Resource Wealth & Development
What are the Issues?
Maximizing Benefits and Mitigating Adverse Impacts Through Revenue Management
The host government/company partnership structure sets the stage for long term collaboration. A partnership that is effective in managing both the extraction of resources and the resulting revenues is likely to result in substantial positive impacts for the people living in the host countries.
What are the Challenges?
The "Resource Curse"
Perhaps the most challenging issue at the intersection of energy and development is resolving how an energy-exporting county can convert its energy wealth into a growing economy that reduces poverty and improves standards of living. Several studies have found a negative relationship between dependence on mineral exports and economic (GDP) growth – greater dependence often leads to lower GDP growth. This phenomenon, known as the "resource curse," has not afflicted all economies that export energy resources. In fact, several countries, including Norway and Chile, have been able to grow their economies through primary commodity exports. But in many cases, evidence appears to support the "resource curse" hypothesis, but such work is not without criticism. The results of such studies are influenced by the period chosen and how "natural resources" are defined.
Countries that depend on commodity exports face challenges in converting resource wealth into economic and social development: "We have seen how the sudden increase in revenues from oil can distort long-term growth. It is naturally tempting for host governments to increase spending unsustainably and to direct funds toward projects that yield narrow benefits. Often, too little revenue flows down to the communities where the resources originate. Non-oil growth – especially in the rural agricultural sector, which should be fueled by energy development – can wither instead. This is certainly true in a number of the world's poorest nations."
What are the Solutions?
Wealth Generation
Natural resource projects can create substantial wealth in the form of profits, bonuses, taxes, and royalties. These revenue flows may be used for a variety of positive social purposes including funding national infrastructure as well as investing in education, security, health, and other critical social services. Similarly, the production of natural resources creates a commodity that is not only exported but can also serve to supply the local economy and its energy needs.
One way that countries have dealt well with the effects of abrupt shifts in wealth is through well-managed financial institutions and policies. Stabilization mechanisms such as "social trust funds" can be used to smooth out expenditures over time – by accumulating funds during times of high prices and dispensing funds over a longer time frame. However, stabilization funds are somewhat controversial, as many feel that they are not a replacement for the strong fiscal management that a government must exercise when faced with an increase in revenues. Solutions necessarily involve many dimensions and multiple stakeholders to reinforce transparency, strengthen fiscal responsibility and planning, and increase good governance.