This year's turbulent oil market, in combination with the Covid-19 pandemic, has threatened the financial outlook of several Latin American nations. With many governments dependent on oil revenues, the issues of public ownership of the oil sector and financial liberalization are subject to intense political debate. But given the fluctuations of the market and national responses over the past three decades, some have called into the question the ideological nature of oil policy in the region.
In a chapter from the 2019 volume The Political Economy of Taxation in Latin America, FRANCISCO MONALDI examines oil expropriation and taxation across Latin America, arguing that oil policy is determined less by political ideology and more by structural factors of the oil sector and investment cycles.
From the chapter:
"In 2013–2015 Mexico opened up its oil industry to private investment, following seventy-five years of exclusive state control. Other Latin American governments, including Argentina, Brazil, Colombia, Ecuador, and even Venezuela, covering all political tendencies, are also enthusiastically courting foreign investment in oil, offering increasingly attractive fiscal conditions, with lower government-take. This trend would seem to proclaim a new liberalization cycle in the industry. In contrast, during the previous decade, under an oil price boom, the region had witnessed a resource nationalism cycle. Most countries in the region significantly increased the government-take on hydrocarbons and the government control over the industry. What are the determinants of these swings in oil policy, and in particular in hydrocarbon taxation policy? This chapter argues that structural factors, such as the characteristics of the oil sector (rents, sunk costs, risk profile of projects), the countries’ geological endowments, and price and investment cycles are key determinants of oil taxation policy. These factors interact with the broader institutional environment of a country to define oil policy. Ideology usually plays a role in how policy change is enacted, particularly regarding the degree of government control, but the general direction of oil taxation policy is largely determined by the incentives provided by structural factors and market conditions.
To understand the dynamic of resource nationalism it is important to focus on the deeper determinants of the historical cycles of private opening and expropriation. These are the incentives faced by political leaders under different scenarios of international prices, stages of the investment cycle, production and reserve tendencies, and size of net exports (imports). Expropriation in its different forms, including significant tax increases, tends to occur when prices rise substantially – that is, when its benefits increase significantly for the government. Expropriation is also more likely to occur in an environment of high and increasing reserves and production, and when the country becomes a large net exporter. Thus, after a cycle of significant and successful private investment, the probability of expropriation paradoxically increases. Given the amounts of the oil rents, which can be as high as 90% of revenues, the fiscal benefits can be politically irresistible. Most relevant petroleum exporters are fiscally reliant on oil. Thus, in this so-called high-sunk-cost sector, the effects of a decline in investment can take years to lead to the consequent decline in production. Therefore, government leaders with short-term horizons may be tempted to obtain high current benefits while deferring costs, leaving future leaders to bear the political consequences of declining production and revenues."
Link to the text.
- "The scaling-up of NAFTA to the SPP (Security and Prosperity Partnership of North America)—which bolstered U.S. national security—is the basis for changes in the Mexican energy sector." Alejandro Alvarez Béjar's account of NAFTA's implications for energy policy challenges Monaldi's framing. Link.
- "Contrary to an explanation based on rentier state theory, Chavez's proclivity for state intervention, both as a candidate and as president remained constant regardless of significant changes in oil prices." Gustavo Flores-Macías' study of Latin American leftism sheds light on Chavez's resource nationalism. Link.
- "Compared with high-income resource-abundant countries, Latin American & Caribbean commodity exporters have much lower (known) natural resource endowments per capita but are much more dependent on natural resource revenues." Emily Sinnott, John Nash, and Augusto de la Torre's World Bank report provides an overview of commodity dependence in the region. Link. And Maristella Svampa examines the tensions between commodity dependence and indigenous rights. Link.
Post-Recession School Choice
PhD Candidate in Economics at the University of Texas Austin JIWON PARK studies the economics of education. In a 2020 paper, Park investigates the effects of post-recession funding cuts to public schools on private school enrollment.
From the abstract:
"This paper asks whether funding for public schools affects parents’ decision to send their children to private schools. In the wake of the Great Recession, funding for public K-12 education fell precipitously in the United States and stayed low for several years. Critically, states with greater historical reliance on state appropriations (rather than local or federal appropriations) and states with no income tax experienced larger cuts. These two features were set decades before the Great Recession, changed little over time, and do not predict other impacts of the Recession, such as unemployment, providing plausibly exogenous sources for variation in public school funding. I combine these two sources with the timing of the Great Recession in an event study framework to instrument for local public school funding. I find that students exposed to a $1,000 (9.0 percent) decrease in per-pupil funding are more likely to enroll in private schools by 0.48 to 0.59 percentage points (4.5 to 5.6 percent). I show further that the effect is strongest among high socioeconomic status students living in disadvantaged areas. These findings suggest that reductions in public school resources lead to greater inequality in education through school choice."
Each week we highlight great work from a graduate student, postdoc, or early-career professor. Have you read any excellent research recently that you'd like to see shared here? Send it our way: firstname.lastname@example.org.
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- "We should not let a stylized image of Manchester stand in for all of capitalism. But the dark satanic mills still must find a place, and a relatively important one, in any history of capitalism." On the blog, Tim Barker reviews Jauris Banaji's latest book, A Brief History of Commercial Capitalism. Link.
- "This inability to pursue expansionary fiscal policy in a global economy is at the root of the economic problems we face today." Also on the blog, an interview with Amit Bhaduri on social democracy, development, and growth. Link.
- Join us on Tuesday, December 8 at 6 pm ET for the next meeting of JFI's Social Wealth Seminar, featuring Sarah Quinn, Associate Professor of Sociology at the University of Washington, on the use of public credit as a multi-purpose political tool. RSVP to email@example.com.
- JFI Senior Fellow Johannes Haushofer, with Robert Mudida and Jeremy P. Shapiro, compares the effects of cash transfers and psychotherapy on economic and psychological well-being, finding "cash transfer recipients had higher consumption, asset holdings, and revenue, as well as higher levels of psychological well-being." Link.
- Valentin Lang finds that IMF programs increase income inequality, an "effect...driven by absolute income losses for the poor and not by income gains for the rich." Link. h/t Paul
- "We find that work requirements reduce SNAP participation by 52 percent." By Colin Gray, Adam Leive, Elena Prager, Kelsey Pukelis, and Mary Zaki. Link.
- Adalmir Antonio Marquetti et al. compare the rate of profit in the United States and China between 2007 and 2014 by investigating "the trajectories of the national average rate of profit and their disaggregation; the distribution of different rates of profit by firms, economic sectors, and manufacturing sectors, and the stability of those distributions over time." Link.
- Brandon P. Martinez and Alan Aja on racial inequality in homeownership between Latinx groups. Link. And an earlier paper from Martinez looks at the homeownership gap between white and Black Cuban-Americans. Link.
- "I compare rates of intergenerational occupational mobility across four countries in the late nineteenth century: 1869–1895 Argentina, 1850–1880 United States, 1851–1881 Britain, and 1865–1900 Norway. Argentina and the United States had similar levels of intergenerational mobility, and these levels were above those of Britain and Norway. These findings suggest that the higher mobility of nineteenth-century United States relative to Britain might not have been a reflection of 'American exceptionalism,' but rather a manifestation of more widespread differences between settler economies of the New World and Europe. I argue that the relative abundance of land in Argentina and the United States made the transition into independent farming relatively easier in these two countries than in Europe. This explanation is consistent with the fact that rates of intergenerational mobility in the United States appear to have converged to those in Europe during the twentieth century, after frontier expansion had concluded." By Santiago Pérez. Link.