Ethiopian Development Research Institute (EDRI) and International Food Policy Research Institute (IFPRI) Seminar Series, February 21, 2012

1. The Effect of Natural Resources on
Income Inequality
Byron Hewson
University of Queensland
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2. Introduction
Global Income Inequality – Gini Coefficients
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3. Introduction
Resource Sector Decline in Non-
Growth Resource Sectors
Natural Inequality
Resources
Wealth
Policy Distortions
and Myopia
Decline in
Institutional
Quality Increased
Corruption and
Rent-Seeking
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4. Introduction
Resource Sector Decline in Non-
Growth Resource Sectors
Natural Inequality
Resources
Wealth
Policy Distortions
and Myopia
Decline in
Institutional
Quality Increased
Corruption and
Rent-Seeking
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5. Introduction
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6. Background
1. What makes natural resources wealth
different from other sources of wealth?
3. Why does income inequality matter?
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7. Natural Resources
Defining “Natural Resources”:
● A subset of “natural capital” which includes subsoil assets, timber
resources and protected areas.
“Subsoil Assets” or “Non-Rural Commodities” =
Mineral resources – e.g. copper, iron, gold
PLUS
Energy Resources – e.g. oil, coal gas
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8. Natural Resources
Distinct Characteristics of Natural Resources
3. High economic rents and relatively high volatility
4. Extracted and non-renewable
5. Cognitive impact in perception and treatment by state and non-
state actors
6. High inequality in ownership and susceptibility to rent-seeking
behaviour
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9. Why is Inequality Important?
1. Inequality can impact on economic growth
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10. Why is Inequality Important?
2. Inequality is important for reducing poverty
Growth and Inequality Elasticities of Poverty
Elasticities Comparative ratio
Growth (1) Inequality (2) Absolute (1)/(2)
Sub-Saharan Africa -1.51 1.56 0.97
Africa -1.82 2.16 0.91
East Asia and Pacific -2.48 3.49 0.71
Eastern Europe and Western -4.22 6.85 0.62
Asia
Latin America and Caribbean -3.08 5.00 0.62
Middle East and Central Asia -2.75 3.91 0.70
South Asia -2.10 2.68 0.78
Source: Compiled from Fosu (2011).
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11. Why is Inequality Important?
3. Inequality impacts on welfare
Inequality
Discontent Crime Health
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12. Data
Measures of Natural Resources:
2. Resource Rents (%GDP)
3. Subsoil Assets (log, per capita)
4. Resource Exports (%Total Merchandise Exports)
Instrument:
7. Value of resource stocks in 1970 (Norman, 2009)
8. Subsoil Assets
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13. Data
Measures of Natural Resources:
● Resource Rents (%GDP)
● Subsoil Assets (log, per capita)
● Resource Exports (%Total Merchandise Exports)
Instrument:
7. Value of resource stocks in 1970 (Norman, 2009)
8. Subsoil Assets
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14. Data
Measure of Inequality:
● Gini Coefficients (UNU-WIDER)
Measure of Institutional Quality
5. Aggregate of six World Bank Governance Indicators
Voice and Accountability, Political Violence, Government Effectiveness,
Regulatory Quality, Rule of Law, Control of Corruption
6. Economic Freedom of the World Index - EFW (Fraser Institute)
7. Corruption Perception Index – CPI (Transparency International)
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15. Data Coverage
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16. Econometric Specification
Relevant features of the model:
•Three equations and three jointly determined variables; income inequality (G),
institutional quality (IQ), and per-capita income (Y).
•Incorporates enough exclusion restrictions to guarantee identification of the
equations - all of the equations are overidentified.
•The vector of control variables in each equation contain a number of variables that
exhibit endogeneity and correlation with the disturbances.
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17. Econometric Specification
Estimation Procedure – GMM-3SLS Estimator :
•Jointly determined variables are regressed on all of the control variables
included in the system, using a GMM estimator to instrument the
endogenous controls in the reduced form equations.
•Predicted values of the jointly determined variables generated from the
reduced form equations are substituted into the structural equations. The
endogenous controls in structural equations are instrumented using GMM.
•Structural equations are jointly estimated using 3SLS.
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18. Results – Preferred Measures
Dep. Variable gini Dep. Variable govt_ind Dep. Variable logGDPpc
resource_rent 0.261*** resource_rent -0.299*** resource_rent 0.005
govt_ind -9.510*** gini -0.022*** govt_ind 0.317***
logGDPpc 3.325 logGDPpc 0.758*** gini -0.003
trade_open 0.024*** malaria -0.035 education 0.007***
polity2 0.466*** education -0.001 phys_capital -0.004
m2 0.007 aid -0.001** trade_open 0.001***
ethnic_frag 5.886*** ethnic_frag 0.317 coast 0.003
land_gini 0.138*** latitude 0.992*** malaria -0.463***
govt_spending 0.029 socialist_legal -0.749***
govt_system -5.957*** english_legal -0.107
resource_rent* 0.209* french_legal -0.404***
govt_ind
german_legal -0.143**
Obs . 156 Obs . 156 Obs . 156
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R-squared 0.664 R-squared 0.791 R-squared 0.785

