant
share of production and Saudi Arabia will change its production in order to clear the market at a “fair” price. OPEC behavior has been widely studied. A review of this literature can be found in De Santis (2000). 23
Data sources as well as a description of the sample are discussed in the appendix.
24
This measure is based on Leamer et al (1998).
16
Those countries that have indexes that are above the median in both indexes were considered oil abundant.25 Figure 13. Oil production growth and GDP growth .04956
-.01411 -.111306
.101293 Avg. oil prd. pc growth (86-01)
Source: Author’s calculations based on EIA (2004) and World Bank (2003)
Figure 14, shows the relationship between growth and oil production growth for these countries. Given the number of observations we cannot do formal statistics. Moreover, it is widely known that growth is affected by an important list of factors.26 However, the figure seems indicate a positive relationship between oil production and growth. The outliers are Congo, Indonesia and Malaysia.27 From the countries depicted here, only Kuwait, Oman and Saudi Arabia were more abundant in both indicators than Venezuela. If we do not cons ider Congo, 6 countries expanded their production at a higher rate than Venezuela and 7 did it at a lower rate. Of those countries with a higher rate of growth for the oil sector, the average per capita GDP growth was 1.78% and for those with a lower
25
It could be argued that we can divide the sample based only on its reserves. However, there might be
countries with a relatively high levels of reserves but the factor contents of exports might indicate that the country is already specialized in other goods, like Egypt or Tunisia. 26
Barro y Xala-i-Marti (1995).
27
In the case of Congo, it has been involved in many internal conflicts, including two civil wars. For
Indonesia, it could also be argued, that if in our sample we could have had countries such as Libya, Russia, Kazakhstan, and Brunei, it would have been dropped from the oil abundant countries.
17
expansion the average per capita GDP growth was 0.72%. Venezuela per capita GDP grew at –0.32% in the period. The graph shows that countries that were less abundant than Venezuela increased their oil production more, which seems to have helped them to grow more. Why didn’t Venezuela expand its production more than other countries that were less abundant? Figure 14. Oil production growth and GDP growth in oil abundant countries Avg. GDP pc growht (86-01)
Linear prediction Malaysia
.04197
Indonesi
Norway Iran Kuwait 4 Mexico Oman
Trinidad
Nigeria
Ecuador Venezuel
United A
Algeria Saudi Ar
Congo (B
-.01411 -.0174
.070454 Avg. oil prd. pc growth (86-01)
Source: Author’s calculations based on EIA (2004) and World Bank (2003)
There are different factors that can affect the growth in oil production: fields productivity, geological risk, etc. However, the crucial factor is the actual decision to increase production. To capture that decision, an index is calculated for what would be called “effort”. The index is the combination of the two main activities that drive oil production: drilling and extraction. 28 In the next figure the index the relationship between
28
The index is constructed for the whole sample of oil producing countries. See the appendix for the
details.
18
oil production growth and effort is shown. From the graph it seems that such relationship is positive. Figure 15. “Effort” index and oil production growth Avg. oil prd. pc growth (86-01)
Linear prediction Norway
.070454
Iran
Trinidad
Congo (B
Malaysia Kuwait 4 Venezuel
Algeria
Nigeria Saudi Ar
Mexico
Ecuador Oman
United A
Indonesi
-.0174 -.825863
-.418992 Effort
Source: Author’s calculations based on EIA (2004) and Baker Hughes (2004)
As it can be seen in the graph, 7 countries had a higher “effort” than Venezuela. For those countries the a verage growth in oil production per capita was 1.58%. 29 On the other hand, 6 countries had a lower “effort” and for them the average growth was 0.77%. For Venezuela the average growth was 1.2%. Therefore, effort in Venezuela was more or less around the median on “effort” and their oil production growth was also around the median. Was this effort sufficient? From the graph we see that countries that were less abundant than Venezuela put more “effort” and increased their production more. It could be that Vene zuelan authorities decided that the actual level of effort was optimal in terms of the intergenerational distribution of oil wealth. Using a framework of intergenerational accounting for fiscal burdens, Fernandez et al. (2005) found that future generations are worse -its fiscal burden is higher- with the current rate of extraction than with an optimal
29
If we do not consider Congo, as before, the average growth is 1.50%.
