Precept 8

October 3, 2013

Summary:

This paper examines options for fiscal policy frameworks in resource rich developing  countries. In doing so, it reassesses the role of the permanent income hypothesis, especially
in low-income countries seeking to tackle in frastructure and development needs by scaling
up growth-enhancing expenditure.
The paper concludes that the fiscal policy framework:
•should reflect country-specific factors, which may change over time;
•should promote the sustainability of fiscal policy;
•should be sufficiently flexible to enable scaling up growth-enhancing expenditure,
especially in low-income countries;
•should consider absorption capacity constraints and the quality of public financial
management systems;
•should provide adequate precautionary buffers in countries that are vulnerable to high
volatility and uncertainty of resource revenue; and
•could be supported by resource funds if they are properly integrated with the budget and
the fiscal policy anchor.

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October 3, 2013

Summary:

This paper provides deeper insights on a few themes with regard to the experience with macroeconomic management in resource-rich developing countries (RRDCs). First, some stylized facts on the performance of these economies relative to their non-resource peers are provided. Second, the experience of Fund engagement in these economies with respect to surveillance, programs, and technical assistance is assessed. Third, the experience of selected countries with good practices in the management of the natural resource wealth is presented. Fourth, the experience of IMF advice in helping RRDCs set up resource funds is discussed. Finally, the main themes and messages from the IMF staff consultation with external stakeholders (CSOs, policy makers, academics) are presented.

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October 3, 2013

Summary:

This paper aims to widen the prism through which Fund policy analysis is conducted for resource-rich developing countries (RRDCs). While all resource-rich economies face resource revenue exhaustibility and volatility, RRDCs face additional challenges, including lack of access to international capital markets and domestic capital scarcity. Resource exhaustibility gives rise to inter-temporal decisions of how much of the resource wealth to consume and how much to save, and revenue volatility calls for appropriate fiscal rules and precautionary savings. Under certain conditions, it would be optimal for a significant share of a RRDC’s savings to be in domestic real assets (e.g., investment in domestic infrastructure), though absorptive capacity constraints need to be tackled to promote efficient spending and short-run policies are needed to preserve macroeconomic stability. The objective of this paper is to develop new macro-fiscal frameworks and policy analysis tools for RRDCs that could enhance Fund policy advice.

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October 3, 2013

Abstract:Are natural resources a "curse" or a "blessing"? The empirical evidence suggests that either outcome is possible. This paper surveys a variety of hypotheses and supporting evidence for why some countries benefit and others lose from the presence of natural resources. These include that a resource bonanza induces appreciation of the real exchange rate, deindustrialization, and bad growth prospects, and that these adverse effects are more severe in volatile countries with bad institutions and lack of rule of law, corruption, presidential democracies, and underdeveloped financial systems. Another hypothesis is that a resource boom reinforces rent grabbing and civil conflict especially if institutions are bad, induces corruption especially in nondemocratic countries, and keeps in place bad policies. Finally, resource rich developing economies seem unable to successfully convert their depleting exhaustible resources into other productive assets. The survey also offers some welfare-based fiscal rules for harnessing resource windfalls in developed and developing economies.Access the article here

October 3, 2013

Abstract:

Many countries have failed to use natural resource wealth to promote growth and development. They have been damaged by the volatility of revenues and have failed to save a sufficiently high proportion of their resource revenues and failed to make high-return investments to support diversification of their economies. This review explores the reasons for these failures and discusses policies to improve performance.

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October 3, 2013

Abstract:

The permanent income rule is seldom the optimal response to a windfall of foreign exchange, such as that from a resource discovery. Absorptive capacity constraints require domestic investment, and investment in structures requires non-traded inputs the supply of which is constrained by the initial capital stock. This, particularly when combined with intra-sectoral capital immobility, delays adjustment and creates short run ‘Dutch disease’ symptoms as the real exchange rate sharply appreciates and overshoots its long run value. Optimal revenue management requires investing in the domestic non-traded goods sector and a slow build up of consumption. Accumulation of foreign assets adjusts to accommodate the time-paths of domestic consumption and investment.

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October 3, 2013

Abstract:

 A windfall of natural resources (or aid) faces government with choices of how to manage public debt, investment and the distribution of funds for consumption. The permanent income hypothesis suggests a sustained increase in consumption supported, once resources are depleted, by interest on accumulated foreign assets. However, this strategy is not optimal for capital-scarce developing economies. Incremental consumption should be skewed towards present generations. Savings should be directed to accumulation of domestic private and public capital rather than foreign assets. Optimal policy depends on the impact of distortionary taxation and ability of consumers to borrow against future revenues.

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October 3, 2013

Abstract:

Three funds are necessary to manage an oil windfall: intergenerational, liquidity and investment funds. The optimal liquidity fund is bigger if the windfall lasts longer and oil price volatility, prudence and the GDP share of oil rents are high and productivity growth is low. We apply our theory to the windfalls of Norway, Iraq and Ghana. The optimal size of Ghana’s liquidity fund is tiny even with high prudence. Norway’s liquidity fund is bigger than Ghana’s. Iraq’s liquidity fund is colossal relative to its intergenerational fund. Only with capital scarcity, part of the windfall should be used for investing to invest. We illustrate how this can speed up the process of development in Ghana despite domestic absorption constraints.

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October 3, 2013

Abstract:

This paper addresses the efficient management of natural resource revenues in capital-scarce developing economies. It departs from usual prescriptions based on the permanent income hypothesis and argues that capital-scarce countries should prioritize domestic investment. Because revenue streams are highly volatile, governments should protect consumption from shocks by increasing it only cautiously. Volatility in domestic investment can be moderated by a buffer of international liquidity, but it is also important to structure investment processes to be able to cope efficiently with substantial fluctuations. To date, most of the resource-rich countries of Africa have not had investment rates commensurate with their rate of resource extraction.

Access the article here. An earlier version of the article can be found here.

April 2, 2013

Precept 10 says that resource revenues can be used by governments to facilitate private investment. A question arises over whether this investment should be steered toward diversifying the economy or exploiting opportunities in the domestic resource sector. The paper by Van der Ploeg and Poelhekke suggests the former. The authors find that an excessive level of natural resource dependence exposes the economy to volatility.

 

Precept 8 states that revenue volatility ought to be addressed through gradually and smoothly building up domestic expenditure and investment from resource revenues. The paper supports the fundamental premise of the Precept through providing evidence that resource dependent economies experience growth volatility. Furthermore, the paper draws out measures on how to address such volatility.

 

The paper investigates the link between natural resources and volatility in economic growth. The authors find that the indirect effect of natural resources on growth, via volatility, is negative. The case is made hereby that poor growth performance and volatility are strongly related to resource dependence, as well as the absence of a sophisticated financial system. However, when controlling for volatility, natural resources can have a positive direct effect upon growth. Reducing volatility through, for instance, a financial system able to cope with sudden resource income fluctuations therefore also reduces the negative effects of resource dependence.

 

With regards to general investments it is crucial to improve the business environment and the productivity of the private sector as a whole. For such reforms the paper provides a specific recommendation, demonstrating that a well functioning capital market can reduce the effect of shocks in the resource share on volatility. This also allows for funding of new activities, thereby fostering a responsive and flexible business environment, which is essential for increased private investment. 

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