Not too long ago, I took a day away from the trading desk in order to attend the Revenue Watch Institute’s panel discussion entitled “Boom, Bust and Better Policy: Crisis Lessons for Resource Rich Countries.” Revenue Watch aims to “promote the responsible management of oil, gas and mineral resources for the public good” and the panel delivered an intriguing discussion on methods to help resource rich countries maintain a level of stability irregardless of fluctuations and volatility in commodity prices.
Panelists included Joseph Stiglitz, a Nobel Prize economist and former chief economist of the World Bank; Chris Canavan, the co-chief risk officer and chief market risk officer at Goldman Sachs; Antoine Heuty, a deputy director at Revenue Watch; and, Sarah Pray, a policy analyst at the Open Society Institute. The event was moderated by Dino Mahtani of the Financial Times.
Mr. Mahtani did an excellent job in steering the conversation from a more abstract discussion of themes and problems to specific avenues for effecting change. First, Professor Stiglitz spoke about the lessons learned on macroeconomic policy for research rich countries in the wake of the financial crisis. Specifically, Dr. Stiglitz discussed the efficacy of stabilization funds in helping to weather the storm of commodity price volatility and the role of global imbalances in exacerbating the crisis. While many focus on the U.S. trade deficit with China, Dr. Stiglitz pointed out the far more significant imbalance between oil exporters, specifically Saudi Arabia, and net importers.
Next, Mr. Canavan of Goldman Sachs offered practical and empirical observations on the short-comings of stabilization funds and explored ways in which resource exporters and importers could more efficiently and effectively collectivize risk and consequently share volatility. Mr. Canavan observed that “producers are more keen to hedge than consumers,” and that this kept the risks too heavily one-sided. Too many countries in the crisis experienced severe long-term consequences from short-term fluctuations in commodity prices.
Dr. Stiglitz and Mr. Canavan both cited Russia’s huge sovereign wealth fund as a stabilizing mechanism that helped the country avoid another catastrophic economic collapse (look back to 1998 for evidence of such a collapse). This is particularly important in countries with developing civic societies, as the risks during an economic crisis reach far further than the purely economic–government and civic society risk collapse as well.
Both Mr. Heuty and Ms. Pray recently published papers that cut at the heart of the themes in the Boom, Bust and Better Policy debate. Mr. Heuty’s research focused on the disparate relative ability of resource rich countries to cope with commodity price volatility in implementing fiscal policy, while Ms. Pray’s argued for increased transparency from governments and companies in resource rich countries seeking foreign capital investments.
To both ends, the panelists discussed ideas that have been cited as potential solutions including the creation of sovereign debt bonds that were negatively correlated to commodity prices (i.e. commodity prices rise, interest rates fall) and asking investors to require conditionality before allocating capital to resource rich countries. Conditionality would include increased transparency and accountability in deploying capital.
Following the general discussion the forum was opened to the audience for questions. I was fortunate enough to ask a targeted question towards Dr. Stiglitz with regard to the role a global reserve currency could play in sorting out global trade imbalances and reducing commodity price volatility. I recently read Freefall, in which Dr. Stiglitz makes the compelling case for such a global reserve. In essence, Dr. Stiglitz asserted that a global reserve would smooth out and boost international aggregate demand and lead to a more stable economic balance overall. This economic stability would yield way to commodity stability; however, no direct relationship could be established.
I realized shortly after asking the question, that I did not elaborate enough as to the specifics of how I think currency fluctuations increased volatility on commodities. The dollar denomination of most important commodity markets leaves prices vulnerable to shifts in sentiment with regard to the base currency. I would be intrigued to see if volatility in commodities would remain as high in a globally denominated metric of value.
The last question came from Jed Miller, a director at Revenue Watch, about the decision of the Obama Administration to open up the U.S. to offshore drilling (the panel took place before the Gulf Disaster). Many arguing in favor of the “drill baby drill” policy push the fact that this will help “free the U.S. from an addiction on Mid-East oil.” To that argument, Dr. Stiglitz offered a spot on response: “drilling offshore depletes our reserves and sacrifices self-sufficiency in the long-run for short-run benefits.”
Furthermore, he argued that the quantity of offshore oil would do little to put downward pressure on the commodity price and it is neither “the lowest cost oil [nor] the most environmentally friendly.” Consistent with one of the themes stressed for resource rich nations, the panelists all agreed that the U.S. government needs to maximize revenue and get adequately compensated in licensing the right to drill offshore if it is to be done right. This is something it often has failed to do in dealing with oil companies.
In light of subsequent events (um you know, that big spill in the Gulf that still won’t stop), this is a particularly apt and concerning point. It was known that much of the new offshore drilling was far less environmentally friendly and riskier than many existing reserves.Several panelists cited the negative externalities associated with oil expropriation that market equilibriums alone do not take into account. In hindsight, this was in many ways eerily frightening in light of recent events.
All in all, I was very impressed with Revenue Watch for putting together not only a stimulating, but also well run panel. Following the discussion I had the opportunity to briefly speak with each of the panelists and found them all to be very engaging and thoughtful individuals with a dedication to advancing public discourse on what is an important, and unfortunately sometimes overlooked topic. I look forward to following up on Revenue Watch‘s research and events in the future.