19
rate of extraction. 30 Consequently, it seems that the lower effort does not seem justified by intergenerational concerns. Why hasn’t Venezuela made a greater effort? As we mentioned before, oil is a capital intensive sector, where an important part of the investment is done up-front, is also specific, and it takes a long time before such investment is recovered. Therefore, the fiscal rules for the sector become an important factor for investors to consider before doing an investment. Evidently, another factors can affect effort, like the political stability of a country, the existing infrastructure for the commercialization of oil, among others, but fiscal rules are of particular relevance. In Figure 16 the role of those fiscal institutions is shown. In the graph the effort is related to the quality of those institutions.31 The graph shows a positive relationship between the quality of such institutions and effort. Figure 16. Fiscal institutions and “effort” Effort
Linear prediction Congo (B
-.418992
Oman
Ecuador
Trinidad
Norway Malaysia
Algeria Indonesi Venezuel Nigeria Mexico United A Iran Saudi Ar
-.825863
Kuwait 4
0
2.66667 Fiscal Institutions
Source: Author’s calculations based on Van Meurs (1997) and Baker Hughes (2004)
30
The optimal rate is derived from an extraction model estimated with the Venezuelan parameters for the
oil sector based on Deacon (1993) and Medina (1997). 31
This index is based on Van Meurs (1997) and it reflects the attractiveness of fiscal institutions for
investors in the oil sector. See the appendix for the details.
20
From the graph it is evident that only four countries have worse fiscal institutions than Venezuela and in those countries the resulting effort in the oil sector was lower. The average for the index in those 4 countries was –0.79. On the other hand 10 countries have better fiscal institutions and the average for the index that measures effort was –0.61. For Venezuela the index was -0.71. This international comparison points out that those abundant countries that had the adequate fiscal institutions after 1986, were the countries that could expand their activity in the oil sector which seems to have helped their economic performance. In this context, the Venezuelan institutions appear to have been an obstacle for a higher expansion of the oil sector. What happened to Venezuela’s fiscal institutions concerning to the oil sector after the 1986? Clearly, after 1986 an effort was made to increase oil production. However, fiscal income was declining and the oil industry was state-owned. This led to an on-going conflict between the goal of increased production and fiscal needs. A first approach was to let PDVSA issue debt to finance its production plans. However, this debt was considered public debt, generating some competition between the government and PDVSA in the financial markets. Eventually interest payments and amortizations started reducing PDVSA funds available for the government and the tensions returned. A clear second option would have been to let private companies back in the country to develop the sector. In 1991, Operating Agreements –“convenios operativos”- were introduced, and marginal fields that, under normal circumstances, were not going to be exploited by PDVSA, were instead given to private companies - companies that would produce the oil for a certain fee per barrel. Next, in 1993, associations for heavy and extraheavy oil production were introduced –“asociaciones estrategicas”. One could describe these crudes in two ways: either as low -commercial-value crudes; or as those requiring a special ''pre-refining'' that would make them suitable for any refinery and, consequently, characterize them as high-production-cost crudes. Finally, in 1996, new areas were given over to private investors for exploration and exploitation. This was termed the “openingup” –“apertura”. Although these areas were supposed to possess light and medium crudes, little or no exploration was actually carried out. All new contracts, were given tax breaks to make them profitable for the private sector. Although these reforms seem to have been a step towards increasing oil activity, the description above indicates that the areas given to the private sector were not the most productive ones. Manzano (2000) evaluated these reforms from the efficiency point of
21
