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Economics development and natural resources 1. Demographic transition in resource rich countries: a bonus or a curse? (forthcoming in World Development) This study argues that resource wealth is a key factor for understanding income effects of demographic transition. We develop a simple model highlighting how the income effect of increased labor supply may depend on resource rents, and provide empirical evidence that support the theoretical predictions. Using panel data covering the period from 1982–2006 for more than 120 countries, we find a negative interaction effect between resource wealth and demographic transition on national income. Moreover, the negative interaction effect does not depend on institutional quality, and is found also across different samples. 2. Resource curse and power balance: evidence from oil rich countries. World Development 40, 1308–1316. (Joint with Bjorvatn and Schneider), 2012. We examine the role of political fractionalization in understanding the “resource curse”. Using panel data for 30 oil-rich countries, we find that the income effect of resource rents is moderated by the political power balance. With a strong government, resource wealth can generate growth even in an environment of poorly developed institutions, while adding oil revenues to a weak government may have damaging effects on the economy. These results have important implications for the economic prospects of the oil-rich countries in the Middle East, which are currently undergoing profound political changes. 3. Resource curse and power balance: evidence from Iran (Joint with Bjorvatn and Schneider) revise & resubmit to Review of Middle East Economics and Finance, 2012. Empirical research shows that natural resources have a detrimental effect on economic growth, a phenomenon known as the “resource curse”. Competition between influence groups for access to the resource rents, that is, rent-seeking, is often blamed for this curse. In this paper we dig deeper into the link between political competition and the resource curse by studying the case of Iran from 1960-2007. We present a theoretical model demonstrating how the effect of rents on the economy depends on the balance of political power. The model shows that an increase in rents may lead to a sharp reduction in income when the distribution of power between influence groups is relatively balanced. The empirical evidence confirms the predictions of the model. 4. Natural resources and internal conflicts - how decentralization lifts the curse (Joint with Lessman and Markwardt), 2012, under progress. We study how the natural resource endowments affect risk of internal conflicts and how this effect depends on decentralization levels in a political system. Resource rents, especially lootable resources such as oil, finance conflicts, creating strong separatist movements. Our main hypothesis is that increasing the levels of political decentralization can limit the destructive effect of the natural resource rents on internal conflicts. We use cross-country and panel data covering the period from 1984–2004 from more than 80 countries to test this hypothesis. Our estimates confirm that the relationship between the natural resource rents and risk of internal conflict is dependent on the levels of decentralization. Our results hold when 1 we control for the effects of other determinants of conflict, time varying common shocks, country-fixed effects and various additional covariates. 5. Oil may buy peace: role of balance of political power (Joint with Bjorvatn), 2012, under progress. We study the oil rents-internal stability relationship, taking into account the role of political power factionalism. Using panel data for more than 120 countries from 1984-2009, our results show that oil rents can bring political stability but this stability effect is significantly depends on the degree of political power balance. The positive stability effect of oil rents reduces at higher levels of political factionalism and lack of dominant political group. 6. Can education save democracy from oil rents? (Joint with Al Dakak), 2012, under progress. While a limited number of oil rich economies enjoy adequate levels of democracy, most others suffer from limited political openness. In this study, we aim to investigate the possible explanation for this contrasting observation. Our main hypothesis is that higher levels of education can reduce the negative effect of oil rents on democratic institutions. Our panel data analysis of more than 60 countries from 1961-2010 shows that level of education matters for the final effect of oil on democracy. This finding is highly significant for the secondary education, controlling for other main determinants of political institutional quality and country and time fixed effects. Economics development and shadow economy 7. Shadow economy trends in Iran: A Comparative Study Using Amos and Lisrel (in Farsi, joint with Nasrollahi and Talei). Quarterly Journal of the Economic Research 12, 61-92. We estimate the size of shadow economy in Iran from 1975-2007. 8. Pollution, shadow economy and corruption: theory and evidence (joint with Thum and Biswas). Ecological Economics 75, 114–125, 2012. We study how the shadow economy affects pollution and how this effect depends on corruption levels in public administration. Production in the shadow economy allows firms to avoid environmental regulation policies; a large informal sector may be accompanied by higher pollution levels. Our theoretical model predicts that controlling the levels of corruption can limit the effect of the shadow economy on pollution. We use panel data covering the period from 1999 to 2005 in more than 100 countries to test this theoretical prediction. Our estimates confirm that the relationship between the shadow economy and the levels of pollution are dependent on the levels of corruption. Our results hold when we control for the effects of other determinants of pollution, time varying common shocks, country-fixed effects and various additional covariates. 