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March 05, 2008

The Pile of Books on the “Resource Curse” Just Keep Growing !!!

So, why we should read “Escaping the Resource Curse”?

Posted by Teresa Dabán

Resource_curse Devising policies and institutions for the prevention of the “resource curse”—a term used to describe the surprisingly negative outcomes of resource-rich countries—has been the object of an extensive literature. One of the most recent contributions is Escaping the Resource Curse, a book edited by Macartan Humphreys, Jeffrey D. Sachs, and Joseph E. Stiglitz under the auspices of the Initiative for Policy Dialogue at the University of Columbia. The book reviews the main challenges posed by the management of resource revenues and proposes some interesting ways to address them.

To strengthen resource revenue management, for instance, the book proposes creating innovative budgetary  bodies and management arrangements that would operate in “parallel” to the existing ones. This post definitely recommends reading Escaping the Resource Curse, but argues that the benefits of creating such additional bodies and arrangements need to be carefully weighed against the risk of undermining and alienating existing budgetary institutions and discouraging reform efforts, especially in low-income countries, weakening governance and fragmenting already weak public finance systems.

Why should we read Escaping the Resource Curse?

Primarily because it presents a rigorous and comprehensive overview of the challenges posed by resource revenues, and especially oil revenues. Also because it conveys an optimistic message—the “resource curse” is avoidable— and includes some very interesting and innovative suggestions on how to address resource-related challenges. For instance, the book advocates for increasing the responsibility of the international community in promoting fair contracts between countries and oil companies. It also advocates that, in strong institutional settings, state-owned oil companies could be useful to curb the asymmetric information and  bargaining power enjoyed by international oil companies.

The discussion on what should be the best use of oil revenues is also very appealing: it argues that oil revenues derive from a “portfolio reallocation”—between a non-renewable asset, the “oil in the ground”, and a financial asset, the oil revenues accrued to the government. Therefore, oil revenues need to be reinvested in other forms of capital (e.g. infrastructures) to preserve the country’s wealth. Other creative recommendation includes creating new budgetary bodies (e.g. oversight bodies and investment committees) and innovative contractual arrangements with actors external to the government (e.g. a foreign financial institution) to shape the incentives of the political actors involved in the management of oil revenues.

What are the most salient recommendations of the book on the public financial management (PFM) front?

On the PFM front, and in line with recent IMF work (see The Role of Fiscal Institutions in Managing the Oil Revenue Boom, IMF 2007), the overall recommendation is to adopt special arrangements (e.g. oil accounts, medium-term frameworks, etc) to insulate spending from oil price volatility, save a part of oil revenues for the future, and promote the transparency and accountability of oil-related operations. These special arrangements, the book follows, should be adopted in a way that preserves the integration of oil revenue management with the normal budgetary process. However, this latter—and more-than-welcome—recommendation is sometimes difficult to reconcile with the book’s inclination for (i) creating new budgetary bodies—committees, commissions, funds, offices, etc— which will operate in “parallel” to the existing budgetary bodies; and (ii) contracting out some of the rules and procedures related to the management of oil revenues. These new budgetary bodies and external arrangements include:

  • oil funds created as public institutions instead of accounts, with separated legal personality and institutional independence, with the mandate of earmarking oil revenues to specific uses;
  • special treasury and banking procedures for the execution of oil-funded spending;
  • investment committees to assess the investment policy of the oil savings;
  • public information offices, i.e. institutions specifically created for the dissemination of information on oil revenues;
  • new oversight institutions or supervisory bodies; and,
  • special contracts, between the government and the foreign/local financial institution that houses the oil fund, spelling out the rules for spending, withdrawing and managing oil revenues.

What are the benefits of creating “parallel” budgetary bodies and contractual arrangements?

J0423100_2 The authors argue that the most salient and overarching benefit would be to discipline policy-makers in oil-producing countries that have weak institutional frameworks. Particular benefits could include:

  • limiting the discretionary power of the government, and deterring misappropriations, by establishing an oil fund as a separated institution with their own legal personality;
  • protecting oil savings, for example, by including in the contractual arrangement with the foreign bank that hosts the oil fund some provisions to freeze the oil accounts under specific conditions;
  • counterbalancing conflicting political interests, by expanding the scope for broad-based participation in the decision making (e.g. allowing for the civil society’s participation), especially in countries with weak separation of powers;
  • improving transparency, by obliging oil companies to provide information on their operations directly to new budgetary bodies;
  • promoting budgetary reforms, by carving out a space within the public sector in which the appropriate budgetary mechanisms can be put to work in a highly visible manner; in particular, the establishment of “parallel” budgetary bodies could open the door for the creation of a competent and efficient civil service.

