Strategies to Address the Resource Curse: Economic Policy Solutions and Institutional Reforms

1. Addressing the resource curse? NS4053 Week 7.2

3. Reviewing features of ‘cursed’ states • Mineral/fuel export dependency. • Mineral exports > 35% of total exports. • ‘Dutch disease’ undermines non-mineral sectors of economy. • Rentier states create perverse incentives for politicians, private sector and civil society. • High income inequality and poverty • Weak states: low capacity, broad scope, high popular expectations.

4. Policy alternatives • Make state more capable. • Make it more difficult for politicians to spend windfall income. • Transfer funding to population. • Privatization. • Regime change.

5. Proposed solution #1: State-centered • Make state more capable of avoiding pitfalls. • ‘Forewarned is forearmed’ • International community consensus. • Large ‘industry’ of technical advisors. • Major international organizations: • World Bank • International Monetary Fund • Development focused non-governmental organizations.

6. Sound fiscal and monetary policy • Manage foreign exchange to avoid currency overvaluation. • Repress windfall profits by investing abroad (living off the dividends). • Accumulate budget surpluses. • Requires: • autonomous technocratic form of government. • Checks and balances on executive. • Institutions to punish rent-seeking and corruption. • Transparency and free media.

7. Economic diversification • Widely adopted policy in mineral export dependent states. • Major source of poor economic outcomes. • States do a poor job of selecting domestic industries to invest in. • Political priorities overwhelm economic priorities.

8. Natural resource funds. • Stabilization: designed to absorb ‘boom’ in funds during boom-bust cycle. • Savings: save ‘boom’ funds for future generations through investment. • Only work if you already have institutions capable of monitoring government corruption, ensuring transparency, rule of law. • Strong executive with no oversight is worst case of all.

9. Transparency • External monitoring of revenues and spending by non-government institutions. • Only works if government, civil society and international institutions are all on board. • Can be disregarded by government. • Particularly a problem in autocratic regimes. • No leverage from international community. • With mineral wealth, who needs foreign aid?

10. Direct distribution • To avoid corruption, send money directly to citizens. • Alaska model: dividends only • New proposal: pass all money to citizens • If it creates poor incentives for governments, why not for citizens? • Deepens the ‘no skin in the game’ problem?

11. Privatization • Removes control from politicians. • Creates incentives for investment rather than consumption. • Clear management criteria • profit/performance • Private actors have an incentive to minimize rent seeking • Corruption takes money out of their pocket.

12. Privatization issues • State gets greedy. • Obsolescing bargaining models. • State seeks to capture revenues during boom times (i.e. see Russia today) • State only has incentive to privatize when prices are low and it can benefit from one time sale to plug budget gaps.

13. Regime change? • Propensity to authoritarianism associated with resource curse. • Authoritarian states have less of the ‘checks and balances’ required to implement policy solutions. • Is a solution regime change? • Encourage democratization? • Other approaches?

14. Shaping the environment • What policies to pursue? • Mitigation of consequences • Risk reduction through technical advice • Free market promotion • Democracy promotion • International institutions • Certification • Monitoring • Promote international civil society • Jawboning governments into doing the right thing?