Managing Natural Resource Revenue In Developing Economies
Submitting InstitutionUniversity of Oxford
Unit of AssessmentEconomics and Econometrics
Summary Impact TypeEconomic
Research Subject Area(s)
Economics: Applied Economics, Econometrics
Summary of the impact
Countries with substantial non-renewable natural resource wealth face
special opportunities and challenges. Research undertaken by Oxford
economists has contributed to understanding these challenges and to
improving policies for resource management, particularly in developing
economies. The key impact is based on a central component of the research
— resource revenue management, including long-run decisions about saving,
investing, and consuming revenues, and short- and medium-run management of
instability. Oxford research has been influential in shaping policy
positions of the International Financial Institutions, particularly the
IMF, and in influencing the policy debate in-country. It has thereby
influenced policies for resource revenue management, particularly in the
newly resource-rich countries of Africa.
Research on the performance and management of resource-rich economies has
been led by Professors Frederick van der Ploeg and Tony Venables,
co-directors of the Oxford Centre for the Analysis of Resource Rich
Economics (OxCARRE). The centre was established in 2008 with funding from
BP. Venables joined Oxford in 2007 as BP Professor of Economics and van
der Ploeg joined in 2008 as Professor of Economics. Work has also involved
Professor Paul Collier (Professor of Economics and Public Policy) of
Oxford's Centre for the Study of African Economies (CSAE).
The research has covered a broad agenda (OxCARRE has produced over 120
research papers) including the relationship between resource wealth and
conflict, the impact of volatility [R3], trade issues [R2],
and the experience of particular countries [R1, R7]. A focus has
been the management of the foreign exchange windfall generated by resource
revenues. At the aggregate level, these revenues can be used for three
things: current expenditure; domestic investment; and the acquisition of
foreign assets (e.g. a Sovereign Wealth Fund). The balance depends on
factors including: the ethical weighting of income accruing to different
generations; constraints on public funds and the supply of capital; the
need to avoid an inflationary resource boom, exchange rate overvaluation,
and `Dutch disease'; the country's capacity (institutional and economic)
to absorb extra spending; the need to insulate the economy from
volatility; and the need for choices to be robust to environments with
difficult political economy. Analysis of how best to manage the trade-offs
between these factors is the subject of much of the research of van der
Ploeg and Venables [R5, R6], together with [R1, R3, R4].
OxCARRE's research on the use of natural resource revenues challenges the
conventional wisdom of following the permanent income hypothesis (PIH).
The researchers construct a dynamic model of a developing economy which is
capital constrained (households and government unable to borrow at the
world interest rate) and on a growth path towards development. They show
that in this setting the optimal policy is not to follow the PIH
prescription of using revenues to build long- run foreign assets, but
rather to balance higher investment in the domestic economy (particularly
infrastructure) with a relatively large increment to current consumption,
to address the poverty of the current generation [R5]. The
research addresses issues relating to short- and medium-run economic
management, analysing the impact of resource revenue on economic
structure, its implications for the exchange rate, and policy to manage
this [R6]. Other work focuses on the problems associated with
volatility [R3, R4].
Together, this body of research outlines a strategy for resource revenue
management which prioritises investment in physical (and human) assets in
the domestic economy, supplementing these with foreign savings vehicles
designed to mitigate the effects of volatility and in which revenues can
be `parked' until absorptive capacity problems are solved. They also
outline the importance of concurrent domestic reform (preparing the
economy to overcome absorption constraints and handle a resource boom),
and the micro-economic detail of interaction between the public and
private sectors. The importance of the work lies in the fact that the core
analysis suggests a use of revenues quite different from the PIH
prescriptions that underpinned the policy advice of the IMF (Fiscal
Affairs Department) and influential donors (the Norwegian Oil for
References to the research
[R1] Collier, P., F. van der Ploeg, A.M. Spence, A.J. Venables,
2010, "Managing Resource Revenues in Developing Economies", IMF Staff
Papers, 57, 84-118 (previously published as OxCARRE Research Paper
15, January 2009).
[R2] Ruta, M. and A. J. Venables, 2012, `International trade in
natural resources; practice and policy', Annual Review of Resource
Economics, vol. 4, 331-52 (previously published as OxCARRE Research
Paper 84, March 2012).