What are the risks of creating “parallel” bodies and contractual arrangements?

J0423087 The authors acknowledge that these new bodies and contractual arrangements are not a panacea, and that their creation as truly independent bodies and separated mechanisms from the government could be especially challenging in low-income countries. In addition, the authors recommend avoiding that such bodies and contractual arrangements could become a “second” government or a “second” treasury which may hamper an integrated management of oil revenues.

However, the book could have benefited from identifying the risks that these “parallel” bodies and arrangements could entail, including:

  • increased opportunities for misappropriation and mismanagement, especially in countries with a high concentration of power in which these new bodies maybe fall under the control of the elite who may use them for its own benefit;
  • an excessive accumulation of power, when these bodies are, for instance, entrusted with the power of pre-authorizing routine budget operations with oil revenues;
  • fragmentation and delay of the budget process, especially in countries with poor sharing-information practices and lacking a competent civil service;
  • high administrative costs, especially in small low-income countries where there may be not enough skilled people to staff these new budgetary bodies; this situation could give rise to a differentiated, expensive, and sometime perceived as privileged bureaucracy; 
  • discouragement of reform efforts, as these separated institutions could seriously discourage the moral and incentive for reforms of existing budgetary institutions, with which they sometimes overlap; in addition their expensive—and sometimes privileged—bureaucracies could undermine efforts to build an efficient and merit-based civil service. 

What is the international experience?

As regards oil-producing countries with strong institutions, the creation of “parallel” budgetary bodies and contractual arrangements does not seem to matter much. There exist examples (see Table 1) of good oil revenue management under an oil fund created as a separated institution (e.g. Alaska) and under an oil fund that operates as an account (e.g. Norway).

However, the experience in low-income countries is not that promising. Chad provides a very illustrative case, in which the Collége—a joint government-civil society oversight body—struggles to conduct its competencies, mainly reflecting its lack of capacity but maybe also the conflicts arising from its overlapping with the treasury and control bodies.

In addition, the World-Bank-supported arrangement for the management of oil revenue did not hamper the authorities from altering the rules of the game and unilaterally reforming the oil-revenue management law. The book, however, seems to take a more optimistic approach about the effectiveness of the myriad committees, commissions, and offices only recently created in Sao Tome e Principe (STP) and East Timor. However, it could have added a note of caution as these bodies still have not been tested as oil revenues so far have been quite modest in STP and quite recent in East-Timor.

Conclusions. What to do then?

We could conclude that before recommending the creation of additional “parallel” budgetary bodies and special contractual arrangements for the management of resource revenues, it could be useful first to:

  1. strengthen existing budgetary bodies and processes; and,
  2. evaluate whether these new institutions could undermine existing budget institutions and governance, and discourage reform of these systems, especially in low-income countries.

 

Table. 1 Parallel Budget Bodies and Contractual Arrangements for Oil Revenues Management

 

Funds as Institutions

Special Contractual Arrangements

Special Budget Circuit

Investment Committee

Special Oversight Institution

 

Chad

No; oil revenues earmarked to separated accounts

Yes; oil royalties and dividends deposited in an off-shore account; debt service of the World Bank-supported pipeline borrowing discounted before repatriating oil revenues.

Yes; the Collége’s prior authorization needed for committing and paying oil-funded spending; over-lapping with treasury and internal control bodies.

No; originally envisaged in the law; saving fund dismantled in 2006.

Yes; a joint government-civil society Collège; not operational in practice; overlapping with Court de Comptes.

 

Sao Tome

e

 

Principe

No; oil fund is an off-shore account.

No; oil account managed by the central bank of behalf of the government in line with the budget. 

No; oil withdrawals fully fungible with the rest of revenues.

Yes; domestic investments and encumbrances prohibited.

Yes; joint government-civil society commission; overlapping with existing oversight and judiciary bodies.

 

East Timor

No; oil fund as an account.

No; oil account is a central bank account.

No; oil revenues management fully integrated with the budget process

No; oil fund managed by the ministry of finance.

Yes; functions limited to communication activities

 

Alaska

Yes; oil fund is a separate public corporation.

Yes; oil fund separated corporation; formula-based withdrawals.

Yes; oil fund invested separated from other government assets.

Yes; separated corporation; return of oil fund directly distributed to people.

n.a.

 

Norway

No; Oil fund as an account.

No; the oil account is at the central bank.

No; Oil revenues management fully integrated with the budget process

No; oil fund managed by the ministry of finance through the central bank; prohibition of encumbrances.

No; the oil fund is audited by the

 

Norway

’s Auditor General.

Source: The Role of Fiscal Institutions in Managing the Oil Revenue Boom, IMF, 2007.

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