Sharing the Wealth

• Author: Sanjeev Gupta, Alex Segura-Ubiergo, and Enrique Flores
• Position: a Deputy Director and is a Senior Economist, both in the IMF’s Fiscal Affairs Department, and is the IMF’s Resident Representative in Mozambique.

Angola is the second largest oil producer in sub-Saharan Africa and one of the continent’s richest countries. Yet more children under the age of five die there than in most places in the world.Â

Most resource-rich countries lack the types of institutions needed to manage natural resource wealth effectively, and past performance does not bode well for countries with a resource windfall. Many of their citizens face continued poverty with little prospect of a significant improvement in living conditions. Angola’s under-five infant mortality rate is a vivid example.Â

In recent years, high commodity prices and new natural resource discoveries have increased many countries’ resource revenues, both as a share of the budget and in percent of GDP, offering new prospects for raising the population’s standard of living (see Chart 1). But few countries stand out as good examples of effective resource wealth management. Botswana, Chile, Norway, and the U.S. state of Alaska are some exceptions.Â

The experience of the success stories suggests that natural resource wealth management requires a commitment to three interrelated principles: fiscal transparency, a rules-based fiscal policy, and strong institutions for public financial management. For example, Norway and Alaska are models of transparency in the way they collect and budget natural resource revenue. This transparency helps people understand the use of resource wealth and holds political leaders accountable for their decisions. Chile’s fiscal rules protect resource wealth from the vagaries of political pressure, and its strong institutions are able to manage public investment. This helps transform natural resource wealth into productive assets, including infrastructure and human capital.Â

Some suggest that governments should give up their resource revenue and distribute it directly to the population. There are some good arguments to support this view—and strong arguments against it. Direct distribution is not a silver bullet (Gupta, Segura-Ubiergo, and Flores, 2014).Â

Devil’s excrement

The weak track record of most resource-rich countries’ use of natural resource revenue supports the view that new discoveries could be as much a curse as a blessing. Why does this happen?

A resource boom can cause a currency’s real exchange rate to appreciate, which reduces the competitiveness of the country’s exports and diverts resources toward sectors of the economy that don't engage in foreign trade—what is widely known as Dutch disease. Moreover, analysts have found that resource wealth is often associated with government corruption that undermines democratic accountability. These arguments are often used to suggest that natural wealth can become a “resource curse.” This idea was captured vividly by Juan Pablo Pérez Alfonso, Venezuela’s former minister of mines and hydrocarbons and cofounder of the Organization of the Petroleum Exporting Countries, who described petroleum as the “devil’s excrement” and warned of its potential to spawn waste, corruption, excessive consumption, and debt.Â

Many resource-rich countries lack both robust public finance management systems to ensure the transparency and efficiency of their budget process and the checks and balances in the decision-making process that are needed to ensure an effective use of resource wealth. Without them, they have struggled to follow the positive example of countries like Botswana, Chile, and Norway.Â

Building strong, stable institutions takes time. In the meantime, some scholars...