[R3] T. Van den Bremer and F. van der Ploeg, 2013, "Managing and
harnessing volatile oil windfalls," IMF Economic Review, 61(1),
[R4] Van der Ploeg, F. and S. Poelhekke, 2009, "Volatility and the
natural resource curse," Oxford Economic Papers, vol. 61, 727-760.
[R5] **Van der Ploeg, F. and A. J. Venables, 2011, "Harnessing
Windfall Revenues: Optimal Policies for Resource-Rich Developing
Economies," The Economic Journal, 121, 1-30.
[R6] **Van der Ploeg, F. and A. J. Venables, 2013, "Absorbing a
Windfall of Foreign Exchange: Dutch Disease Dynamics," Journal of
Development Economics, 103, 229-243.
[R7] Venables, A.J. 2011, "Economic Integration in Remote Resource
Rich Regions". R. Barro and J.W. Lee (eds), 'Costs and Benefits of
Economic Integration in Asia', Oxford: Oxford University Press
(previously published as OxCARRE Research Paper 22, April 2009).
Annual Review of Resource Economics
is a leading scientific journal
in resource economics.
is a leading general-interest economics journal and
is the UK's top economics journal. It was rated as "4*" by the ESRC-RES
International Benchmarking Review of UK Economics in 2008 and is classed as
"AA" in the Combes-Linnemer (2010) ranking.
IMF Economic Review (formerly IMF Staff Papers)
peer-reviewed academic research on open economy macroeconomics.
Journal of Development Economics
is the top field journal for
development economics. It was rated as "4*" by the ESRC-RES International
Benchmarking review of UK Economics in 2008 and classed as "A" in the
Combes-Linnemer (2010) ranking.
** denotes publication returned as part of REF 2014.
The Oxford Centre for the Analysis of Resource-Rich Economies was
established in 2008 with core funding from BP.
Details of the impact
This research has had significant impact on policy advice provided by the
international financial institutions. It has influenced the policy debate
within a range of countries (through advice offered to ministers and
engagement in debates within civil society and NGOs) and hence shaped
1) International financial institutions and the development policy
A key point of influence has been the International Monetary Fund (IMF),
in particular the Fiscal Affairs Department and also the Low-Income
Countries Strategy Unit and the IMF Research Department. The IMF undertook
a thorough review of its policy advice on revenue management leading to a
2012 policy paper for the IMF Executive Board setting out a new
macro-fiscal framework and policy advice for resource-rich developing
countries [C1]. This draws heavily on Oxford research (citing 9
research papers including [R1], [R5] and [R6], and
consulting Van der Ploeg and Venables in preparation of the paper).
Accompanying the Executive Board paper, the IMF published a background
paper [C2] and Staff Discussion Note [C3] drawing on the
research and designed to ensure policy reaches IMF staff and country
offices. The Deputy Director of the Fiscal Affairs department at the IMF
has confirmed that the IMF Board paper has had a major impact on the
Fund's policy advice to resource-rich countries, particularly in the
context of the scaling of public spending [C4]. Van der Ploeg
subsequently taught a course at the IMF Institute attended by 50+
professional economists from within the IMF (The Economics of Natural
Resources, IMF Institute, 2010).
OxCARRE research [R1, R7] has also been used by the World Trade
Organisation in their flagship 2010 World Trade Report [C5], which
focused on trade in natural resources. The World Bank (WB) has used the
research in their policy dialogue with the government of Iraq (a model
based on their research [R2] and provided by Venables and Van der
Ploeg forms chapter 2 of the Iraq Country Economic Memorandum [C6]);
and in their Governance of Extractive Industries Initiative (GOXI), and
their Extractive Industries Sourcebook designed to provide senior
government officials and policymakers with a guide to good practice [C7].
2) Policy in Country:
Impact on the policy within countries has been achieved through two main
mechanisms. The first is interaction with policy makers through high-level
conferences and meetings. Examples include government conferences in
Ghana, Uganda, South Sudan, Sierra Leone, Tanzania, D. R. Congo; IMF
conferences including a joint IMF — WB conference in March 2012; the
annual conference of the Extractive Industries Initiative (2011); and the
Global Development Network (`Natural Resources and development' 2009).
