Speech

Natural Resources, Finance, and Development: Confronting Old and New Challenges

November 4, 2010

As prepared for delivery

It is my great pleasure to welcome you to this seminar, which the IMF is proud to co-host with the Central Bank of Algeria. I wish to thank Governor Laksaci for his kind introduction, and for his support—and that of his staff—in making this event possible. I am also honored to be sharing the stage with Prime Minister Ouyahia, and I look forward to hearing his thoughts on the challenges facing resource-rich countries.

We meet against the backdrop of a recovering, yet still fragile, global economy. The recovery remains subdued in the United States and sluggish in Europe. It is much stronger in other parts of the world—including in Asia, Latin America, and the Middle East. And even in Africa, many countries have returned to growth much faster than in previous recessions. This is a testament to sound policies implemented in many African countries in the years before the crisis hit.

What polices are needed to secure the global recovery? The answer varies by country. In those where the recovery remains weak, macroeconomic policies need to remain as supportive as possible. In others, a stronger recovery means that policy support may no longer be needed. But all countries must work together to find policies that secure the global recovery, and foster strong, stable and balanced global growth for the medium term.

Creating jobs is a major policy challenge across the world. It is true in the economies at the heart of the crisis—where unemployment has hit historic highs—and in economies where unemployment has been a problem for many years already. Joblessness is not only a major economic problem, it’s a major social problem—with tremendous human costs for those out of work, and for their families.

This high-level seminar presents a good opportunity to focus on the specific challenges facing resource-rich countries today. We have a wide mix of countries represented at this seminar, which should provide a good basis for sharing experiences and drawing lessons on how your economies can deal with future challenges. I just want to touch on a few of the issues that you may be discussing during the seminar.

The global economy is going through dramatic changes, with major implications for the demand for natural resources. Over the coming years, emerging economies will increasingly drive global growth. Many countries will take steps to adapt to climate change. And there will be further technological advances in extractive industries. Such changes will clearly impact the demand for natural resources.

A perennial challenge for commodity exporters has been how to manage the impact of volatile commodity prices on macroeconomic and financial stability. Even though commodity prices have stabilized somewhat since the Great Recession, volatility is sure to return—and is already back in agricultural commodity markets. This underscores the importance of having the right macroeconomic policies to manage this volatility. Financial tools, including hedging strategies, clearly matter too.

Another challenge is how to increase competitiveness. You are all familiar with “Dutch disease”—the phenomenon of large commodity exports leading to an appreciation of the real exchange rate, which in turn slows productivity growth in other sectors of the economy. This weakens competitiveness, and holds back economic diversification—leaving the economy overly dependent on the natural resource sector.

But perhaps the most fundamental challenge is how to ensure that natural resource wealth is used wisely and shared fairly across society. Your countries have been blessed with tremendous natural riches. And yet in many of them, unemployment is high—especially among the young—and millions remain in poverty. It seems only right that your countries’ natural riches should be used to tackle constraints on growth and development, to create the decent jobs needed to raise living standards.

Much greater investment in physical, human, and institutional capital is clearly needed to boost productivity and raise competitiveness. This should be supported by structural reforms that tackle constraints on entrepreneurship and that improve the business climate.

But spending should be at a measured pace. This will safeguard macroeconomic stability, which includes maintaining the real exchange rate at a fair level. It will also allow future generations to benefit from the revenues earned from exhaustible natural resources today.

Strong institutions will play a critical role in ensuring that well-designed policies are indeed effective. Strong fiscal institutions help prevent excess spending in times of plenty—thus leaving enough resources for times of want. And strong financial institutions help manage the impact of spikes in capital inflows on the broader economy. Sound management of foreign exchange reserves is a critical complement in this regard.

Unfortunately, strong institutions have been missing in many resource-rich economies. As a result, economic performance in many countries with abundant natural resources has been quite poor. And even worse—the blessing of resource riches has too often turned into the curse of conflict.

A strong commitment to good governance lies at the heart of responsible management of natural resource wealth. Good governance helps ensure that commodity revenues can benefit all in society. This is why institutions with a high level of accountability are so important. The experiences of countries like Botswana, Chile, and Indonesia show the important role that strong, independent, and accountable institutions can play in resource-rich countries. I also firmly believe that a vigorous civil society is critical for achieving—and maintaining—a high standard of accountability.

Transparency is an important first step in ensuring accountability—and an issue which the IMF is helping to promote. To support our members’ efforts in this area, we developed the Guide on Resource Revenue Transparency and the Code of Good Practices on Fiscal Transparency. We also provide technical assistance and training to our members, drawing on our deep experience of working on these issues all over the world. For example, later this month we are hosting a course in South Africa on macro-financial issues faced by resource rich countries.

In closing, let me affirm the IMF’s commitment to working with you, our members, to tackle the policy challenges of this new global economy. It is my hope that through events like these—and through our close bilateral relations with our members—we can help support a strong and stable global recovery, to the benefit of all nations of the world.

Thank you for your attention.