view. The work concludes that although efficiency gains were obtained from the reform, the areas selected for the reform were not the most negatively affected by the tax code. The areas where the most gains could be obtained were those that remained under PDVSA control. Moreover in these areas a reduction in tax rates would have increased tax collection, implying that they were overtaxed. Therefore, cha nges in the fiscal rules were modest. The reason behind these modest changes was the whole system of institutions was still based on the policy orientation of “preservation”. The sector was reserved for the state and for the private sector to produce, each contract had to go to Congress to get approval. From the discussions it was clear that the preservation view was still in the mind of an important part of the political class and, consequently what could be approved were reforms perceived as “marginal”. A second line of action after the reality faced by oil producing countries in 1986 would have been to add value to oil exports. This paper does not try to assess industrial policies. Rather, it will focus on the industry related to the oil sector and the possibility of increasing exports value per capita by developing downstream by-products or upstream suppliers. The reason for exploring this probable strategy for increasing oil related export is that, in most of the countries analyzed here, the oil sector is still dominated by a stated owned oil company. Therefore, the possibility for the development of connected sectors depends on oil policy. As shown Figure 17, this policy option was important for these countries. The relationship between export concentration in 1986 and growth is shown for nine countries from the previous sample that have a complete set of data on exports.32 The graph appears to support the idea that export-concentration reduces growth. Included are 9 of the most oilabundant countries in the world. They have very different growth performances and it looks that such performance is related to the Herfindahl Index of export-concentration for those countries. However, this concentration is not related to abundance. On figure 18, the index of concentration is plotted against a measure for abundance –reserves divided by GDP. The graph reflects that there is not a clear relationship between abundance and exportconcentration. Therefore, policies might have varied depending on the characteristics of each country.
32
The concentration index is calculated using the Herfindahl index for exports. For further details please
refer to the appendix.
22
Figure 17. Export concentration and GDP growth .04197
Malaysia
Indonesi
Norway
Mexico
Trinidad
Oman
Ecuador Venezuel Algeria
-.006063 .136127
.952256 Herfhindal Index for exports (19
Source: Author’s calculations based on World Bank (2003) and UNSD (2004)
Figure 18. Resource abundance and export concentration Algeria
.952256
Venezuel
Trinidad Ecuador
Indonesi
Norway Malaysia
Mexico
.136127 146.46
Oman
546.14 Oil and Gas Reserves/GDP
Source: Author’s calculations based on EIA (2004), World Ban k (2003) and UNSD (2004)
23
To see the different strategies followed by these countries an index for the diversification pattern is constructed. On it the change in net exports per capita in 28 different categories of goods for each country is compared to the relationship of those sectors with the oil sector in the US33 and a correlation is calculated. If the diversification index is positive it implies that the pattern followed was around sectors related to the oil industry. On the other hand, if the index is negative, it implies that the pattern followed was around sectors not related and even “away” from that industry. In the next figure we plot that correlation with the relative abundance. Index of diversification pattern Linear prediction
Linear prediction
Trinidad
.368012
Ecuador
Algeria
Mexico
Venezuel Oman
Malaysia
Indonesi
Norway
-.305282 146.46
546.14 Oil and Gas Reserves/GDP
Author’s calculations based on UNSD (2004), World Bank (2003) and EIA (2004)
At first sight there is no clear relationship. However, the reader will notice that two lines are drawn. All the countries in the upward sloping line increased their non-oil net exports per capita. All the countries in the downward sloping line decreased their non-oil net exports per capita. These relationships seem to point out that, for the nine countries in this sample –which include Venezuela, the countries that increased their non-oil net exports
33
The US is included because of its mature oil sector. Oil has been produced in the US for more than a
century. It was the largest producer until 1973 and currently is still the 3 rd largest oil producer in the world. The relationship between non -oil sectors and the oil sectors is based on multipliers from an input -output matrix. See the appendix for details.
