A growing number of developing countries – including Ghana, Tanzania and PNG – are looking forward to sizeable revenues from their non-renewable resource sectors. Will this be a blessing or a curse? What can policy-makers do?
Economists have long debated this issue. Alan Gelb’s book – Oil Windfalls: Blessing or Curse? – reviewed six countries that experienced oil windfalls during the 1970s and found that many of the potential benefits were dissipated and some countries actually ended up worse off. Key drivers were a loss of competitiveness of exports, a rise in corruption and stagnating non-oil growth.
Alan Gelb went on to suggest that:
Natural resources alone will do little to promote economic development. Countries need sound economic management, and they need to address the political factors that conflict with wise policy choices.
Alan Gelb’s more recent paper – ‘How should oil exporters spend their rents?‘ – builds on this analysis.
Drawing on the experience of a few successful countries, it points to a number of common factors that seem to be important in enabling countries to obtain a positive payoff from resource wealth. These include a strong concern for social stability and growth, a capable and engaged technocracy, and interests in the non-oil sectors able to act as agents of restraint.
Another paper from CGD – on the ‘Case for direct cash distribution‘ – explores an approach for developing ‘agents of restraint.’
Todd Moss and Lauren Young’s solution is to create a constituency through direct cash distribution; making each citizen a direct shareholder in mineral revenues. The approach would also boost consumption among the poorest and provide a broad tax base with which to fund basic services and infrastructure.
This isn’t a new concept – for example it is used in Alaska – but it is new for developing countries. Would it work?
There are at least four challenges that such a scheme would need to address:
- A political challenge: In order to be implemented, the scheme would first need to be approved by government. And it is not clear from the CGD paper how the scheme would get over the initial hurdle of convincing politicians to cede control of mineral revenues.
- A logistical challenge: Poor countries lack some of the necessary institutional foundations – an accurate and reliable register of citizens or access to banks – to distribute cash to the population. For example, a scheme to distribute shares in state owned enterprises to each adult in PNG was shelved for these reasons. However, new technologies means that these challenge may be solvable – India is introducing a unique ID cards for 600m people and rise of mobile phones offer another channel for payments to the unbanked.
- A macroeconomic challenge: Mineral revenues are notoriously volatile. Economists have long debated the implications for absorptive capacity and Dutch Disease and subsequent impact on growth. While my own view is that such arguments are often overstated, it is clear that volatile revenue flows do create difficulties for fiscal management and simply passing on revenues to citizens isn’t itself an adequate solution.
- A development effectiveness challenge: It is not entirely clear whether distribution of cash would ‘strengthen the social contract’ or instead become a source of social conflict between competing groups, or even a source of political patronage itself. Adequate evidence to persuade skeptics is needed and this will probably need to be highly contextual.
Notwithstanding this, the proposal for direct distribution of cash is a welcome contribution to the debate and deserves serious consideration.
A competition of ideas is always a good idea – especially when it’s on an issue as critical as managing mineral booms.
Matt Morris is the Deputy Director of the Development Policy Centre at the ANU’s Crawford School.
A version of this post appeared first on Virtual Economics.
Hi Matt,
Thanks for an interesting post and reply.
I always enjoy discussion on this topic, and good to see the harm of volatility enter your post!
I also would not consider myself an expert by any means, but I just wanted to add that as usual, I was disappointed that the negative effects on – and challenges to – social development (say proxied by health, education, ‘other’ skills development, civil society, interest groups and weakened institutions, efficient cross-sectoral allocation of all this etc.) were omitted. These are closely related to the TFP declines associated with these booms; when married together, I (persionally) think (only think at this stage – no proof) this is one of the key culprits behind any long-run ‘curse’ and should all be crucial factors in any discourse in this area.
Cheers for encouraging discussion on this and providing all the links, which I’ll be sure to look into.
Ryan
I am the first to admit that this is not my area, so really I am asking a question, on an issue that has been troubling me for some time. And that is related to Australia’s mineral boom.
In short, there are ideas like those in your post, on marshalling boom financial in-flows for the broadest development good. In previous booms, various countries have established sovereign wealth funds, to ensure that the short-term (and one-off) gain has long term national benefit (e.g. Norway, Mexico, Kiribati). We know that the Australian Government is conceptually supportive of sovereign wealth funds for other countries (i.e. PNG), as shown by a recent press release from Richard Marles’ office (28 March 2011).
So, my question: why is there no debate domestically about establishing a sovereign wealth fund, to similarly ensure that the short-term (and one-off) gain from the current Australian mineral boom has long term national benefit? To me, the super-profits tax and similar tax initiatives are a distraction, if the tax windfall simply lands in the current account. Australia should instead be thinking about its long-term fiscal health, by (potentially) establishing something akin to the Norway Oil Fund.
Apologies for launching into this! I just find it amazing that there has been (seemingly) no debate of this option domestically, especially since it is on the agenda for PNG (and elsewhere), and given that the Australian Government is supportive of such an approach internationally.
Thanks for an interesting comment/question. I must admit that I am not an expert on the Australian economy, but I can reply briefly on the macroeconomic advice and extractive industries transparency for developing countries. Others can perhaps comment on their relevance to Australia’s mining boom.
First, there is the textbook macroeconomic advise. The IMF provides this to many developing countries on how to manage resource booms. (A more detailed analysis for petroleum booms in Africa can be found here.) The IMF advice is to be cautious and transparent, tax rents in the sector, and save windfalls revenues to manage revenue volatility and inflation.
I had a quick look at the most recent IMF Article IV report for Australia and it made recommendations along these lines:
What is interesting, especially for an IMF report, is that there are very few numbers on the mining sector in their 2010 analysis, and this possibly highlights a data availability issue.
A second important initiative for developing countries is the Extractive Industries Transparency Initiative–a global standard for information on revenues from oil, gas and mining. EITI also helps resource-rich developing countries improve their systems for publishing details of the revenues that they receive from the mining and petroleum sectors. EITI compliant countries include Norway, Nigeria and Timor-Leste.
Australia doesn’t implement EITI, and nor does PNG–the other country that you refer to in your comment. Nevertheless PNG does publish data in its annual budget on tax revenues and dividends from the mining and petroleum sectors. Based on this, PNG Treasury officials, with support from Australian counterparts, calculate a base scenario (normal mineral revenues), from which they can calculate the windfall (additional mineral revenues). For further details see the PNG Medium Term Fiscal Strategy.
I was curious to see if there is data on mining and petroleum revenues in Australia? I had a quick look in the Federal budget but didn’t find it. I did find some data on the ABS site, which they get from industry sources and this is summarised in the chart below. (I don’t know how comprehensive it is.)
If anyone has any better time series data on government revenues from the mining and petroleum sectors, please let me know. First this would give a clearer idea of the volatility of this revenue flow and it’s importance to the overall budget. Secondly, it would enable us to calculate the non-mineral balance for the budget–a crude indicator of underlying fiscal sustainability. Thirdly, it would give us an idea of how much revenue that is per person.
This could inform some of the policy questions–such as on resource curse, sovereign wealth funds and cash transfers–that you mention in your comment.