Today’s Bounty, Tomorrow’s Promise: Better Policies to Manage Natural Resources

By Leslie Lipschitz

(Version in Español | Français | عربي )

Countries rich in natural resources are often looked at with envy: they face few financial constraints and that should speed their development path. But the reality is less rosy.
Countries with an abundance of natural resources—typically oil, gas or minerals—have, on average, performed less well than comparable non-resource rich countries.

That raises one of the perennial questions in economic policymaking. How to manage the economic and social challenges that stem from resource wealth? Or, to borrow the words of Professor Thorvaldur Gylfason (University of Iceland), how to prevent “nature’s bounty” from “becoming the curse of the common people”?

Broadening the policy dialogue

While this issue isn’t a new one, it is particularly topical for a number of African economies that have new natural resource discoveries about to come on stream. So, in early November, the IMF Institute, in cooperation with the Bank of Algeria, organized a High Level Seminar on Natural Resources in Algiers, focusing on the challenges that these countries face, and distilling lessons from countries that have managed their natural resources successfully. The seminar brought together senior officials with experts from academia and civil society organizations.

One of the advantages of being an international organization with a near-global membership is that the IMF is a unique repository of examples of member countries’ good and bad policy practices and experiences from which other policymakers can learn and benefit. The IMF is thus well placed to bring together policymakers and experts to discuss what has worked and what has not—that is, to learn from one another and from history. Participants from Botswana, Chile, Mexico, and Norway discussed what had worked best in their countries, and some other country representatives were quite frank on what had not worked in their experience.

Common themes

The benefits from “picking each other’s brains” were immediately evident in Algiers. Representatives from countries with newly discovered natural resource wealth, such as Ghana and Uganda, had the opportunity to ask direct questions and get advice from experts and from other policymakers about how best to manage resource wealth. Several themes emerged.

Many acknowledged the difficulties of negotiating contracts with big multinational extraction firms about the sharing of exploration costs and the distribution of profits.

  • Clearly governments want to ensure that a fair share of the profits stay in the country, while companies want to be certain that the initial investment in exploration and discovery will yield a fair return.
  • While countries shared their experiences, they also heard the point of view of a major global petroleum company. Various technical experts also weighed in with suggestions on how contracts could be structured to deal with various contingencies.

A second universal question is how the benefits should be shared between current and future generations.

  • This entails a careful balancing act between the urgent need to address current poverty and the longer-term investment strategy—and it often requires substantial political fortitude and robust institutions to ensure that domestic spending does not exceed the level that can be absorbed effectively.
  • While there is clearly no single ideal, universally applicable solution, elements from many of the countries’ strategies might well be useful in other cases. The primary common denominator of success was undoubtedly good governance underpinned by robust and transparent institutions.

Underlying these natural resource-specific issues is the need for a stable and predictable macroeconomic environment to enable countries to capitalize on their resource wealth. Here, the views of the IMF were sought on a range of macroeconomic issues—such as designing fiscal policies, monetary and exchange rate policies for cushioning the volatility of resource revenues, and the efficacy of ‘industrial policies’ designed to favor specific sectors (for example, through trade policies or budgetary subsidies).

Continuing the dialogue on good policies

While the High-Level Seminar in Algiers provided a rich and varied discussion, it would be naive to think that there might be a ‘quick fix’ for an issue that countries have struggled with for many years.

But, to the extent that this seminar—the proceedings of which we plan to publish as a book—has stimulated policymakers’ thinking about both the complexities and successful examples of managing natural resource endowments, it will have met our objectives. What is needed is an ongoing consultative dialogue inclusive of the civil society and a collaborative approach.

We at the IMF are committed to being part of that conversation. In addition to country level policy discussions, we will continue to engage on two broad fronts:

  • First, by providing technical assistance in areas such as tax and expenditure policies, monetary policies under alternative exchange rate regimes, and the use and management of sovereign wealth funds. 
  • Second, by providing training opportunities. For example, following the Algiers Seminar, the IMF Institute launched a new two-week course on “Macroeconomic Management in Resource Rich Countries” (at Stellenbosch University in South Africa). This course aimed at giving a broad overview of all topics and challenges involved in policymaking and strategic planning for countries with resource wealth. Next year the course will be offered again—to different regional audiences at the Joint Vienna Institute in Austria and the Joint Partnership for Africa in Tunisia.

3 Responses

  1. Resource abundant countries perform less well along which dimensions? Economic growth, inequality, human capital accumulation?

    What does “good governance underpinned by robust and transparent institutions” look like on the ground? Are there examples of institutional innovations that reflect this goal?

    What is the IMF’s positive regarding industrial policies in resource-rich countries? How are infant industry subsidies supposed to managed? What kinds of industrial policy investments are acceptable?

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