Reference

April 2, 2013

Precept 8 states that revenue volatility ought to be addressed through gradually and smoothly building up domestic expenditure and investment from resource revenues. Doing so involves making instrumental and design decisions on adapting to absorption constraints and managing volatility. The World Bank report provides a number of insights on managing revenue volatility and overcoming bottlenecks.

 

The report outlines the economic impact of oil discovery in Ghana and makes suggestions on how oil revenue can be used for pro-developmental purposes. A number of key actions are identified as critical preparatory steps for the pro-poor use of oil revenues. For instance, it is noted that bottlenecks for the non-tradable sector need to be removed to mitigate for Dutch Disease. Removing constraints to competition and domestic supply response in non-tradable sectors. These include high barriers to entry into formal sectors and a lack of public infrastructure for small medium enterprises.

 

The problem of oil price volatility is also addressed. The report states that such volatility ought to be managed by introducing stabilization mechanisms such as setting a reference price and transferring only revenue from oil at that price to the budget, the remainder going to a Stabilization Fund, which is tapped into if the price decreases. Such an approach is however sensitive to political pressure to revise world price assumptions. Another mechanism is building a Permanent Income Fund where only the interest rate on revenue of accumulated assets is included in the government budget. Such a fund should be invested abroad as a permanent income can only be insured if financial returns on the fund are guaranteed. For the establishment of an oil fund the report recommends:

     - Concessions ought to be worked towards at the design stage regarding the use of the oil rents and their management.

     - A clear institutional framework is also important. This means addressing specific issues such as which government institution is responsible for running concession auctions.

     - Transparency and accountability mechanisms are to be built into the institutional frameworks through an oil fund, in order to improve weak institutional contexts.

Access the report here.

April 2, 2013

Precept 8 states that revenue volatility ought to be addressed through gradually and smoothly building up domestic expenditure and investment from resource revenues. In applying the principles of the Precept, one issue which arises is how to adjust spending to a rapid increase in resource revenue. The paper by van Wijnbergen directly addresses the challenge posed by Dutch Disease and provides support in considering whether government ought to invest in the traded goods sector.

 

The paper considers the Dutch Disease, (where an increase in resource revenues strengthens a country’s currency in comparison to other country’s, leading to non-oil goods becoming more expensive and thereby making the manufacturing sector less competitive), noting that this is particularly problematic when a process of ‘Learning by Doing’ induced technological progress is confined to the traded goods sector. A short term “decline in that sector may permanently lower income per head compared with what could otherwise have been attained” (p. 41). In light of this the author considers the question of whether oil revenue from a boom and the above mentioned negative effects upon the traded goods sector, should be responded to by an increase in production subsidies. It is found that the optimal production subsidy size depends on a trade off between current welfare cost and the welfare benefits derived by such a subsidy in the future. The answer is dependent upon context:

     - Subsidies ought to be increased to traded goods if the country does not accumulate foreign assets during a boom but rather uses the wealth for consumption.

     - For countries that are able to break the link between oil booms and total expenditure through accumulating foreign assets, no clear answer can be provided. As the income accrued in foreign assets enables the flow of resources to the non-traded goods sector to continue, it may not be necessary to switch to production of non-oil traded goods.

Access the report here.

April 2, 2013

Precept 8 states that revenue volatility ought to be addressed through gradually and smoothly building up domestic expenditure and investment from resource revenues. Doing so involves making instrumental and design decisions on resisting spending pressure, adapting to absorption constraints and managing volatility.  The paper by Stefanski et al provides a number of insights on managing resource revenues in a low income country.

 

Stefanski et al examine how Ghana ought to best harness revenues from its recently discovered oil. This is done by addressing two major questions; firstly, should the windfall be saved or spent? This is a matter of choosing between domestic consumption benefiting the current generation or investment in foreign assets, benefiting future generations and investment in domestic assets. This decision is not one of absolutes but lies on a continuum between investment and consumption. The authors recommend for Ghana to bring its spending forward if that spending is used to promote growth through investment. 

 

Secondly, how should those windfalls be used? Focusing upon investment, three options are considered:

     - With regards to alleviating capital scarcity it is argued that if foreign debt stock is increasing the cost of borrowing, the focus should be reducing that debt. Borrowing costs are reduced, in turn stimulating investment.

     - With regards to accumulating foreign capital in a Sovereign Wealth Fund it is argued that doing so is beneficial as a temporary measure for stabilizing oil volatility.

     - With regard to accumulating domestic capital, the paper finds that for Ghana it would be optimal to invest heavily in domestic assets for the duration of an oil boom. 

 

The paper also takes into consideration that Ghana does not have a steady business cycle model and that oil shocks are a common occurrence. As such, for an anticipated shock it is recommended that domestic capital be consumed before and accumulated during the shock whilst slowly returning to a non-oil growth path afterwards.

