Can Resource Policy Reverse the Resource Curse? Evidence from China Na Zuo Assistant Professor of Practice, Department of Agricultural and Resource Economics, University of Arizona [email protected] Hua Zhong Assistant Professor, Department of Applied Economics, School of Economics and Management, Beihang University [email protected] Selected Paper prepared for presentation at the 2019 Agricultural & Applied Economics Association Annual Meeting, Atlanta, GA, July 21-23 Copyright 2019 by Na Zuo and Hua Zhong. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. 1 Abstract: This study investigates the impact of resource policies on regional resource-growth relation – the resource curse hypothesis – in a case of China. We examine three major resource policies: the energy market price reform, the fiscal reform with private mining rights, and the Western Development Strategy, taking advantage of timing and resource type variations in the policy implementation. Using a cross-province sample of China over the period of 1990 to 2015 with an instrumental strategy, we show that the market price reform together with the privatization process on coal drive the positive resource effect on provincial economic growth in China. The Western Development Strategy also show a positive contribution to strength the resource–growth relation in western provinces through coal and natural gas developments. Though our results show strong and positive resource-growth relations in China, evidences also suggest consistent negative resource effects on certain growth-related factors, such as R&D activities and educational attainments. Key word: Energy resources; Resource curse; Resource policies; Economic growth JEL code: O13, Q32, Q38 2 1.Introduction The phenomenon that resource-rich regions develop less quickly, called the resource curse, was formally presented by Auty (1993), and have become “one of the most intriguing puzzles in economic development and a great example of how organized empirical observations can guide economic theory and inform policy” (James and Aadland, 2011). Although numerous economists have attempted to explain the puzzle, little consensus has been concluded in the literature. Empirical studies have devoted great efforts to identifying institutional quality and debating the measurement of resource wealth (Brunnschweiler and Bulte, 2008; Brunnschweiler, 2008; van der Ploeg and Poelhekke, 2010; Arezki and Brückner, 2012). However, few studies have examined efficacies of resource related policies and their impacts on the resource-growth relation. van der Ploeg (2011) has summarized several history experiences of resource policies such as appropriate property rights and financial sustainable polices that can successfully manage to beat the “curse”, but the experiences vary from country to country. This paper addresses this issue in a case of China by examining impacts of resource policies, including the energy market price reforms, the fiscal reform, and the Western Development Strategy, on the regional resource-growth relation. Efficacies of different resource policies are of interest for two reasons. First, historical evidences show that resource-rich developing countries performed badly because they failed in designing appropriate property rights and fiscal policies in developing their mineral resources (van der Ploeg 2011). Hence, understating impacts of resource policies may help mitigate the negative impact of resource wealth and can potentially improve economic well-being in resource-rich developing countries. Second, resource policies could vary by resource type. Point-sources with concentrated production and revenues that are of high value and can be easily stored, transported, and sold, and thus are more likely to be appropriated by the state or by political elites with taxation and/or state ownership (Jensen and Wantchekon, 2004; Boschini, Pettersson, and Roine, 2007; Vahabi 2018). Resource policies redistribute the resource wealth and that how the resource rent flow matters in the resource-growth relation. Thus, identifying resource policies tailored to resource types that can effectively alleviate negative impacts of resource windfalls and benefit local economies would be of great practical value, especially for developing countries. Among other nations, three unique characteristics endow China serving the purpose of this study. First, China has been the largest primary energy production country since 2005 and energy 3 resource development has played a crucial role in Chinese economic growth. With homogeneous constitution, law, and governance structures across provinces in China, provinces also show substantial variation in resource endowments, institutional quality, and economic development (Ji, Magnus, and Wang 2014). Such variations provide us an opportunity to investigate the regional resource-growth relation in the world largest developing country. Second, resource policies such as market price reforms on coal, crude oil, and natural gas sectors have been rolled out one after another since 1990s in China (see Table 1). The variations in policy timing across the three resources provide compelling setting to explore the regional resource-growth mechanisms with resource heterogeneity accounted. Because resource related policies were implemented in different manners with homogeneous constitution, a comparison of their relative effectiveness can shed light on effective policy design to turn the curse into the blessing. Third, China has experienced increasing in oil, natural gas and coal extractions in the 2000s but with different rates. Together with the regional sparsity across oil, natural gas, and coal endowments and the type-specific resource policies, being able to decompose resources into crude oil, natural gas, and coal helps us to further identify the role of resource types in the resource-growth relation. In addition, previous cross-country studies have been criticized with confounding features, such as geography, culture, and institution quality. To alleviate these issues, within-country evidences have emerged, sampling in China (Fan, Fang and Park, 2012; Ji, Magnus and Wang, 2014; Shao and Qi, 2009), the U.S. (Papyrakis and Gerlagh 2007; Weber 2014), Canada (Papyrakis and Raveh 2014), Russia (Alexeev and Chernyavskiy 2015) and Peru (Aragón and Rud, 2013) among other nations. Within-country studies reduce the danger of spurious correlations by analyzing subnational regions facing the same economic system, institution arrangement, macroeconomic policies, and less various cultures and institutional qualities. Thus, we argue that examining resource policy reforms within China is well suited to serve the purpose of the study. This paper examines the impacts of resource policies on the regional resource-growth relation in China and identify transmission channels of “the curse” with respect to three energy resources - crude oil, natural gas, and coal. We consider three major resource-related policies in China: the energy market price reform, the fiscal reform with focus of mining rights transfer and fiscal centralization, and the Western Development Strategy. These policies resemble resource- related policies observed in other countries, thereby providing a comparison of efficacies of different resource polices within the same institutional setting. In this study, we first examine the 4 effects of different types of resource revenues on economic growth and growth-related factors across Chinese provinces from 1990 to 2015. Then test the resource policy effects conditioning on resource types. With the Instrumental Variable (IV) strategy implemented in the panel dataset, we show that regions with higher coal revenues grow faster than other regions in China. Our results suggest that the market price reform together with the privatization process on coal contribute to the positive resource effect in China. Though strong and positive resource-growth relations appear in our estimation, evidences also suggest consistent negative resource effects on certain growth- related factors, such as educational attainments and R&D activities. Our study builds on a growing literature that examines resource curse and makes three contributions. First, much of the literature relating the resource curse or “Dutch disease” focuses on testing the overall effect of resource wealth on economic growth or on debating the measurement and specification of resource wealth (Badeeb, Lean, and Clark, 2017; van der Ploeg and Poelhekke 2017). Despite the ongoing debate, most of studies have reached a consensus that resource-rich developing countries are more likely to suffer from the “curse”, so appropriate polices to manage natural resource windfalls in developing countries seems to be more important and urgent (van der Ploeg 2011; Dauvin and Guerreiro, 2017). Thus, this paper moves forward over existing literature by examining impacts of several resource-related policies on resource- growth relation and seeks to shed the light on understanding policies that can alter the “curse” into “blessing” in developing economies. Second, recent studies have emphasized the need of using natural experimental or quasi-experimental variation to obtain reliable evidences of relationship between resource wealth and economic performance (van der Ploeg and Poelhekke, 2017). In a specific illustration provided in Section II, the resource-related