2 9. Smuggling around the World: Evidence from Structural Equation Modeling (joint with Buehn). Applied Economics 44 (23), 3047-3064, 2012 This article uses a Multiple Indicators Multiple Causes (MIMIC) model to analyse the determinants of smuggling. The analysis reveals that higher corruption and a lower rule of law encourage smuggling. Tariffs and trade restrictions are important push factors, while a higher Black Market Premium (BMP) discourages smugglers. Based on the MIMIC estimates, we calculate an index of smuggling which provides a ranking for 54 countries. We find that smuggling is rampant in Cameroon, Pakistan and Kenya while it is least prevalent in Switzerland, Finland and Sweden. 10. Illegal Trade in the Iranian Economy: Evidence from Structural Equation Model. European Journal of Political Economy 25(4), 489-507. This study investigates the causes and consequences of import and export smuggling and estimates its relative size in Iran from 1970 to 2002. Multiple Indicators–Multiple Causes (MIMIC) modeling and trade misinvoicing are used to compute the latent variable of smuggling. The results indicate that the penalty rate for smuggling and the quality of economic and political institutions reduce smuggling, while tariffs and black market premia increase the incentives for illegal trade. More trade openness is associated with greater illegal trade in the case of Iran. On average, smuggling in Iran has been approximately 13% of total trade. 11. Dark side of trade in Iran. In: Storti, C.C., de Grauwe, P. (Eds), Illicit Trade and Globalisation, MIT Press, Cambridge, MA. As international trade has expanded dramatically in the postwar period--an expansion accelerated by the opening of China, Russia, India, and Eastern Europe--illicit international trade has grown in tandem with it. This volume uses the economist’s toolkit to examine the economic, political, and social problems resulting from such illicit activities as illegal drug trade, smuggling, and organized crime. The contributors consider several aspects of the illegal drug market, including the sometimes puzzling relationships among purity, price, and risk; the effect of globalization on the heroin and cocaine markets, examined both through mathematical models and with empirical data from the U.K; the spread of khat, a psychoactive drug imported legally to the U.K. as a vegetable; and the economic effect of the “war on drugs” on producer and consumer countries. Other chapters examine the hidden financial flows of organized crime, patterns of smuggling in international trade, Iran’s illicit trading activity, and the impact of mafia-like crime on foreign direct investment in Italy. 12. Does the Shadow Economy Bring Political Stability? (Joint with Badreldin), under progress, 2012. In this research, we intend to investigate the relation between the size of activities in the shadow economy and political (in) stability. 13. Impact of education on the shadow economy: Institutions matter (Joint with Andreas Buehn), 2012. Our paper aims to answer the question whether education and its interplay with a society’s institutions are important elements explaining the dynamics of participation in the shadow 3 economy. Through its positive effect on income returns, education should reduce the incentives to participate in the shadow economy, as taking on an official, well-paid job becomes more rewarding, hence attractive. This may be referred to as the human capital effect of education. At the same time though, education contributes to the formation of values and helps people to understand the importance of paying taxes. Higher morale sentiments should reinforce the reluctance to enter the shadow economy. If institutions are however severely deprived, education may be less effective a mechanism to reduce shadow economy participation. We call this the normative effect. Using panel data for more than 80 countries between 1999 and 2007, the empirical analysis presented in this paper tests the relationship between the shadow economy and education, taking into account the impact of institutions and controlling for other important factors such as the tax burden. 14. Does real estate transparency matter for foreign real estate investments? (joint with Gholipour Fereidouni), 2012. The purpose of this paper is to examine the impact of real estate transparency (RET) on foreign real estate investments (FREI). Most of the previous studies have argued that the free flow of information and the fair and consistent application of local property laws could attract greater amounts of FREI. Using observations from 32 countries covering 2004, 2006, 2008 and 2010 and applying fixed-effect and the generalized method of moments (GMM) techniques, our empirical results reveal that RET is not a major determinant of FREI. However, we find that the effect of RET on FREI is dependent on its interaction with the level of income implying that the higher the level of income in the host country, the higher the effect of RET on FREI. Finally, the results show that foreign direct investment (FDI) in other sector, market size and property prices are important determinants of FREI. Economics development and oil shocks 15. Oil revenues shocks and government spending behavior in Iran. Energy Economics 33 (6), 1055-1069, 2011. Oil revenues play an important role in the political economy of Iran. On average, 60% of the Iranian government revenues and 90% of export revenues originate from oil and gas resources. Current international sanctions on Iran have mainly targeted the oil production capacity of Iran and its exports to the global markets. In this study, we analyze the dynamic effects of oil shocks on different categories of the Iranian government expenditures from 1959 to 2007, using impulse response functions (IRF) and variance decomposition analysis (VDC) techniques. The main results show that Iran's military and security expenditures significantly respond to a shock in oil revenues (or oil prices), while social spending components do not show significant reactions to such shocks. 