19. Results – Alternative Measures of Institutional Quality
Governance Indicators
● Political violence, voice and accountability, and the rule of law all have a
significant negative effect on inequality
● Resource rents have a significant negative effect on each of the
indicators, except control of corruption
Corruption Perception Index (CPI)
● There is no significant relationship between CPI and inequality and
resource rent and CPI
Economic Freedom of the World (EFW)
● Resource rent has a significant negative effect on EFW and EFW has a
significant positive effect on inequality
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20. Results – Subsoil Assets and Resource Exports
Dep. Variable gini gini Dep. Variable govt_ind govt_ind
subsoil_assets 1.869*** subsoil_assets 0.086***
resource_exports 0.053* resource_exports -0.003*
govt_ind -6.483*** -9.333*** gini -0.010 -0.027***
logGDPpc 2.553 3.200 logGDPpc 0.497*** 0.414***
trade_open 0.020* 0.035** education 0.004* 0.002
polity2 0.581** 0.329** aid -0.001 -0.001**
m2 0.032 0.009 ethnic_frag -0.155 0.152
ethnic_frag 7.622*** 3.486 latitude 1.880*** 1.286***
land_gini 0.170*** 0.187*** socialist_legal -0.851*** -0.793***
govt_spending 0.201 0.184 english_legal -0.066 -0.061
govt_system -5.608*** -5.245*** french_legal -0.341*** -0.242***
german_legal -0.226*** -0.088
Obs . 129 146 Obs . 129 146
R-squared 0.727 0.698 R-squared 0.794 0.771 20

21. Results – Summary
1. Natural resource wealth, abundance, and intensity, consistently
increases income inequality.
3. Both resource wealth and resource intensity decrease institutional
quality. Conversely, resource abundance positively affects
institutional quality.
5. The direct marginal impact of resource wealth and resource
intensity on income inequality depends on the level of institutional
quality.
7. The effect of resource wealth and resource intensity on inequality
is robust to broader measures of natural resources
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22. Policy Implications
Policymakers must ensure that:
3. Resource wealth is not misappropriated
5. Benefits of resource wealth are shared both within society
and across generations
Overall Aim: transforming non-renewable resource wealth
into other forms of wealth which can
provide sustainable growth
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23. Policy Implications
Achieving inclusive growth
3. Taxation of natural resource wealth
2. Distribution and investment of natural resource
wealth
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24. Policy Implications
Taxation of natural resource wealth
1. Efficient
2. Competitive
3. Stable and Transparent
4. Flexible and Responsive
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25. Policy Implications – Taxation
• Efficient
• Profit-based taxes encourage exploitation of lower grade ore and
recognise risks in mining and mineral price fluctuations but are more
difficult to administer than royalties
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26. Policy Implications – Taxation
2. Competitive
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27. Policy Implications – Taxation
3. Stable and Transparent
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28. Policy Implications – Taxation
4. Flexible and Responsive
Mining Cycle:
5. Exploration – Mineral Development Funds, carrying
forward losses
7. Mine Development – depreciation allowance, low VAT and
duties, tax deductions for infrastructure
9. Production – tax changes with price fluctuations
11.Post-Mining – tax deductions for rehabilitation funds
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29. Policy Implications – Distribution and Investment
• Sovereign wealth fund (Norway)
• Direct Distribution (US, Canada)
• Tax Cuts (Australia)
• Public Goods (Indonesia)
• Infrastructure (PNG, DRC)
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30. Conclusion
• Natural resources increase income inequality
• Improved institutional quality decreases income inequality
• Resource wealth tends to decrease institutional quality, though
resource abundance need not necessarily lead to a decline in
institutional quality
• Resource policy must concentrate on limiting expropriation of
resources
• Efficient and equitable taxation must be combined with long
term resource utilisation strategies
• Political and social institutions are pivotal in determining the
effect of natural resources
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31. Thank you for listening
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