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Chapter 1. Introduction

Author(s):
Charlotte Lundgren, Alun Thomas, and Robert York
Published Date:
August 2013
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Sizable natural resource endowments and the potentially large economic proceeds from their extraction in a number of sub-Saharan African (SSA) countries provide an unparalleled opportunity for economic growth and development. The revenue from these resources can be used to address human capital and infrastructure deficits that are obstacles to sustained, broad-based, and inclusive growth, and to achieve improvements in social indicators. In many SSA countries, natural resources already account for an important share of export and government revenue, and several other countries in the region are poised to become significant resource exporters in the future. Empirical evidence suggests, however, that translating this resource wealth into stronger economic performance and a higher standard of living has been challenging. Making the right policy decisions in managing these natural resources can have a high payoff, but weak management and poor governance can also result in lost opportunities for strong growth and economic development.

Managing natural resource wealth is fraught with difficulties—some economic, many political—and if not done well, can adversely impact macroeconomic performance in the short and long runs. These difficulties arise from the particular characteristics of natural resource wealth:

  • The volatile and unpredictable nature of natural resource prices, and hence resource revenue, complicates macroeconomic management and budget planning, and often imparts a high degree of procyclicality to economic policies. Indeed, macroeconomic volatility is an important contributor to the growth-damaging “resource curse,” and wide swings in government spending generally make spending less effective and less productive.
  • The exhaustibility of these resources and related revenue raise complex economic and political issues concerning intergenerational equity and long-term fiscal and external sustainability. Questions inevitably arise about when to spend the resource revenue, but also how to spend it. In capital-scarce SSA countries, a priority is often to tilt public spending toward investment, especially in economic infrastructure and human capital.
  • Transforming natural resource wealthinto productive human, physical, and financial assets is difficult because many SSA countries lack the institutional and administrative capacity to manage public finances well. Without this capacity, public resources are frequently wasted or misappropriated.

Addressing these challenges in a way that makes the most of resource revenue requires appropriate macroeconomic frameworks supported by strong governance and fiscal regimes. Strong governance helps ensure that resource rents are not captured by vested interests or misappropriated; and a strong fiscal regime helps ensure the government is accountable and transparent in its resource allocation.

How to address these policy challenges—in the economic context—is the focus of this publication. A two-pronged approach is used. First, the main policy considerations and options in managing natural resource wealth are outlined, drawing on experience within and outside sub-Saharan Africa, the IMF’s latest analysis and policy advice in this area, the World Bank, and leading academic research. The policy advice is also informed by an exchange of views from a conference on the “Management of Natural Resources in Sub-Saharan Africa,” cohosted by the IMF and the authorities of the Democratic Republic of the Congo in Kinshasa, March 21–22, 2012.1 Second, a list of recommended further reading material is provided in a box at the end of each chapter to further inform policymakers and other stakeholders on the theoretical and analytical underpinnings of recent work. This publication is not meant to cover the entirety of the complex set of issues related to the management of natural resources, but rather to give an overview of the main considerations and current thinking and to give guidance on further, more in-depth reading material on these questions.

Elaborating on the challenges and experiences across the SSA region in managing natural resources is important, because the returns from the exploitation of these resources has generally been poor. As a consequence, natural resource wealth has not been translated into stronger economic performance or a higher standard of living. Instead, natural resource–rich countries across the region have seen a vicious boom and bust cycle with the rise and fall of commodity prices over time; difficulties in the implementation of macroeconomic policies and real exchange rate pressures; wasteful public investment; and weak governance, where vested interests have frequently captured economic rents that should otherwise accrue to the state.

This publication is structured as follows: Chapter 2 presents some stylized facts to set the stage for the ensuing discussion and highlight the relative importance of natural resources to many SSA countries, and the contribution such resources have made to the region’s growth and development. Chapter 3 presents the main macroeconomic policy considerations, including volatility and exhaustibility of resources, striking the right balance between consuming now or later, and how best to invest resource rents. Well-designed fiscal frameworks are the cornerstone of sound economic policies in resource-rich countries and are discussed in detail in Chapter 4. Chapter 5 elaborates on the vexing problem of public investment management, given the need to “invest in investment capacity” to ensure the high quality and efficiency of investment spending. Chapter 6 considers policy options for revenue mobilization with the goal of extracting as much revenue from the natural resource sector as possible through tax policies and better tax administration, while remaining internationally competitive. Chapter 7 tackles the issue of good governance, which is essential to ensuring that resources are not wasted, that the management of natural resources is transparent and accountable, and that the public interest is safeguarded in the decision-making process.

1

The Kinshasa conference was also generously sponsored by the Managing Natural Resource Wealth–Topical Trust Fund and the United Kingdom’s Department for International Development. Authorities from 28 SSA countries participated in this event, which featured speakers from international organizations, academia, civil society organizations, and the private sector (the conference agenda and presentations can be found at http://www.imf.org/external/np/seminars/eng/2012/kinshasa/index.htm).

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