Managing Resources a Careful Balancing Act, Says IMF’s F&D

Resource wealth must be managed carefully to create growth

Balance spending now with investment in future

Sustainable investing tool helps policymakers scale up public investment

Sometimes revenue riches are squandered, or the wrong groups benefit, harming the economy as a whole. The September 2013 issue of F&D explores the challenges of natural resource management and proposes new ideas for sustaining resource revenues over the long haul to support steady economic growth and reduce poverty.

Wealth management

In “Too Much of a Good Thing?” IMF economists examine the challenges facing resource-rich countries. A new discovery of a precious natural resource—oil, coal, or a rare mineral, for example—always generates high hopes. Some resource-rich countries do fare well, but many others struggle to convert their resource wealth into growth engines that will benefit future generations.

An abundance of precious natural resources is no guarantee of sustained growth over the long haul, caution the authors. Economists have explored many explanations for this. Some blame corruption, exposure to volatile commodity prices, or “Dutch disease,” whereby a booming resource sector chokes off growth in other parts of the economy. Yet another reason is the exhaustible nature of certain resources—an oil well runs dry, a coal mine stops producing.

Developing countries face particular problems managing their resource revenues. Their development needs call for more spending up front on immediate needs such as school supplies, malaria nets, and vaccination campaigns. But they also have huge unmet investments.

The authors say balanced management is the answer: use revenues to boost domestic savings and investment and smooth spending. They advocate the use of a sustainable investing tool developed by the IMF to help policymakers decide how best to allocate resource revenue between saving and investment.

In another article, “Extracting Resource Revenue,” Philip Daniel, Sanjeev Gupta, Todd Mattina, and Alex Segura-Ubiergo of the IMF’s Fiscal Affairs Department tackle the challenges of formulating tax and spending policies in revenue-rich countries. Among other things, they recommend that countries set up a resource fund—also known as a sovereign wealth fund—to save excess revenues.

Oil and water critical

In “A...