 

Access the report here.

April 2, 2013

Precept 8 states that revenue volatility ought to be addressed through gradually and smoothly building up domestic expenditure and investment from resource revenues. The chapter by Sachs provides a number of insights on how to manage oil revenue, focusing upon public investment and the question of whether to save revenues for the future.

 

The chapter begins with the premise that the oil curse is not a matter of fate. Indeed, many oil rich states have tended to outperform their neighbours in terms of levels of economic performance. However, there are a number of challenges which Sachs addresses. One major challenge is that oil-producing countries often find themselves in a poverty trap due to a lack of investment by the private sector. In turn this is dependent upon the existence of core public goods, which are often lacking in developing countries. However, oil earnings can allow countries to break out of this trap.  The key recommendation made is that oil revenue in low-income countries needs to be turned into public investment and not increased private consumption. Another challenge is that of Dutch Disease, whereby the non-oil export sector is squeezed, in turn squeezing a primary source of technological development in the economy. However, Sachs finds that this fear is exaggerated and mainly a worry if oil revenue is used to finance consumption instead of investment.

 

The chapter also considers whether oil wealth ought to be saved for the future in financial assets. Consumption can be smoothed beyond oil reserves through accumulating income into a fund, spending only the earnings on financial assets. However, Sachs finds that whilst such a strategy makes sense for a country that already has extensive human and physical capital, poor countries ought to turn oil revenue into physical and human capital. 

 

Access the report here.

April 2, 2013

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. This introduces the question of how those resource revenues ought to be used and consequently also of which generation has a right to those revenues. The paper considers ownership of resources and the distribution of resource revenues through dividends.

 

Wenar makes the case that the resource curse is fundamentally a result of a lack of property rights enforcement. Thus, slow growth, civil conflict and authoritarianism plague these countries. Wenar begins with the premise that each country’s people are the rightful owners of the country’s natural resources. This is often laid out in national constitutions and in international human rights treaties, yet it is often violated by authoritarian regimes or civil warriors. In considering how the benefits can be accrued by the rightful owners resource dividends are rejected as unfeasible due to a lack of incentives for doing so. Instead, existing treaties and accompanying institutions need to be employed to “bring all resource sales into the system of enforced market rules” (p. 3). This is achieved through applying two mechanisms. Firstly, litigation in the courts of the country from which the extraction companies originate. Secondly, by establishing an ‘anti-theft’ system operated by developed countries governments to punish countries which buy resources from a disqualified regime. 

Access the report here.

March 26, 2013

Under 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, a substantial proportion of revenues ought to be saved, combined with moderate immediate consumption. The paper by Segal makes the case that the best policy choice is to distribute resource revenue through dividends for citizens.

The paper begins with the premise that natural resources belong to all citizens of a country and not a select elite. As such, the argument is made that the distribution of a country’s resource rents between all citizens through unconditional cash transfers (sometimes called a “resource dividend”), is the most equitable policy choice. Supporting this argument, the author presents evidence that if all developing countries had adopted the resource dividend approach, global poverty would have been cut by between 44 per cent and 66 per cent each year 2004 – 2006. 

Adopting a resource dividend would furthermore provide benefits beyond poverty reduction. For instance, the incentive to register with the government to receive the resource dividend would reduce informality and enhance state capacity. Implementation would require administrative procedures similar to mass vaccination programmes which have been effectively carried out in low capacity countries. The author recognizes however that if a government is not effective enough to recuperate tax revenue lost to the resource dividend, yet effective enough for the expenditures that would be cut to genuinely benefit the poor, the resource dividend may not be the best policy.

Access this article here.

March 26, 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 a substantial proportion of revenues to be saved, combined with moderate immediate consumption. The paper provides insights into the latter approach.The paper provides a case study of Nigeria’s oil sector, finding that it has a systematic and robust negative impact on growth via the effect upon institutional quality. Thus, the huge sums of revenue Nigeria gained have been either wasted or fallen pray to corruption. As a means of mitigating this problem the authors suggest that the government no longer manage oil revenues, rather these should be directly transferred to citizens, rendering Nigeria a ‘non-oil’ economy. Revenues for social expenditure would then have to be raised through taxation of citizens and companies. Such taxes would be less subject to corruption and create the right incentives for governance (also through creating a state-society revenue bargain). The paper also deals with practical considerations in applying such direct cash transfers:

  • - Firstly, it is argued that due to the possibility of a fiscally induced fertility boom, revenues ought to be transferred to adults. Thereby the incentive to have children in order to receive those revenues is reduced.
  • - Secondly, as shocks of commodity market price volatility would be born by the citizens, rather than the government, the authors recommend for a fund to be established to manage revenue flows. However, the conditions that thwart sound fiscal policy are also likely to undermine the effectiveness of a fund (see Precept 8 for more detail).