24
were those that followed a pattern suited to their endowments. Countries with less oil reserves followed a diversification pattern “away” from oil, while countries with higher reserves followed a pattern around the oil sector. On the other hand, countries that followed a diversification pattern that was not in accordance with their endowments were not able to increase their non-oil exports per capita. Among those countries is Venezuela. Of course the next question is whether or not an increase in net exports is desirable, but that question is beyond this chapter.34 For this chapter, the relevant question is why Venezuela followed a pattern not connected with oil as, for example, Trinidad and Tobago did. The answer again lies in the policy guidelines discussed before. In the nineties, Venezuela embarked on a program of structural reform, similar to those followed by other Latin American countries. These programs implied the opening of the economy to the international markets, the removal of distortions, the establishment of institutions needed to achieve macroeconomic stability –such as central bank independenceamong other. However in Venezuela, not all the reforms could be implemented.35 On the other hand, these programs lacked policies that nowadays are seen as necessary in the process of diversifying the economy. 36 In a review of the effects of the oil sector on the Venezuelan economy, Clemente et al (2005) estimated whether there is an economic impact on companies that are linked to businesses with the oil sector. The work found a positive impact on being a user of oil as an input. However, there is a positive correlation between domestic prices of oil derivates and productivity. Domestic prices of oil derivatives are subsidized in Venezuela, as a result of past policies, and this is an area where policy updates have been inhibited. Therefore, domestic prices are around 1/4 of international prices. This subsidy has a negative impact the productivity of consumers of oil derivates. This effect is bigger than the positive effect of having oil as an input and therefore being an user of oil related products have a negative impact on productivity. 34
For instance, all the countries in the upward -sloped line have a p ositive GDP per capita growth but
Algeria, and the average growth was 2.10%. Form the countries in the negative-sloped line two have positives rates –Mexico and Oman- and tow have negative rates –Ecuador and Venezuela. Their average GDP per capita growth w as 0.44%. 35
For a complete description of reform programs in Venezuela and their successful or failed
implementation se Gonzalez et al. (2004a). 36
Hausmann and Rodrick (2003). In Trinidad and Tobago some form of these policies were adopted. For a
review on Trinidad and Tobago economic performance as well as policy implemented see Artana et al. (2004), Barclay (2003) y Berezin et al. (2002).
25
Additionally, the work also explores the effect on productivity of being a supplier to the oil sector. The paper also found a negative impact. Sectors where PDVSA purchases were relatively high compared to total sales of the sector have lower productivity. This is due to the fact that purchasing policies from PDVSA were not design with a strategy of export diversification in mind. Usually, local suppliers were more expensive and of lower quality and the government intervention forced PDVSA to buy a certain amount of local products. There were no incentives for firms to become more productive or to sell to the international markets. These two policies –subsidies on domestic prices of oil products and local content obligations for PDVSA purchases- were a deviation from the original goal of the “sowing of oil” principle. In other words, both policies were used to distribute the rents generated by the oil sector. Of course, they were not necessarily ends sought by the original proposal of the principle. The reasons for these deviations from the original idea are beyond the scope of this chapter. 37 The main point is that these instruments were not designed with the intention of increasing the value of oil-related exports.
Therefore, in the case of
Venezuela, there was no intention of pursuing that aim.
6. Concluding remarks Oil fiscal revenue per capita evolution in the last 30 years has resembled that of the Venezuela GDP per capita. After three decades of sustained growth, it collapsed in the eighties and it has not recovered since. In this chapter we have explored the possible explanations for this collapse. As described, this collapse is due to the fall in oil exports per capita, mainly driven by the fall in oil production per capita. Although other factors might have played a role –oil prices, oil quality, production costs-, clearly the evolution of oil production per capita is correlated to that of oil exports. Therefore, to understand the reasons behind the collapse in oil fiscal revenue it is important to study the factors that drive oil production in Venezuela. In this regard, the chapter argued that the main reason for the reduction in oil production per capita were unchanged policies in a changing international environment. Oil policy was driven in Venezuela by two principles: “preservation” and “sowing of oil”. Both principles
37
Urbaneja (1992) and Gonzalez et al (2004b), among others, have described that after the seventies
policy outcomes have deteriorated. Urbaneja (1992), in particular, has argued that it was due to the perception, by policy makers, of massive rents coming out from the oil sector in the seventies. These rents generated the impression that cost-benefit analysis for policy making were less necessary.
