Media Briefings

How Developing Countries Rich In Natural Resources Should Harness The Revenues For Growth

  • Published Date: March 2011


Developing countries that are well endowed with natural resources should use the
revenues to increase wages and employment, boost private and public sector investment
and so bring forward economic development. They should ignore those who advise using
all the revenues to build a stock of foreign assets to provide dividend income for future
generations.
These are the key conclusions of research by Professors Rick van der Ploeg and Tony
Venables
, published in the March 2011 issue of the Economic Journal. They argue that
current poverty levels in developing countries mean that it is appropriate to skew the
consumption benefits of windfall revenues towards the current generation rather than
passing them on to future generations, who will in any case be richer.
Many countries have made a mess of managing their natural resource revenues. The
'resource curse' is the term usually used to express the fact that countries that are well
endowed with natural resources – particularly oil – have on average had worse economic
performance than resource-poor countries.
There are many reasons for the resource curse: some countries have failed to capture
resource revenues; others have dissipated them in rent-seeking, corruption or conflict;
many have suffered the adverse effects of price and revenue volatility; and many have
saved and invested too little of the revenue.
This study addresses the question of how resource revenues should be managed. What
should be the balance between consumption and saving? How should savings be
invested? And how can public and private sector actions be made to fit together?
For a high-income country, the choices between consumption, savings and investment are
relatively straightforward. Resource revenues (at least from an exhaustible resource such
as oil) flow for a limited period of time, but the consumption benefits should be spread over
the present generation (in retirement as well as in work) and future generations.
So for such countries, the response should be to set up a sovereign wealth fund, such as
Norway's Pension Fund. Revenues are deposited in the fund and current distribution is
limited to income from the fund.
For a developing country the choice is harder. Current poverty levels mean that it is
appropriate to skew consumption benefits towards the current generation rather than
passing them on to future generations, who will in any case be richer.
Capital scarcity in developing countries means that saving should, where possible, be
invested in increasing human and physical capital in the domestic economy rather than in
foreign investment funds. So while it is important that developing countries save more of
their resource revenues, advice that it should all be saved in foreign funds is inappropriate.
The researchers outline how the balance between consumption and domestic investment
should be managed to ensure maximum impact on economic growth and development.
Central to this is securing an increase in private sector investment: resource revenues can
be used to remove obstacles to investment by reducing taxes and improving infrastructure.
Policy in developing countries should therefore typically follow a profile of measures to
increase public and private sector investment, accompanied by some initial increases in
consumption (perhaps achieved through tax reductions or conditional cash transfers).
The objective should be to use resource revenues to increase wages and employment and
so bring forward economic development in the country, not to build a stock of foreign assets
to provide dividend income for future generations.
ENDS
Notes for editors: ‘Harnessing Windfall Revenues: Optimal Policies for Resource-Rich
Developing Economies’ by Rick van der Ploeg and Tony Venables is published in the
March 2011 issue of the Economic Journal.
The authors are professors of economics at the University of Oxford and co-directors of the
Oxford Centre for the Analysis of Resource Rich Economies.
For further information: contact Tony Venables on +44 (0)1865-271066 (email:
tony.venables@economics.ox.ac.uk); Rick van der Ploeg on +44 (0)1865-281285 (email:
rick.vanderploeg@economics.ox.ac.uk); or Romesh Vaitilingam on +44-7768-661095
(email: romesh@vaitilingam.com).