DEVELOPMENT STRATEGIES IN EXTRACTIVE RESOURCE ECONOMIES HON. MOSES ASAGA - GHANA

PROPERTY FEATURES Location: Public lands and territorial waters Ownership : mostly by the state and governed by the national constitutional. Income: Is in the form of rent rather than reproductive capital.

FISCAL REGIME Royalty (%) Royalty (%) Cost Recovery Cost Recovery Carried interest Carried interest Taxes Taxes Profit sharing Profit sharing Production sharing contract Production sharing contract Fee-based contracts Fee-based contracts

ISSUES OF OVERTAXING Return on Investment Return on Investment Payment of Debt Payment of Debt Reduction of Reproducible Capital Reduction of Reproducible Capital Exploration, Appraisal, Development Production storage and Transportation Exploration, Appraisal, Development Production storage and Transportation Management of Production levels (Time Paths) Management of Production levels (Time Paths) Depletable resources Depletable resources Conversion to financial capital & consumption Conversion to financial capital & consumption

RISK TO MACROECONOMIC STABILITY Unpredictable (large swings) Prices Unpredictable (large swings) Prices Unpredictable and variable budget revenue. Unpredictable and variable budget revenue. Exchange Rate Regime issues Exchange Rate Regime issues Central Bank Role Central Bank Role Floating exchange rate Floating exchange rate Peg/ Adjustable Peg Peg/ Adjustable Peg Option for devaluation and revaluation of domestic currency. Option for devaluation and revaluation of domestic currency. Reserves Reserves

MANAGING RISK OF MACROECONOMICS STABILITY Three approaches can be used Hedging against future fluctuations Hedging against future fluctuations Conservative Estimation of revenue flows Conservative Estimation of revenue flows  Long term average prices and quantities  Avoid short-term income streams current prices and production levels Investment into diversified portfolio financial assets, sectors of economyInvestment into diversified portfolio financial assets, sectors of economy

POLICY CHOICES OF INCOME AND ASSETS Resource in the ground (exploit or not to) Resource in the ground (exploit or not to) Financial Assets (e.g. foreign exchange reserves Financial Assets (e.g. foreign exchange reserves Physical assets (Infrastructure) Physical assets (Infrastructure) Human Capital (better education labour force, health) Human Capital (better education labour force, health)

POSITIVE ATTRIBUTES OF NATURAL RESOURCE INCOME Despite Criticism there are huge benefits Improve real living standards Improve real living standards Through high levels of public and private consumption Through high levels of public and private consumption Finance huge levels of investments Finance huge levels of investments Improve credit rating, and enhance borrowing capacity. Improve credit rating, and enhance borrowing capacity. Income accrues largely to public sector Income accrues largely to public sector

NATIONAL DEVELOPMENT MIX Mixed Economy Mixed Economy Public and private Investment Public and private Investment Public investments are into two important areas (Jeff. Sachs) Public investments are into two important areas (Jeff. Sachs) Public and merit Goods Public and merit Goods

INVESTMENT IN PUBLIC GOODS Infrastructure Networks Infrastructure Networks National Defense and security National Defense and security Rule of law Rule of law Environmental protection Environmental protection Scientific research Scientific research Infectious disease control Infectious disease control

INVESTMENT IN MERIT GOODS List of merit goods include the following: List of merit goods include the following: Basic health care Basic health care Basic education Basic education Safe drinking water and sanitation Safe drinking water and sanitation Adequate basic nutrition Adequate basic nutrition Safe shelter and social insurance Safe shelter and social insurance

CAUTION ON PUBLIC INVESTMENTS Based on sound macroeconomic stability Based on sound macroeconomic stability Short-run macroeconmic stability Short-run macroeconmic stability Long-term fiscal solvency Long-term fiscal solvency Inherent instability of earnings Inherent instability of earnings Depletion of resources Depletion of resources Complementary rather than substitute for private investment Complementary rather than substitute for private investment

Programme Based Public Investment Long term development plan Long term development plan Medium term development framework Medium term development framework Millennium Development Goals (MDG) Millennium Development Goals (MDG) Benchmarks Benchmarks Bold and achievable targets Bold and achievable targets Absorptive capacity Absorptive capacity

THANK YOU