Spend or Send

• Author: Rabah Arezki, Arnaud Dupuy, and Alan Gelb
• Position: an Economist in the IMF Institute for Capacity Development, is Professor of Economics at the Reims Management School, and is Senior Fellow at the Center for Global Development.

THE decade-long boom in commodity prices has boosted government coffers in many traditional producing countries. Following a wave of discoveries, new oil and gas producers—such as Ghana, Mozambique, Tanzania, and Uganda—are also emerging (see table). They may not all be major players at the global level, but the revenues they raise will be substantial for them and will brighten the prospects for growth and poverty reduction.

Still, the future is not without its dark side. New oil income will almost certainly relax constraints on government budgets, but it will also create challenges—as conditions in other resource-rich countries show. Many citizens of these countries remain poor, despite large revenues from resources. In some cases competition over resource wealth
has fueled or sustained civil conflict. Economic diversification is a further long-run challenge: nonresource sectors tend to lose competitiveness as a result of exchange rate appreciation.

All of these effects have been seen, for example, in Nigeria in past years. The long-run issues surrounding development become starker in light of the need to rebalance economies by fostering non-commodity-based industries to produce higher-value-added goods and provide a livelihood for people after commodity reserves are depleted. Advanced economies have moved away from natural capital—such as oil and gas deposits and mineral reserves—to physical and human capital (see Chart 1). But the wealth of poor countries tends to be concentrated in natural resources.

The traditional argument is that countries should use their resource revenues to finance public investment. But there are questions about whether this is always the best approach. The limited state capacity of many resource-based countries makes appropriate and effective investment difficult to achieve. Limited capacity reflects not only a government’s lack of technical ability to identify, implement, and monitor key investment projects. It is often also the result of public sector corruption that allows those with clout to misspend and misallocate the resource windfall, including through high-value construction contracts that are especially susceptible to mismanagement. As a result, in some cases sharply scaled-up public investment may be the wrong way to go. It may be more effective in the short run to distribute some of the windfall as a direct dividend to citizens and rely on their spending choices to create and foster nonresource industries. In the medium and long run, countries should beef up their governing capacity—investing in investment capacity, so to speak—to relax some of the constraints on the use of revenues.

Avoiding past mistakes

During the booms of the 1970s, many traditional commodity exporters embarked on ambitious, but often wasteful, public spending—including on infrastructure such as roads, ports, and railroads. Case studies document investment projects that were plagued by inefficiency and also contributed to resource misallocation (Gelb, 1988). Even when completed, large projects sometimes failed to provide benefits because governments were unable to cover the high costs of operating and maintaining them.

Commodity windfalls, because they move directly through government coffers, offer public officials ample opportunity to divert them for personal gain. Manipulation of public spending, especially in the letting...