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Beyond the resource curse : mineral resources and development in Guinea-Conakry
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Beyond the Resource Curse: Rents and Development
Accessed September 7, Auty, R. Barma, N. Rents to Riches? Besada, H. Brautigam, D. Brown, W. Bulte, E. Chikozho, C.
Introduction: Beyond the Resource Curse : Rents to Riches?
Hanson, G. Kararach, and T. Shaw eds. Collier, P.
Beyond the Resource Curse
Collier P. Assessed September 15, Corden, W. Diamond, L. Duruigbo, E.
Grindle, M. 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 Das et al. 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 Gylfason 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. Resource-rich countries frequently face large and volatile capital flows which complicate the conduct of monetary and exchange rate policy.
Many African countries, however, are fearful of embarking on a fully-flexible exchange rate regime. Therefore, a more gradualist path to exchange rate flexibility with inflation targeting will probably be pursued in many countries, with all of the transitional difficulties that this will entail.
The experience of Ghana, which adopted inflation targeting with limited exchange rate flexibility since , is an interesting example of a gradualist approach.
Yet another challenge is the Dutch Disease — that is, the tendency for natural resource booms to result in overvalued currencies that depress non-resource exports of goods and services, import-competing local industries and long-run economic growth but also tend to jack up interest rates and short-run capital inflows, thus creating macroeconomic and financial volatility.
An important question here is how to stabilise exchange rates and sterilise current-account inflows in times of high commodity prices as well as capital inflows that are correlated with resource windfalls. Because equilibrium domestic interest rates are almost always above those in advanced countries, the costs of sterilisation can be significant and can create tensions between the fiscal authorities and the central bank. As is clear from the case of Botswana, however, insofar as periods of high commodity prices are also periods of large government surpluses held at the central bank, a properly managed counter-cyclical fiscal policy will provide a degree of automatic sterilisation.
follow site Experiences with industrial policy around the world suggest that it is not straightforward to design an appropriate incentive structure that would help lay the ground for economic diversification in resource-rich countries. Old-style industrial policies where government is directly involved in the production process need to be avoided.
Indeed, those policies have in many cases been captured by local elites, opening the door to corruption and undermining the broader institutional framework. New industrial policies have focused on designing incentive-compatible rules aiming to achieve a private sector-led economic diversification Rodrik Success stories that have yielded economic diversification suggest that low, predictable and non-distorting taxes on entrepreneurial activity can help foster diversification.
Also, the use of commodity proceeds to establish a supportive physical and social infrastructure can raise returns and encourage private investment in other sectors. The financial sector can also play an important role in fostering economic diversification. In particular, efforts to deepen and broaden financial systems in resource-based economies would help achieve that goal. Perhaps the biggest challenge facing resource-rich countries results from rent-seeking behaviour that undermines their existing institutions, including political diversification and democracy.
Specifically, abundant natural resources tend to distort the allocation of talent, sometimes attracting the wrong sort of people and methods to politics.
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Especially in countries with weak institutions, talent tends to shift out of private entrepreneurial activity into more lucrative rent-seeking activities, with detrimental implications for efficiency and sustainable economic growth. Institutions need to be designed to guard against such developments. For example, strong and reliable property rights can foster financial-sector development, allowing the financial system to play a more active and significant role in intermediating resources to help build small- and medium-sized enterprises in the non-resource-rich sectors of the economy.