26
together implied that oil extraction should be relatively low, in order to keep oil for the future and the rents generated by the oil sector should be invested in other sectors to diversify the economy “away” from oil. These principles though appropriate in the context that prevailed in the international oil markets up to 1980, became less so afte r changes in policies by net oil importing countries as well as oil companies to the price crises of the seventies. After the crises energy use became more efficient and oil was sought and found in non-traditional places. 1986 is considered the year where this new reality became apparent, at the time when oil prices collapsed. After 1986 different oil producing countries took different routes. From a sample of oil producing countries that was analyzed it emerged that countries that decided to expand their oil sector as well as to increase their oil exports through a broader view of the sector (i.e. including suppliers and users and expanding those sectors) fared better. In this regard Venezuela increased oil production, but relatively less than the leading countries and no apparent effort was made to pursue the development of related sectors. The main reason for this is that the principles previously described continued to guide oil policies outside the new international context. This does not imply that there were not attempts to pursue a different policy. In this chapter some efforts to do so were described. However, there was resistance and political debate as well as laws that were required to be changed in order to change the policy orientation. The chapter does not discuss why those policy guidelines were not changed. To do so would have required important consensus 38 . Some authors have discussed that this is precisely the time when political fragmentation started in Venezuela and to generate consensus became more difficult.39 The work by Monaldi and Penfold in this book even tries to explore some causes of this increased fragmentation. It would be an interesting line of research to explore whether the increased fragmentation was a consequence of the situation in the oil sector and the need to change the guiding principles.
References Adelman, M.A. (1993), The Economics of Petroleum Supply, MIT Press, Cambridge.
38
It is not clear that a constitutional reform was needed in order to pursue a different oil policy, but at
least changes in “organic” laws that required for approval two thirds Congress members. 39
See Gonzalez et al (2004b),
27
Adriani, Alberto (1931), “La Crisis, los cambios y nosotros,” in Valecillos, Hector and Omar Bello (editors) (1990). La Economía Contemporánea de Venezuela. Ensayos Escogidos. Tomo I. Caracas, Banco Central de Venezuela.. Artana, Daniel, Juan Luis Bour and Fernando Navajas (2004), “Fiscal Policy in Trinidad and Tobago”, Draft Document, Inter-American Development Bank. Baker Hughes (2004), “Baker Hughes Rig Counts”, http://www.bakerhughes.com/. Barclay, Lou Anne (2003), “FDI-Facilitated development: The case of the natural gas industry of Trinidad and Tobago”, Intech Discussion Paper Series #2003-7, United Nations University. Barro, Robert J. and Xavier Sala -i-Martin (1995), Economic Growth, McGraw-Hill. Berezin, Peter, Ali Salehizadeh, and Elcior Santana (2002), “The challenge of diversification in the Caribbean”, mimeo, International Monetary Fund. Blomstrom, Magnus and Ari Kokko (2003), "From Natural Resources to High-tech Production: The Evolution of Industrial Competitiveness in Sweden and Finland," CEPR Discussion Paper No. 3804. Chami, Jorge (2003), “Especialización y Crecimiento de las Exportaciones en América Latina: naturaleza de las competencia de productos entre diferentes exportadores,” en Perspectivas: Análisis de temas críticos para el desarrollo sostenible , Vol. 2 Nº 1, CAF. Caracas. Clemente, Lino, Osmel Manzano and Alejandro Puente (2005), “Oil sector impact on industrial productivity in Venezuela”, mimeo, Coporacion Andina de Fomento Cuddington, John, Rodney Ludema and Shamila Jayasuriya (2002), "Prebisch-Singer Redux" in Daniel Lederman and William F. Maloney (eds.), Natural Resources and Development: Are They a Curse? Are They Destiny? (October 2002), Stanford University Press, forthcoming. Deacon, R.T. (1993), "Taxation, Depletion, and Welfare: A Simulation Study of the U.S. Petroleum