Access the article here.

March 26, 2013

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. This introduces the question of how those resource revenues ought to be used and consequently also which generation has a right to those revenues. Through drawing on evidence from Norway and Venezuela the paper provides a number of insights on resource management and fiscal discipline.The paper by Bjerkholt and Niculescu considers the negative effects which resource abundance often has upon the economy and questions whether fiscal rules can help to make better use of resource gains and thereby also achieve higher growth rates. Whilst rules alone cannot be a guarantee for success, appropriate rules can work towards a shift from short term perspectives on resource revenues to long term pursuit of sustainability and growth. The paper examines recent fiscal rules adopted in two large oil producing countries. 

  • - Norway presents an example of a ‘bird-in-the-hand’ strategy whereby an oil savings account and a macro fiscal rule “limiting the fiscal deficit to the return on assets accumulated from liquidated resource wealth” (p. 176).  This allows revenue use to be decoupled from fluctuations in oil prices. The authors note that this strategy is applicable in economies which have a fiscal situation which enables an effective operation of a savings fund created from selling off significant parts of the country’s resources.
  • - A recent fiscal reform in Venezuela can be characterised as a “birds-in-a-bush” strategy. In an unstable economic situation, Venezuela had to prioritize macroeconomic stability through managing cash-flow risk. It opted therefore to temporarily separate saving and stabilization functions, combining these with a rules-based fiscal framework. The authors find that such rules “should significantly strengthen Venezuela’s public finances” (p. 176).

 Access the article here.

March 26, 2013

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. This introduces the question of how those resource revenues ought to be used and consequently, also which generation has a right to those revenues. The paper by Barnet and Ossowski provides a number of general principles, which guide government in finding an answer.

 The paper begins with the recognition that in oil producing countries, oil revenue is exhaustible, volatile, uncertain and primarily derived from abroad. This in turn poses a unique challenge in fiscal management for these countries. The paper seeks to address these challenges and outlines a number of general principles which are important in the formulation and assessment of fiscal policy. These are:

  • - Decoupling the overall balance into an oil and non-oil balance is essential in understanding fiscal policy developments, evaluating sustainability and determining the macroeconomic impact of fiscal policy. As such “non-oil balance should feature prominently in the formulation of fiscal policy” (p. 3).
  • - As large fluctuations in fiscal policy have a destabilising effect upon aggregate demand, create macroeconomic volatility and foster uncertainty, “the non-oil balance, especially expenditure, should generally be adjusted gradually” (p. 3).
  • - Government ought to attempt to accumulate substantial financial assets during oil production. Oil wealth should be transformed into financial wealth, thus it ought to be viewed as a portfolio transaction with the objective of accumulating assets during production which are able to sustain fiscal policy in the post-oil period.

   In addition, the paper makes a number of general observations regarding the desirability of non-oil deficits.

  • - It is noted with precaution that oil-producing countries can in fact run sizable non-oil deficits, but decisions should be determined by an assessment of government wealth and not merely oil income.
  • - In the government’s fiscal policy support needs to be given to the broader macroeconomic objectives such as growth and stability.
  • - Due to pro-cyclical fiscal policies and recurrent fiscal deficits, oil producing countries should focus on fiscal strategies which “break pro-cyclical fiscal responses to volatile oil prices, targeting prudent non-oil fiscal balances, and reducing the non-oil fiscal deficits over time” (p. 4).

Access the article here.

March 25, 2013

Recognizing 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 paper by Phillips addresses the issue of mining in protected areas, thereby assisting in steering the design and implementation of best practice guidelines as outlined in Precept 5.

Phillips presents both mining and conservation perspectives on mining in protected areas and calls for a dialogue between the two communities. The paper suggests that mining ought to be considered in its land use, with access to such land requiring “prior approval by government, informed consent of local communities and a commitment to conservation of biodiversity and of other natural and cultural values” (p. 4). A vision for a sustainable approach to mining and land use ought to involve a number of aspects:

    - A development or land use plan for a particular region or country, which seeks to maximize social, economic and environmental objectives.

    - A number of graded policies reflecting varying degrees of sensitivity of natural values to mining.

    - The establishment of ‘no go’ areas which are off limits to mining.

 Of particular difficulty is reaching an agreement on ‘no go’ areas for mining and on restrictions on mining activities in protected areas. The author calls on mining companies to recognize the different categories of protected areas where mining ought to be prohibited. This can be achieved through a joint declaration by major mining companies recognizing ‘no go’ areas and protected areas as well as supporting the work program of the conservation bodies. The conservation community on the other hand ought to improve the application of the protected areas categories system.

Access the article here.

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