EconomicDevelopment

After contributing to the theory and policy of international trade and eco­nomic geography, by the end of the 1990s Tony was back to his original pas­sion for economic development, and since then his research on trade, economic geography and economic development have increasingly come together as one with the usual strong emphasis on policy issues.

A prominent example of how the study of the interactions among trade, geography and development can lead to new useful insights on what holds some countries back economically can be found in Redding and Venables (2004). This paper starts from the observation that, despite increasing inter­national economic integration, the vast cross-country disparities in per capita have not been bid away by the mobility of manufacturing firms and plants. While there are many potential reasons for the reluctance of firms to move production to low wage countries, including endowments, technology, insti­tutional quality and geographical location, Redding and Venables focus on the last and emphasise two main mechanisms. One is the distance of coun­tries from the markets in which they sell output (“demand access”), and the other is distance from countries that supply manufactures and provide the capital equipment and intermediate goods required for production (“supply access”). Transport costs or other barriers to trade mean that more distant countries suffer a market access penalty on their sales and also face additional costs on imported inputs.

In the same vein, Limao and Venables (2001) note that the real costs of trade, due to transport and various frictions in doing business, are important determinants of a country's ability to fully participate in the world economy. Remoteness and poor transport and communications infrastructure act to iso­late countries, inhibiting their participation in global production networks such as those Tony investigated subsequently in Baldwin and Venables (2013). Using different datasets to investigate the dependence of transport costs on geography and infrastructure, Limao and Venables (2001) find that infra­structure is an important determinant of transport costs, especially in land­locked countries. In particular, analysis of African trade flows reveals that their relatively low level is largely due to poor infrastructure.

At a finer level of disaggregation, Collier and Venables (2016) evaluate the importance of infrastructure (in particular infrastructure for connectivity) in the development of fast-growing cities. They argue that the value of infra­structure goes well beyond the “user benefits” of standard cost-benefit appraisal, as infrastructure supports an economic environment in which the potential of cities, that is, scale, specialisation and agglomeration, can best be achieved.

An important concern about some developing countries is their mishan­dling of natural resources. This concern had already attracted Tony's attention at an early stage of his career. In particular, when he started publishing his NTT trilogy in 1982, he also published a paper on the macroeconomic impli­cations of a resource discovery in an open economy (see Eastwood and Venables 1982). Fast forward and the analysis of resource-rich economies again became prominent in his research agenda when he went back to Oxford in 2007 as Director of OxCarre.^[224]

Countries with substantial non-renewable natural resource wealth face spe­cial opportunities and challenges. Research undertaken by Tony with other Oxford economists, notably Frederick van der Ploeg and Paul Collier, has contributed to understanding these challenges and to improving policies for resource management, particularly in developing economies. Of particular impact has been their study of the relationship between resource wealth and conflict, the short- and medium-run management of instability in revenue streams (see van den Bremer and van der Ploeg 2013), trade issues (see Ruta and Venables 2012), the experience of particular countries (see Collier et al. 2010; Venables 2011), and long-run decisions about saving, investing and consuming revenues. Through this research, Tony's team has been influential in shaping the policy positions of international financial institutions, particu­larly the IMF, and in contributing to policy debates within countries, particu­larly in the newly resource-rich nations of Africa.

Another focus has been the management of the foreign exchange windfall that is often generated by resource revenues. At the aggregate level, these rev­enues can help to finance three things: current expenditure, domestic invest­ment and the acquisition of foreign assets (e.g. through a sovereign wealth fund). OxCarre research has shown that the balance between these different types of spending depends on a number of factors including the following: the ethical weighting of income accruing to different generations to the con­straints on public funds and the supply of capital; the need to avoid an infla­tionary resource boom to exchange rate overvaluation and Dutch disease; a country's capacity (institutional and economic) to absorb extra expenditure; and the need to insulate an economy from volatility in world commodity prices to the need for spending decisions to be robust to different politico- economic environments. Analysis of how best to manage the trade-offs between these factors has been the subject of van der Ploeg and Venables (2011, 2013), Collier et al. (2010), van den Bremer and van der Ploeg (2013) and van der Ploeg and Poelhekke (2009).

OxCarre research on the use of natural resource revenues has challenged the conventional wisdom of using the permanent income hypothesis (PIH) to guide decisions about how revenues are spent. In particular, Tony's team has constructed a dynamic model of a developing economy that is capital con­strained (because households and government are unable to borrow at the world interest rate) and on a growth path towards development. They have shown that in this setting the optimal policy is not to follow the PIH prescrip­tion of using revenues to accumulate long-run foreign assets, but rather to balance higher investment in the domestic economy (particularly infrastruc­ture) with a relatively large increment to current consumption to address the poverty of the current generation (see van der Ploeg and Venables 2011). This research has also addressed issues relating to short- and medium-run eco­nomic management, analysing the impact of resource revenue on the struc­ture of the economy, its implications for the exchange rate and how to manage these implications (see van der Ploeg and Venables 2013).

This body of research has outlined a strategy for resource revenue manage­ment that prioritises investment in physical (and human) assets in the domes­tic economy, supplementing these with foreign savings vehicles designed to mitigate the effects of volatility and in which revenues can be “parked” until absorptive capacity problems are solved. It also outlines the importance of concurrent domestic economic reform—for example, preparing the economy to overcome absorption constraints and how to handle a resource boom—and the microeconomic detail of the interaction between the public and private sectors. The importance of this line of research lies in the fact that the core analysis suggests a use of revenues quite different from the PIH prescriptions that have underpinned the policy advice of the Fiscal Affairs Department of the IMF and influential country-based organisations, such as the Norwegian Oil for Development programme. Indeed, it has influenced the policy debate within a range of countries through advice offered to ministers and engage­ment in debates within civil society and NGOs. The WTO in its World Trade Report 2010 (WTO 2010) has also used Tony's research insights, as has the IMF despite its attachment to the PIH. The impact on policy design within countries has been achieved in particular by advice provided through the Natural Resource Charter (NRC), established in 2009 by an independent team of experts to provide guidance on the management of natural resources. The NRC has been adopted or otherwise endorsed by a broad range of organ­isations, governments and NGOs: the World Bank, the IMF, Norway, Australia, Zimbabwe, the African Development Bank and the Africa Progress Panel. The UK government has given its support to the NRC through DFID (see DFID 2009).

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