consumption and saving for the long term. Policy makers need to strike a balance between spending today and saving for tomorrow. In practice, this is often less clearly a problem. Apart from the island of Nauru, no country has actually run out of mineral (or hydrocarbons) resources, although the Republic of Yemen comes close. 4. Undetermined ownership. Resource rents belong to the “nation,” but what does that mean? Does it mean the government or municipalities in producing areas or something wider like “the people”? If the latter, what about unborn citizens? These questions go to the heart of the accountability problem and beyond questions of whether revenue should be shared among today’s citizens. Responding to volatility
Policies have to be designed in ways that avoid transmitting volatility (which is outside the control of policy makers) to the macroeconomy. This is achievable by smoothing spending flows; promoting long-term fiscal sustainability and intergenerational equity; enforcing measures to mitigate Dutch Disease (see the discussion of overall resource policy in chapter 2 and section 4.2). In principle, decisions on current versus future consumption and on the form of investment can all be made using a model—but volatility is a complication. Experience suggests that success is often elusive. One researcher notes, “Capital flows, fiscal policy, monetary policy, and sectoral allocation each tend to be more procyclical in commodity producing countries than economists’ models often assume. If anything, they tend to exacerbate booms and busts instead of moderating them” (Frankel 2011, 167). Formal fiscal rules and resource funds are not a panacea. A study of increased revenues from oil concluded, “Implementation of quantitative fiscal rules has proved very challenging, mainly due to the characteristics of oil revenue and political economy factors. . . . Many countries have had difficulty managing funds with rigid operational rules, as tensions have often surfaced in situations of significant exogenous changes or with shifting policy priorities” (IMF 2007b, 3). Large sovereign wealth funds can also be raided by future governments, who may also seek to divert resource rents outside the budget. For example, in the República Bolivariana de Venezuela, almost 70 percent of oil rent flows through funds that are outside the budget (Rodríguez, Morales, and Monaldi 2012). This undermines fiscal rules as well as transparency. No option is free from risks.
7.3 CONSUME OR SAVE?
The basic question for a country facing the prospect of significant resource revenues is how it should plan the time path of spending and saving from this revenue flow (intertemporal optimization). How much of the resource wealth should a government consume and how much should it save? ■
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If consumption is the priority, government has to make decisions about increasing public consumption or transferring funds to citizens. If investment is the priority (and investment is the principal option for the use of savings), there are several choices: decisions can involve making domestic public investments or to invest abroad in financial assets (sovereign wealth funds).4 Investment in human capital can be done by training or education and in intellectual capital through investment in research and development. Rather than overseeing the investing itself, the government can offer investment incentives to private firms.
In either case, the choice could lead to waste and generate unfair outcomes. Whatever decision is made for the use of rents, it will be made under high levels of uncertainty about resource revenue flows. For example, sudden slumps in demand can follow euphoric booms, and the persistence of either is unknown. Some kind of fiscal framework is required to address these issues. Given the inevitable fluctuations in revenues, it needs to smooth revenue flows and perhaps involve the use of stabilization funds. The fiscal framework may also wish to introduce an instrument called fiscal rules as a means of addressing stabilization or savings. This does not necessarily have a statutory basis. Other factors and policy choices have to be taken into account in making such fiscal choices, including the factor of absorptive capacity and choices such as tax reduction, increases in expenditure, and debt reduction or savings of windfall revenues. Fiscal rules
Fiscal rules are multiyear formal constraints on government spending or public debt accumulation. They rely on formal commitments to the achievement of certain numerical values for selected and targeted fiscal variables, such as the fiscal balance, public expenditure, or the public debt. The International Monetary Fund (IMF) has defined them as “institutional mechanisms that are
CHAPTER 7: REVENUE MANAGEMENT AND DISTRIBUTION
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