These events, attracting ministerial and in some cases presidential
audiences, have contributed to a greater awareness of the policy
alternatives and the dissemination of good practice (for example see [C8]).
Extractive industries legislation (or draft legislation) in newly resource
rich countries in Africa now generally contains explicit clauses on the
use of resource revenues, including investment in the domestic economy and
limited use of off-shore funds (in line with the policy recommendations
from [R1, R5]). For example: Ghana's Petroleum Revenue Management
Act (2011) and associated Stabilization and Heritage funds [C9].
The second mechanism by which the research has informed and influenced
policy is the Natural Resource Charter (NRC),
established in 2009 by an independent team of experts to provide a guide
to the management of natural resources. The NRC is "a set of economic
principles for governments and societies on how to best manage the
opportunities created by natural resources for development." It is
organized around twelve core precepts that offer guidance on key
decisions; beginning with whether to extract natural resources, and ending
with decisions that determine how resource revenue can produce maximum
good for a country's citizens. Collier and Venables were members of the
team that launched the initiative and continue as members of the Technical
Advisory Group, with Oxford providing the intellectual base for the NRC.
Oxford research on revenue management (including [R1], [R4], [R5])
directly informs precepts 7, 8, 9 and 10 of the charter [C10]. The
NRC has been adopted or otherwise endorsed by a broad range of
organizations/governments/NGOs: the World Bank, the IMF, Norway,
Australia, Zimbabwe, African Development Bank, and the African Progress
Panel. The UK government gave its support to the the NRC in the 2009
Department For International Development white paper Eliminating World
Poverty: Building Our Common Future [C11]. In 2012, Nigeria was the
first country to benchmark its performance against the 12 precepts of good
practice set out in the Charter [C12].
Sources to corroborate the impact
[C1] Policy paper for the IMF Executive Board: Macroeconomic
Policy Frameworks for Resource-Rich Developing Countries http://www.imf.org/external/pp/longres.aspx?id=4698
(See: pages 11 to 14 and footnotes, and references.)
[C2] Background paper for the IMF Executive Board : Macroeconomic
Policy Frameworks for Resource-Rich Developing Countries — Background
(See: Part 1: Stylised Facts, footnote p. 6; references p17; references
[C3] IMF Staff Discussion note SDN/12/04, Baunsgaard et al, (2012)
`Fiscal Frameworks for Resource Rich Developing Countries', http://www.imf.org/external/pubs/ft/sdn/2012/sdn1204.pdf
(See: Acknowledgements, p.9 and references.)
[C4] Corroboration from the Deputy Director, Fiscal Affairs
Department, IMF that OxCARRE research, through the IMF Executive Board
papers and accompanying papers, has had substantial impact on the Fund's
policy advice to resource-rich economies (email on file).
[C5] "World Trade Report 2010; trade in natural resources" WTO
(see: section II.D.6, pp 141-174; also Acknowledgements and Bibliography.)
[C6] Iraq Country Economic Memorandum (2012 internal WB document:
public release date tbc).
[C7] World Bank Governance of Extractive Industries Initiative: http://goxi.org/
[C8] IMF conference Management of natural resources in
sub-Saharan Africa, 21-22 March 2012
(for evidence of ministerial level engagement).
[C9] Revenue Watch Institute, "Comments on Ghana Petroleum Revenue
Management Bill, August 2010. http://www.revenuewatch.org/sites/default/files/Ghana_revenue_management_brief_final.pdf
Further corroboration may be obtained from the President, Revenue Watch
Institute, New York 2006- 12.
[C10] Natural Resource Charter: http://naturalresourcecharter.org/content/about/history
(go to http://naturalresourcecharter.org/precepts
for details of the twelve precepts).
[C11] DFID (2009) Eliminating World Poverty: Building Our Common
Future, CM 7656, (July, p78.
[C12] Nigeria Natural Resource Charter: Benchmarking Exercise
Report December 2012 http://naturalresourcecharter.org/content/nigeria-assessment