Natural Resource Revenue
Natural Resources Can Play Key Role in Inclusive Growth
March 26, 2014
- Andean countries generating increased exports from extractive industries
- Suitable fiscal and regulatory frameworks needed to aid revenue management
- Sound management of revenue needed to ensure benefits flow to future generations
If natural resource development is properly managed, the associated revenue can be used to speed up growth, reduce inequality, and lift people out of poverty.
The potential pitfalls and opportunities associated with natural resource revenue were the focus of the closing session of a three-day conference in Lima, Peru, where representatives from across the Andean region gathered March 3rd–5th to share insights and discuss best practices on natural resource management.
The countries of the Andean region are important commodity exporters. Extractive industries—mainly mining, petroleum, and natural gas—play a growing role in the economies of the region (see chart). With commodity prices tripling between 2000 and 2013, burgeoning export volumes have been accompanied by large capital inflows into the region, fostering economic growth and helping to boost tax revenue. But this has also posed challenges for governments as they attempt to invest and spend the revenue in ways to help their citizens.
“The countries of the Andean region have been successful in avoiding many of the pitfalls experienced by other natural resource-rich countries,” said IMF First Deputy Managing Director David Lipton. “For instance, their economies have demonstrated a strong ability to expand non-resource sectors of the economy, not least by ensuring adequate supply of skilled labor and capital to be utilized in them.”
Companies doing more
In most instances, the extractive industries in the Andean countries are not large employers. However, they can help generate employment in related activities, including construction and strengthening capacity in local communities.
Local communities in which resource developments are located usually have high expectations in terms of improvements in their living standards—ranging from direct cash transfers, higher employment, or infrastructure development. Sometimes, these communities oppose resource projects on environmental, social, and even economic grounds. Petroleum and mining companies have had to demonstrate their commitment to environmental stewardship, socially responsible practices, and support of local community development in order to allay community concerns.
For their part, governments need to provide investors with credible fiscal and regulatory regimes within which to explore, develop, and produce. Governments also need to meet their responsibilities for infrastructure, social services, and security in extraction areas. In return, governments expect to receive a reasonable share of the revenues.
How much revenue is derived from extractive industry exports?
Exports from extractive industries in Bolivia, Colombia, Ecuador, and Peru accounted for about two-thirds of total exports, on average, over the past five years. Similarly, extractive industry revenue now represents an important share of total government revenue in the region: about one-third in Bolivia and Ecuador; 20 percent in Peru; and 13 percent in Colombia.
But governments also need adequate fiscal frameworks to deal with price volatility and resource exhaustibility. So, for example, a government might enact a budget rule that limits spending when high prices bring revenue windfalls into government coffers. This type of rule tries to smooth spending so adequate funds remain available should prices fall, and to avoid the negative consequences of high spending on the economy.
The exhaustibility of resources also raises issues of sustainability of revenue and ensuring future generations continue to benefit from the resource revenue. Therefore, it also calls for smoothing government spending over time.
Governments also need broad public support and incentives to sustain savings of resource revenues; otherwise, there is a risk that their savings may merely transfer spending power to a bad successor.
Attaining inclusive and sustainable growth
Sustained development and equitable growth are now the focus in many countries. Governments have options when it comes to the revenues they receive from natural resources. Critically, they must decide how much of the resource revenue flows to consume now and how much to save/invest for future generations; and how best to save and invest—that is, in the domestic economy or abroad in foreign assets.
By setting up natural resource funds governments can deal with resource revenue volatility (stabilization funds), meet development needs (development funds), and save for future generations (savings funds).
Rapid and sustained poverty reduction requires inclusive growth that allows people to contribute to and benefit from economic growth—a big challenge under natural resource development. If well designed, targeted cash transfers have shown they can help reduce income inequality. Experience in the region has also shown that linking eligibility for transfers to investments in education and health can promote more inclusive growth.
IMF work has illustrated the damage to equity and efficiency from pervasive energy subsidies, to which oil- or gas-rich countries are especially prone. In particular, subsidies aggravate fiscal imbalances, crowd out priority public spending, and depress private investment. Most subsidy benefits are captured by higher-income households, reinforcing inequality. Removal of subsidies in phases is becoming a priority for many countries.
The lessons from the Andean region are similar to those shared at an earlier conference held by the East African Community (EAC). Representatives from the five EAC countries gathered from 15 to 17 January 2014 in Arusha, Tanzania, to discuss fiscal management of oil and natural gas. Like the Andean countries there is a strong recognition that fiscal management of these resources needs to be approach in an integrated fashion: fiscal regime design, revenue administration, macro-fiscal policy frameworks, and public financial management and budget systems. The participants also stressed the difficulty and importance of managing expectations about the fruits of new petroleum discoveries.