16. The Effects of Oil Price Shocks on the Iranian Economy (Joint with Markwardt). Energy Economics 31(1), 134-151. The Iranian economy is highly vulnerable to oil price fluctuations. This paper analyzes the dynamic relationship between oil price shocks and major macroeconomic variables in Iran by applying a VAR approach. The study points out the asymmetric effects of oil price shocks; for 4 instance, positive as well as negative oil price shocks significantly increase inflation. We find a strong positive relationship between positive oil price changes and industrial output growth. Unexpectedly, we can only identify a marginal impact of oil price fluctuations on real government expenditures. Furthermore, we observe the ”Dutch Disease” syndrome through significant real effective exchange rate appreciation. 17. Does the Iranian oil supply matter for the oil prices? (Joint with Raesian), under progress, 2012. There is an increasing tension between the Iranian Government and the west on an increasingly likely European oil embargo and the Iranian threat to close the Strait of Hormuz. The main question is: What will happen to the international oil prices in the case of shocks in the flow of Iranian oil to the international markets? In this study, we analyze the dynamic relationship between the Iranian oil supply and international oil prices from January 1973 to September 2011, using a modified version of the Granger causality test introduced by Toda and Yamamoto (1995). Our results show that there is no Granger causality between the Iranian oil production and international oil prices. Historical data on the Iranian oil production do not provide any useful information to explain the current and future values of international oil prices. Thus, global oil prices do not follow shocks in the Iranian oil production. Economics development and military spending 18. Military spending and economic growth: The case of Iran. Defence and Peace Economics (forthcoming: http://dx.doi.org/10.1080/10242694.2012.723160). Over the last decade, the Iranian Government budget on military has been higher than the average of the world. The current increasing international sanctions aim to reduce the military capabilities and capacities of the Iranian Government. We analyze the response of the Iranian economy to shocks in its military budget from 1959 to 2007, using impulse response functions and variance decomposition analysis. The Granger causality results show that there is unidirectional causality from the military spending growth rate to the economic growth rate. The response of income growth to increasing shocks in the military budget is positive and statistically significant. Economics development and environment 19. Hold your breath: a new index of air quality (Joint with Buehn) (Revise & Resubmit to Energy Economics), 2012. Environmental quality and climate change have long attracted attention in policy debates. Recently, air quality has emerged on the policy agenda. We calculate a new index of air quality using CO2 and SO2 emissions per capita as indicators and provide a ranking for 122 countries from 1985 to 2005. The empirical analysis supports the EKC hypothesis and shows a significant influence of determinants such as energy efficiency, industrial production, electricity produced from coal sources, and urbanization on air quality. According to our index, Luxemburg, Norway, Iceland, Switzerland, and Japan are among the top 5 countries in terms of air quality performance. The Democratic Republic of Congo, Eritrea, Ethiopia, Togo, and Nepal performed worst in 2005 5 20. Pollution, economic development and democracy: evidence from the MENA countries (joint with Markwardt). (MAGKS Paper No. 27-2012, Marburg) The Middle East and North Africa (MENA) countries are among the world's top emitters of CO2 and SO2 in per capita terms. The objective of this paper is to analyze whether investing in the democratic development of these countries is an effective tool to make the economic growth in this region more environmentally compatible. Arguing on the basis of the Environmental Kuznets Curve hypothesis and using panel data on the income-emissiondemocracy nexus, we find evidence that improvements in the democratic development of the MENA countries help to mitigate environmental problems. Our results clearly show, that the quality of democratic institutions has a greater influence on local environmental problems than on global environmental issues in the MENA region. Economics development: others 21. Education spending and productivity in Iran: where have all the education expenditures gone? ERF conference paper .No. ERF17AC_055., 2011 22. Macroeconomic of populism in Iran. MPRA Paper No. 15546, Munich, 2009 23. Cement industry in Iran (in Persian). Bourse Financial & Economical Monthly Magazin (Mahname Bours), No. 49, 23-29. , 2005. 24. Economic evaluation of the Caspian Oil transit to International markets (in Persian). Quarterly Energy Economics Review (Faslnameh Motaleate Eghtesad Energy), First year, 3-24, 2004. 25. Opportunities for Iran commodity transit routes after the Iraqi war (in Persian). Political & Economical Ettelat Journal. No.9-10, 224-229, 2003. 26. Economics of oil pipelines in the Caspian Sea region (in English), Energy Economics (Eghtessad-e-Energy) 2 (47), April 2003. ISSN: 1563-1133, 2003 27. Iranian options most economically viable for exporting Caspian Sea Oil. Oil & Gas Journal 101 (11), 22-26. ISSN (printed): 0030-1388, 2003 6