Curing the curse of resources

Jul 11, 2012 Editorial

No one has ever doubted the “potential” of Guyana: it was based on the famed resources in our land – gold, bauxite, diamonds, manganese, agriculture and timber. In the last few decades they were joined by oil, located for certain in our continental shelf.
As we have done before, three economists, of VOX-EU, recently pointed out that the presence of natural resources poses a number of potential economic challenges, especially for developing countries. They argued that resource-rich countries need to look beyond the so-called resource curse and put into action innovative policies and institutions to confront their many challenges and reap the benefits of widely shared natural-resource wealth.
The challenges include: a loss of competitiveness in potentially dynamic, non-natural resource sectors leading to a narrowing of the production base; excessive government reliance on revenues derived from commodities and export earnings; too much macroeconomic and financial volatility; and rent-seeking behaviour that can undermine governance and exacerbate the difficulty of building robust, growth-enabling institutions.
But there are several options available to governments in confronting those challenges. They can begin with fiscal policy. Government revenues in resource-rich countries are highly dependent on the prices of the commodities they export. Those prices are both highly volatile and hard to predict. In the short run, governments in resource-rich countries need to promote macroeconomic stability by decoupling current spending from volatile government revenues.
In the long run, those governments need to establish medium-term spending plans to ensure intergenerational equity. Sustainable management of revenues derived from the exploitation of exhaustible natural resources can be achieved either through the accumulation of savings in sovereign wealth funds or through public investment in future growth outside the natural-resource sector.
Fiscal institutions have proved helpful in achieving such decoupling between spending programs and revenues. For example, Chile has successfully implemented a fiscal rule that targets a structural budget balance set by an independent panel of experts. Countries with weaker institutional environments cannot, however, establish institutional arrangements capable of credibly committing to counter-cyclical or at least non-cyclical fiscal policies.
In this context, alternative policies could be explored, such as the use of financial instruments to hedge against the volatility in government oil revenues as has been done in Mexico. Norway has vested the management of its oil wealth in its independent central bank rather than in its Ministry of Finance for the explicit purpose of increasing the distance between the management of the oil fund and the political process.
The decision to set up sovereign wealth funds in resource-rich developing countries needs to be guided by domestic conditions.
While countries with high capital-to-labour ratios, such as Norway, have successfully set aside large pools of savings in dedicated sovereign funds aimed at guaranteeing intergenerational equity, many resource-rich countries in Africa have an urgent need to focus on investing in public goods to diversify their economies away from the natural-resource sector and to create the jobs that Africa needs so badly.
Historically, Norway has focused its fiscal policies on the provision of public goods. Therefore, Norway can afford to be patient. Understandably, many developing resource-rich countries are in more of a hurry. Even so, the Norwegian model is far from being irrelevant to them. In the short run, their limited absorptive capacity may call for some savings to be put aside, possibly in sovereign wealth funds.
From the outset, Norway set itself strict standards for natural-resource management, reflected in the Norwegian parliament’s adoption in 1972 of the so-called Ten Oil Commandments.
The commandments include a commitment to (i) national supervision and control of all operations on the Norwegian Continental Shelf; (ii) the development of new industries on the basis of petroleum; (iii) respect for existing industrial activities and the protection of nature and the environment; and (iv) state involvement at all appropriate levels, contributing to a coordination of Norwegian interests in Norway’s petroleum industry. The commandments underpin the transparent ways in which Norway’s oil wealth has been allocated to its oil fund, now called a pension fund.
(To be continued)

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