Reference

April 2, 2013

In facilitating private sector investment for a diversified economy and exploiting added value at a domestic level, a major objective of Precept 10 lies with supporting resource-linked development. New sources of demand, such as for labor services and goods, can be met by local sources. The report provides a number of insights on a successful case of adding domestic value through local content policies.

 

Recognising that resource projects can have both negative and positive local economic, environmental and social effects, Precept 5 outlines the internationally accepted frameworks governing resource extraction.  The report provides insight on some of the measures which can be taken by mining companies to mitigate adverse effects and contribute to development. In addition, the case study demonstrates the importance of early community consultations.

 

Through a case study of the Lao PDR the report provides support for adopting local content policies. The two mines in the country have had a significant contribution to local development through a number of local content projects. These have focused primarily around four areas: employment generation, procurement of local goods and services, training programmes and enterprise development. For both mines, 35% of employees come from local districts and 50% of goods and services are procured nationally. Since 2011 these policies have led to a significant improvement in mortality rates, 14% higher literacy rate than at national level, five fold total village income increase and a seven fold per capita income increase. These figures come from biennial surveys, which are conducted to monitor social, economic and health status of local communities and serve as a basis for programme prioritization.

 

The authors find however that such success it highly contingent upon the mine’s ability to work with and understand the local community actors and streamline the companies policies with government institutions at local and national level.  It is also noted that the most important mechanism for wealth generation is through the consumption linkage, which arises from spending on goods and services and also the multiplier effect from employees spending their wages.

 Access the report here.

April 2, 2013

Precept 10 states that resource revenues can be used by governments to facilitate private investment for diversification as well as exploiting opportunities for increased domestic value added. The report supports the underlying statement of Precept 10, that increasing growth of the domestic economy requires a significant increase of private sector investment. In addition the report provides a number of general points specifically for resource rich countries.

Precept 9 recommends that government use resource wealth for increasing efficiency and equity in public spending. In doing so the government is required to raise the capacity for spending. As resource rich countries have a large concentration of revenues accumulating to government, the government must be able to spend that money effectively. The report provides a number of guideline recommendations on public spending.

Precept 7 states that resource revenues must foster continued high levels of domestic investment if those revenues are to promote sustainable and inclusive economic growth. A general principle of the Precept is that once it has been decided to invest, investment in public capital is particularly beneficial. The report supports this principle and places emphasis upon infrastructure investment.

The Growth Commission report analyses 13 economies which experienced sustained high growth rates for 25 years or longer. In doing so it identifies some of the characteristics of high growth economies and considers how these can be replicated. The underlying statement of the report is that growth is a necessary, albeit insufficient, condition for broader development. It is found that no country achieved sustained growth without also maintaining high rates of public investment. Such investment furthermore crowds in private investment and allows new industries to emerge. Public investment is however affected by the availability of savings, the report finding that high income economies often have a saving rate of between 20-25%. One sector which has been neglected and which the report highly recommends for public investment to reach is infrastructure.

The report also directly addresses growth in resource rich countries. The Dutch disease and fluctuating commodity prices, whilst presenting a challenge, are not insurmountable. They have not been handled well by many governments however. Extraction rights are sold too cheaply and taxation is too low whilst money accrued is stolen or wasted. As a response to these challenges the report suggests government begin by deciding how to allocate exploration and development rights and an accompanying tax regime. Once revenue is collected, government should aim to invest between 5-7% of GDP in the domestic economy. Remaining revenue ought to be invested in a politically insulated savings fund.

Access the report here.

April 2, 2013

Precept 10 states that resource revenues can be used by governments to facilitate private investment for diversification as well as exploiting opportunities for domestic value added. The strategy chosen for doing so can significantly affect growth of the domestic economy. The paper by Collier and Goderis provides a number of insights on some of the potential transmission channels through which growth can be negatively affected as a result of natural resource booms.

 

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 by Collier and Goderis provides evidence on resource volatility. Supporting Precept 8, it is found that resource booms have short term positive effects but long term negative effects which need to be mitigated, through, for instance, establishing a stabilization fund.

 

Paper begins with the finding that whilst the literature predicts negative effect of commodity booms upon growth, evidence has been shown that such booms significantly raise growth. These findings could be short lasting however. The paper therefore examines data from 1963 to 2003 to consider short and long run effects of commodity prices on growth. In doing so they investigate all the potential causes of the resource curse proposed in the literature. The authors find that no single transmission channel determines whether resources are a curse. However, a combination of private and public consumption, total investment and exchange rate overvaluation accounts for a substantial part (p. 3). They also find that commodity booms have positive short-term but adverse long-term effects. The results support the view that such booms provide incentives for non-productive activities such as rent seeking and lobbying. The authors note, however, that the existence of strong institutions and good government can mitigate the curse and enable positive growth for resource rich countries.

Access the paper here.