Resource," JEEM, (24) March 1993, pp. 159-187. De Santis, Roberto, (2000), “Crude oil price fluctuations and Saudi Arabian behavior”, Kiel Working Paper No. 1014, Kiel Institute of World Economics. Energy Information Administration (2004), “International Energy Annual 2002”, Washington, DC. Fernandez, Aureliano, Juan C. Gomez S and Osmel Manzano (2005), “Intergeneration accounting of oil wealth in Venezuela”, mimeo, Corporacion Andina de Fomento. Gonzalez, Marino, Francisco Monaldi, German Rios and Ricardo Villasmil (2004a), “Understanding Reform Country Study: Venezuela”, mimeo, Global Development Network. Gonzalez, Rosa Amelia, Francisco Monaldi, Richard Obuchi and Michael Penfold (2004b), “Political Institutions, Policy Making Processes and Policy Outcomes in Venezuela”, mimeo, Latin American Research Network, IADB. Hausmann, Ricardo y Dani Rodrick (2003), “Economic Development as Self Discovery” NBER Working Paper 8952, National Bureau of Economic Research. Cambridge MA. Hausman, Ricardo y Roberto Rigobón (2003), “An Alternative Interpretation of the ‘Resource Curse’: Theory and policy implications,” NBER Working Paper 9424, National Bureau of Economic Research. Cambridge MA. International Monetary Fund (2004), “International Financial Statistics”, Washington, DC.
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Krugman, Paul (1987) "The Narrow Moving Band, the Dutch Disease and The Competitive Consequences of Mrs. Thatcher on Trade in the Presence of Dynamic Scale Economies" in The Journal of Development Economics. vol. 27, p. 41-55. Leamer, Edward, Hugo Maul, Sergio Rodriguez, Peter K. Schott (1998), "Does Natural Resource Abundance Increase Latin American Income Inequality?" mimeo, Univestity of California at Berkeley. Lederman, Daniel and William Maloney (2003), “Trade Structure and Growth,” Policy Research Working Paper 3025, Banco Mundial. Washington, D.C. Maloney, William (2002), “Missed Opportunities: Innovation and Resource-Based Growth in Latin America,” en Economía, Vol. 3 No. 1, pp 111-151. Manzano, Osmel, 2000, “Tax effects upon Oil Field Development in Venezuela”. Center for Energy and Environmental Policy Research Working Papers Series Number 2000-006. Center for Energy and Environmental Policy Research at MIT, Cambridge. Manzano, Osmel and Roberto Rigobón (2001), “Resource Curse or Debt Overhang,” NBER Working Paper 8390, National Bureau of Economic Research. Cambridge MA. Mayobre, Jose Antonio (1944), “La paridad del Bolivar”, in Valecillos, Hector and Omar Bello (compiladores) (1990). La Economía Contemporánea de Venezuela. Ensayos Escogid os. Tomo I. Caracas, Banco Central de Venezuela. Medina, Humberto (1997), “Evaluación de los efectos de diferentes esquemas impositivos sobre la senda exploración y producción de una empresa petrolera en el tiempo (un análisis para el caso Venezolano)”, mimeo, PDVSA Ministerio de Energía y Minas (MEM) (various years), “Petróleo y Otros Datos Estadísticos”, Dirección de Economía e Hidrocarburos, Caracas. Peltzer, Ernesto (1944), “La industrialización de Venezuela y el alto tipo de cambio del Bolívar”, in Valecillos, Hector and Omar Bello (compiladores) (1990). La Economía Contemporánea de Venezuela. Ensayos Escogidos. Tomo I. Caracas, Banco Central de Venezuela. Perez Alfonzo, Juan (1962), “Política Petrolera”, Imprenta Nacional, Caracas. Prebisch, Raúl (1964), “Nueva Política Comercial para el Desarrollo” , Vol. II de los Actos de la Conferencia de Naciones Unidas para el Comercio y Desarrollo (Ginebra, UNCTAD, 1964). Rodríguez, Francisco and Jeffrey D. Sachs (1999) “Why Do Resource Abundant Economies Grow More Slowly: A New Explanation and an Application to Venezuela,” forthcoming, Journal of Economic Growth . Sachs, Jeffrey y Andrew Warner (1995), “Natural Resource Abundance and Economic, Growth,” NBER Working Paper 5398, National Bureau of Economic Research. Cambridge MA. Salter, W.E.G. (1959) "Internal and External Balance: The role of price and expenditure effects" in The Economic Record. vol. 35, p. 226-238 United Nations Statistics Division (2004), “UN Commodity Trade Statistics Database (UN Comtrade)”, United Nations, New York, NY. Urbaneja, Diego (1992), “Pueblo y Petróleo en la Política Venezolana del siglo XX”, Ediciones CEPET, Caracas, Venezuela. Van Meurs & Associates Ltd (1997), “Worldwide Fiscal Systems for Oil – 1997”, Barrows Inc. New York, NY.
