Escaping the Resource Curse
IMF Blog, May 16, 2012
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Bibliographic details
- Authors: Mauricio Villafuerte
- Published: May 16, 2012
Context and problem statement
- For many developing countries, managing natural resources and the increased revenues they bring is a persistent challenge described as the “resource curse.”
- High commodity prices and the discovery of new reserves offer potential revenue to promote economic and social development, build human capital, and reduce infrastructure gaps in resource-rich countries.
- The volatility, uncertainty, and exhaustibility of resource revenues create trade-offs when formulating fiscal policy and scaling up public spending.
- Key practical policy questions:
- How to ensure short-term macroeconomic and fiscal stability?
- How to achieve long-term fiscal sustainability and adequate savings for future generations while allocating sufficient resources to meet development needs?
- How to address absorption capacity constraints that could limit the quality and effectiveness of scaled-up spending?
Assessment of existing literature and gaps
- Recent academic and empirical work highlights the need to avoid rigid policy formulations that force constant consumption of resource wealth over time (for example, borrowing at the beginning, saving when income is high, and lowering the rate of saving as income tapers off).
- Such work has not offered practical approaches to managing fiscal policy in resource-rich developing countries and overemphasizes the role of resource funds.
- There is no “one size fits all” approach; country-specific economic and institutional circumstances (resource revenue dependency, reserve longevity, development needs) must guide policy design.
- The large volatility of resource revenues and difficulty predicting swings call for prudence, gradualism in scaling up spending, and flexible fiscal rules that adapt to new information and changing circumstances.
Seven principles to guide fiscal frameworks for resource-rich developing countries
- The framework should reflect country-specific characteristics like revenue dependency and volatility as well as how long the resource revenue stream is expected to last—all of which may change over time.
- It should ensure the sustainability of fiscal policy. Depending on how many years the natural resource is expected to last before it is depleted, benchmarks of sustainability can be derived from simple constant consumption approaches—particularly for countries with short-lasting reserves—or from a broader focus on stabilizing government net wealth (not now, but over the long run).
- Policymakers can choose alternative fiscal anchors, either primarily addressing fiscal sustainability concerns (for example, permanently constant non-oil balance deficit rules) or focusing more on short-term demand management (such as a price-based or structural balance rule). Country characteristics should guide the choice of the appropriate fiscal anchor.
- Frameworks should be sufficiently flexible to enable the scaling up of growth-enhancing expenditure (for example, public investment to tackle existing infrastructure gaps), especially in low-income countries.
- In countries with large absorption constraints, the pace of scaling up may have to be gradual, while public financial management systems are reinforced and domestic supply constraints softened.
- The volatility and uncertainty of resource revenue is critical for the design of fiscal frameworks, and having sufficient precautionary fiscal buffers is critical. A strong revenue forecasting framework needs to be developed and spending plans framed in a medium-term perspective.
- The credibility and transparency of the framework can be supported by a well-designed natural resource fund. But the fund cannot be a substitute for an appropriate policy framework nor a panacea that obviates the need to strengthen overall fiscal management capacity. Funds need to be fully integrated with the budget and the fiscal framework.
Core components of a complete fiscal framework (as proposed)
- Fiscal policy indicators — the best analytical measures of the actual stance of fiscal policy.
- Fiscal sustainability benchmarks — provide a way to assess fiscal policy with a longer-term perspective.
- Fiscal policy anchors — the rules or guidelines that would better fit resource-rich countries and their specific characteristics.
Source: Escaping the Resource Curse, Mauricio Villafuerte, May 16, 2012
Content in this bundle
- Staff Discussion Note