April 2, 2013

 

At a fundamental level Precept 7 deals with the trade off between using revenues to benefit the present generation or accumulate assets to yield returns for the future generation. Once this has been decided the question arises as to how those investments are to be made. The Precept recommends for limited immediate consumption but for a substantial portion of revenues to be invested in domestic assets. Investment in foreign assets such as Sovereign Wealth Funds (SWF) is discouraged for developing countries.

Whilst most of the paper is oriented towards oil funds, the paper provides general insights on structuring laws to build revenue management institutions.

 

Precept 8 states that revenue volatility ought to be addressed through gradually and smoothly building up domestic expenditure and investment from resource revenues. Due to resource volatility spending and revenue generation ought to be decoupled through establishing a ‘Sovereign Stabilization Fund’ – similar to a SWF but with the purpose of covering short run volatility. As such the paper provides useful guidelines on the legal and institutional instruments which can support in the management of resource wealth.

 

The chapter by Bell and Faria addresses the institutional and legal issues in the management of resource wealth. The authors consider legal aspects such as integrating an oil revenue management system with international obligations as well as more political concerns such as transparency and oversight and control mechanisms. Drawing on evidence from Sao Tome and Principe the authors provide a number of recommendations for establishing an oil fund:

     - Large revenue flows ought to be deposited in major international institutions and held in a foreign currency.

     - The fund ought not to be invested in the domestic economy in order to reduce political influence.

     - An investment committee ought to be established and charged with oversight and investment policy of oil fund assets.

     - Portfolio managers ought to be responsible for carrying out the investments.

     - The use of oil resources ought also not to be used as securities for loans, instead lending should be based on credit worthiness.

In establishing a permanent fund inevitable questions arise regarding intergenerational equity, estimates about the size and value of deposits and the efficiency of expenditures. In addressing these issues evidence can be drawn from Timor-Leste, which calculated the ‘maximum sustainable annual expenditures’ by finding the present value of the resource and making available for immediate consumption the expected return on estimated value in addition to the return on the balance in the account.

Access this chapter here.

April 2, 2013

In Precept 7 a major trade-off that arises when government seeks to foster domestic investment is whether to use revenues for current expenditure or invest them in the future. As a general principle, the Precept recommends for low income countries to invest a substantial portion of revenues in the domestic economy rather than in Sovereign Wealth Funds as these are more beneficial for high income countries. The paper provides insights on some of the trade-offs which have to be made in setting up a SWF.

 

Precept 8 states that revenue volatility ought to be addressed through gradually and smoothly building up domestic expenditure and investment from resource revenues. Due to resource volatility, spending and revenue generation ought to be decoupled through establishing a ‘Sovereign Stabilization Fund’ – similar to a SWF but with the purpose of covering short run volatility. As such the paper provides useful guidelines on setting up and maintaining such a fund.

 

The paper by Bacon and Tordo provides policy makers with a reference document to be used when establishing and operating oil funds. Evidence is drawn from twelve oil funds and three mineral resource funds, taking into considering the major practical issues which arise in doing so:

     - Formalizing the objectives of the fund and placing these within the context of overall fiscal policy (whether revenue is used for current consumption, invested in non-financial assets or for purchase of financial assets).

     - Legal foundation of the fund (whether the fund is ‘virtual’, i.e commingled with other government resources, or ‘real’, i.e held separate from other government assets).

     - Rules governing the payments into and out of the fund (either savings funds and permanent income or stabilization funds and revenue volatility).

     - Arrangements for financial management of the fund (making decisions on asset class, asset managers and oversight of fund performance).

     - Nature of fund oversight (provisions for oversight at different levels).

 

The paper concludes by comparing the individual funds and creating a set of 20 good practice indicators for the design and operation of an oil fund. The indicators include:

     - Setting formal and clear rules on payments into and out of the fund.

     - Effective management of funds in order to maximize long-term returns, subject to an acceptable level of risk.

     - Establishing funds with flexible governing rules and good public support in order to adapt to changing circumstances.

     - Entrenching rules of transparency and accountability within overall management.

Access the report here.

April 2, 2013

To maintain high levels of growth private sector investment needs to be increased. Precept 10 shows that government ought to have the objective of making ‘general purpose’ investments and diversifying the economy. The paper supports both these objectives, providing guidelines on how this can be achieved through industrial policy.

 

Rodrik begins with the recognition that employment and sectoral production are less concentrated and more diversified in rich countries. In order to diversify the economy Rodrik puts forward an industrial policy framework. A fundamental element of this is the challenge of how government can expedite private sector investment.  According to the paper this challenge ought to be tackled through a collaborative approach between private sector and government, whereby focus is placed as much on the exchange of information regarding significant externalities as it is on implementing the right policies

 

In achieving diversification Rodrik makes the case for an industrial policy in which strategic cooperation between the private and public sector occurs. However, such cooperation ought to be guided by a number of industrial policy design principles. These include, but are not limited to:

      - First, as not all investments will pay off there ought to be clear benchmarks for success and failure – ideally dependent upon productivity.

