28 June 2010

7 ways to overcome the natural resource curse

A new survey article by Jeffrey Frankel at Harvard concludes with a list of promising ideas for overcoming the natural resource curse and achieve good economic performance.

1. Indexation of oil contracts – Contracts between oil companies and governments could easily (but usually don’t) have explicit clauses to deal with global price volatility - sharing the downside and upside risk.

2. Hedging of export proceeds – Simply buy insurance against low oil prices, like the Government of Mexico has done. Easy.

3. Denomination of debt in terms of oil – i.e. promise to repay a quantity of oil rather than a dollar amount. This insures the borrowing government and transfers the price-risk to the lender.

4. Chile-style fiscal rules – Chile managed to save its copper boom and spend its way through the global recession by having an independent fiscal panel make assessments of the medium-term price and output gap – and tell the government how much they were allowed to spend.

5. A monetary target that emphasizes product prices – If the Central Bank has greater political independence than government coffers, monetary policy could be geared towards building up higher-than-otherwise-desirable stocks of foreign currency reserves – in order to ensure the savings aren’t raided.

6. Transparent commodity funds – The challenge is in the transparent part.

7. Lump-sum distribution – Last but not least, my favourite. Just give people the money.

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