29
World Bank (2003), “Global Development Indicators”, Washington, DC. Wright, Gavin y Jesse Czelusta (2002), “Resource-based growth past and present,” mimeo, Stanford University.
Appendix: Data description GDP Growth: this variable refers to the average yearly growth from 1986 to 2001 of the Gross Domestic Product per capita in constant 1995 US$, based on data from the World Development Indicators of the World Bank (World Bank, 2003). Oil Sector Growth: this variable refers to the average yearly growth of the world crude oil production per capita -calculated using country population from the World Bank (2003)from 1986 to 2001measured in thousands of barrels per day per person, based on data from the Energy Information Administration’s (EIA) International Energy Annual 2002 (EIA, 2004). Effort Index: this index is the result of the average of two sub-indices, the production index and the exploration index. The production index is based on the number of standard deviations that a country’s extraction rate –oil and gas production divided by oil and gas reserves- is away from the world average for the period. The oil and gas production are the average for the period 1986-2001 taken from EIA (2004). The oil and gas reserves are for 1986 and are also taken from EIA (2004). The exploration index is based on the number of standard deviations that a country’s exploration rate - the number of active land and offshore rigs divided by oil and gas reserves- is away from the world average. The number of active land and offshore rigs are the average for the period 1986-2001 taken from Baker Hughes (2004). The oil and gas reserves are for 1986 and are also taken from EIA (2004). Van Meurs Institutional Index: this index refers to the average ranking (according to the number of stars) of all the fiscal systems from each country according to Van Meurs (1997). Fiscal systems can refer to the law systems in a country or specific conditions negotiated for the exploitation of a specific area in a country. Countries were there are NOC were awarded one fiscal system with no stars (the worst ranking).
30
Concentration: this index is calculated in a similar way as the Herfindal Index, using Export data from the United Nations Commodity Trade Statistics Database (Commtrade, 2004). The index is the sum of the square of the shares that each item represents out of the total country’s exports for a certain year. The data used was classified into 34 items according to the Standard International Trade Classification Revision 2 at one digit, except for subdivisions 5,6 and 7 which were used at the two digits level. Correlation between the change in net exports and the matrix multipliers : the change in net exports were calculated subtracting the net exports from 2001 to those in 1986 for every one of the 34 items previously discussed, for every country. The net exports for each year were calculated subtracting the imports to the exports of each item. Afterwards, in each country the items were ranked from most positive to most negative according to their changes in net exports. The matrix multipliers comes from the inputoutput matrix for the United States in 1998 classified according to the same 34 items used before and a 35th sector that encompasses all other economic activities. Afterwards, supply and demand coefficients in relation to the oil industry for each item were added. Then countries were ranked according to these coefficients from the most integrated to least. Then a correlation is calculated fro each country using both rankings.
31