     - Second, government needs to target activities rather than sectors, thereby supporting the correction of specific market failures.

     - Third, a built-in sunset clause would ensure that resources do not remain stuck with activities that do not pay off.

     - Fourth, subsidized activities ought to have the potential of providing spillovers and demonstration effects

     - Fifth, government agencies promoting industrial policy ought to maintain channels of communication with the private sector, thereby allowing public officials to have good information on business realities.

     - Sixth, in adopting a strategy of picking winners, mistakes will be made. These should be allowed but minimized where possible.

Access the report here.

April 2, 2013

Precept 9 recommends that government use resource wealth for increasing efficiency and equity in public spending. In doing so the government is required to raise the capacity for spending. As resource rich countries have a large concentration of revenues accumulating to government, the government must be able to spend that money effectively.

 

The paper analyses the effectiveness of aid projects in post conflict situations using data on World Bank projects. The authors find that whilst aid ought to be particularly effective in the immediate post-conflict setting, this tends to be offset by the limit to absorptive capacity in such a context. It is found that the supervision of projects is a crucial determinant in the success of projects. This is particularly relevant evidence for the implementation of public investment projects, suggesting that international development agencies could act as partners in projects due to their experience in supervision.

Accesss the report here.

April 2, 2013

Precept 9 recommends that government use resource wealth for increasing efficiency and equity in public spending. This can be achieved through investing-in-investing, which in turn requires improved efficiency in recurrent public spending. The World Development Report (WDR) provides us with a framework for how this can be achieved.

 

The WDR begins with the premise that service provision often fails the poor but the fact that this is not always the case means failure is not inevitable. The report builds an analytical and practical framework for using resources more effectively. In understanding how services are delivered it is suggested service delivery be considered as a chain which can be unbundled into three actors and their relationships; these are policymakers, clients and providers. A fundamental explanatory factor in understanding service delivery failure is the accountability problem. Whilst in a market transaction a consumer can hold the provider directly to account, in government service provision this is not the case, occurring only via the long root of policymakers. Depending on whether a political system is pro poor, the clients are homogenous or heterogeneous and whether the output is hard or easy to monitor the paper provides a number of general lessons on making services more effective:

     - In a pro-poor political context services that are easy to monitor can be delivered by the public sector or financed by government and contracted out to the private sector.

     - When services are hard to monitor, politics are pro-poor and clients homogenous then the centralized public sector is most appropriate.

     - When preferences are heterogeneous local government ought to be involved in service delivery.

     - When politics are not pro poor and subject to capture it is best to strengthen the client’s power. 

Access the report here.

April 2, 2013

In seeking to use resource wealth for increasing efficiency and equity in public spending (a main objective of Precept 9) there is a need for good decision making over the entire process chain, from design through to implementation. The Precept provides guidelines on the different components of the public investment management process.

 

The IMF paper recognizes the importance of scaling up investment, specifically in physical and social infrastructure, for sustained growth. However, in most developing countries there have been low returns to public and private investment. This is in part due to poor selection and implementation of projects. In turn a result of limited information, a lack of technical expertise, and leakage and waste of resources. In addressing these challenges the paper provides an index of the “efficiency of the public investment management process” (p. 3). The quality and efficiency of the investment process is measured across each stage: project appraisal, selection, implementation and evaluation. This index provides a tool for conducting policy-relevant diagnostics and analysis as well as fostering accountability and transparency in the sector.

Access the report here.

April 2, 2013

Precept 9 recommends that government use resource wealth for increasing efficiency and equity in public spending. One hindrance to efficiency in both public and private investment is that in resource rich and low income countries the unit cost of capital goods is higher than global average.  According to Precept 9 a general principle that should be followed therefore is avoiding tariffs on capital goods. The paper by Collier and Venables provides support for this principle, finding that in resource rich economies, tariffs do not generate revenue.

 

The paper examines the fiscal consequence of tariffs for countries with large resource export and aid revenues. It is found that revenues generated by tariffs are “offset by unrecorded reductions in the real values of resource rents and aid flows, so that the apparent revenues are illusory” (p. 2). Import tariffs raise revenue whilst also reducing domestic purchasing power of revenues from resources or aid. As such, tariffs which appear to be providing government with revenue, often have no effect. They can however prevent export diversification and have a negative effect upon aggregate real income. The authors consider why such tariffs are still adopted; finding that either the true nature of tariffs is opaque or that the transfer of revenue between government accounts converts aid flows into tariff revenue and thus creates revenue free from donor conditionality. Although it is found that illusory revenues are particular to circumstances, the pertinence of the analysis to a particular context is the “sum of resource rents and aid relative to the value of imports” (p. 19).

Access the report here.

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