Addressing the resource curse? NS4053 Week 7.2

Reviewing features of ‘cursed’ states Mineral/fuel export dependency. – Mineral exports > 35% of total exports. ‘Dutch disease’ undermines non-mineral sectors of economy. Rentier states create perverse incentives for politicians, private sector and civil society. High income inequality and poverty Weak states: low capacity, broad scope, high popular expectations.

Policy alternatives Make state more capable. Make it more difficult for politicians to spend windfall income. Transfer funding to population. Privatization. Regime change.

Proposed solution #1: State-centered Make state more capable of avoiding pitfalls. – ‘Forewarned is forearmed’ International community consensus. Large ‘industry’ of technical advisors. Major international organizations: – World Bank – International Monetary Fund Development focused non-governmental organizations.

Sound fiscal and monetary policy Manage foreign exchange to avoid currency overvaluation. Repress windfall profits by investing abroad (living off the dividends). Accumulate budget surpluses. Requires: – autonomous technocratic form of government. – Checks and balances on executive. – Institutions to punish rent-seeking and corruption. – Transparency and free media.

Economic diversification Widely adopted policy in mineral export dependent states. Major source of poor economic outcomes. States do a poor job of selecting domestic industries to invest in. – Political priorities overwhelm economic priorities.

Natural resource funds. Stabilization: designed to absorb ‘boom’ in funds during boom-bust cycle. Savings: save ‘boom’ funds for future generations through investment. Only work if you already have institutions capable of monitoring government corruption, ensuring transparency, rule of law. Strong executive with no oversight is worst case of all.

Transparency External monitoring of revenues and spending by non-government institutions. Only works if government, civil society and international institutions are all on board. Can be disregarded by government. – Particularly a problem in autocratic regimes. – No leverage from international community. With mineral wealth, who needs foreign aid?

Direct distribution To avoid corruption, send money directly to citizens. – Alaska model: dividends only – New proposal: pass all money to citizens If it creates poor incentives for governments, why not for citizens? – Deepens the ‘no skin in the game’ problem?

Privatization Removes control from politicians. Creates incentives for investment rather than consumption. Clear management criteria – profit/performance Private actors have an incentive to minimize rent seeking – Corruption takes money out of their pocket.

Privatization issues State gets greedy. – Obsolescing bargaining models. – State seeks to capture revenues during boom times (i.e. see Russia today) State only has incentive to privatize when prices are low and it can benefit from one time sale to plug budget gaps.

Regime change? Propensity to authoritarianism associated with resource curse. Authoritarian states have less of the ‘checks and balances’ required to implement policy solutions. Is a solution regime change? – Encourage democratization? – Other approaches?

Shaping the environment What policies to pursue? – Mitigation of consequences – Risk reduction through technical advice – Free market promotion – Democracy promotion – International institutions Certification Monitoring – Promote international civil society Jawboning governments into doing the right thing?