Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
IMF Survey: Resource-rich Countries Can Learn from History, Says Collier
September 27, 2011
- Dedicated funds can cushion low-income countries against price shocks
- Allocate substantial resources to building productive infrastructure
- Use revenues from natural resources to diversify economy
Low-income countries rich in natural resources have historically performed worse economically than might have been expected. They have fallen prey to conflict, corruption, or overdependency on a single resource.
Botswana is ‘trying to break into the market for cutting and trading diamonds as well as just digging them out of the ground,’ notes Paul Collier (photo: Corbis)
NATURAL RESOURCE REVENUES
During a seminar on “Commodity Price Volatility and Inclusive Growth in Low-Income Countries” on the sidelines of the 2011 IMF–World Bank Annual Meetings, Paul Collier from the Centre for the Study of African Economies at Oxford University outlined policies to help countries ride the “commodity price tiger.”
In an interview with IMF Survey online, Collier said that African countries endowed with mineral and other natural wealth could learn from the mistakes of the past and rise from their low-income status through better management of their natural resources.
IMF Survey online: Are low-income countries always doomed to fall victim to the so-called “natural resources curse?”
Collier: If we look at the history of resource extraction in Africa and elsewhere, it is not a happy history. In fact, it is a history of plunder. So the task is to make sure that history does not repeat itself. Societies do not have to repeat history. They are not condemned to repeat mistakes. There is a thing called “social learning” and that is what has to happen in Africa.
IMF Survey online: What are some recommendations that you might suggest for saving and investing in natural resources?
Collier: Governments should not devote everything to the future. Similarly, if people are poor now, everything should not be devoted to just raising consumption in the present. Governments need to find a balance between present and future needs.
Part of the task is to smooth spending so you do not get these booms followed by crashes. You need one set of institutions, which rides the tiger of commodity prices. You need to save in good times and then pull that money back into consumption in bad times.
I call those “sovereign resilience funds.” You put the money in when you have got plenty of money; you take it out when you have not. Alongside a sovereign resilience fund is a “sovereign development fund”. It finances the schools, the ports, the hospitals, the roads, power stations that build a more productive future. Africa has been starved of economic infrastructure. It really needs to devote serious money to that task of building productive infrastructure.
IMF Survey online: Can you give us an example of a particular place that has done a good job at that?
Collier: Botswana has done a splendid job of riding the tiger. Botswana has had two episodes where its revenues from its only export—which are diamonds—fell pretty well to zero. They were terrible shocks. But because they had been prudent and built up a big financial cushion, they could ride through their shocks even though for several months there was no revenue.
The other economy is Malaysia. If we go back 40 years, Malaysia looked just like Africa. It was resource rich, it had all sorts of social problems, a lot of social tensions, and people were forecasting the worst.
What Malaysia did was harness the revenues from natural resources to invest so it could diversify its economy out of natural resources. For example, the government invested in Penang. Penang used to be a dirt-poor fishing area. It is now a world-beating electronics center because the government put in the physical infrastructure and the social infrastructure that made the Penang area attractive for skilled people to go to, so that an electricity export industry could take off.
IMF Survey online: Is that diversification appropriate in all contexts? In other words, is that something Botswana, for example, should now be pursuing? Even though they had a good strategy of saving, should they be following the lead of Malaysia and also diversify their markets?
Collier: Botswana has been trying, but Botswana has big disadvantages that Malaysia did not have. Botswana is landlocked and so it is very much harder for a landlocked country to actually integrate into global markets in a diversified way. It is now trying to do that rather intelligently by trying to break into the market for cutting and trading diamonds as well as just digging them out of the ground, and that is a clever move for Botswana. I think it will succeed.
IMF Survey online: There are clearly very distinct circumstances for every country to consider. Are there a few bullet point ideas that they should be keeping in mind as they are developing these strategies?
Collier: First of all, they must realize that there is nobody to copy out there. The rich countries, most of them, were never natural resource rich, and so their development strategies were completely different. The few rich countries that are resource rich—Canada, Australia—are not a good guide to what to do. For example, they save their money abroad because they have already got huge amounts of capital. Africa needs to save its money at home. It needs investment within Africa.
There are distinctive challenges and also distinctive policies. Where are you going to get guidance? There is one independent source I can point to and that is a thing called the Natural Resource Charter. Naturalresourcecharter.org sets out guidance on the whole decision chain, from how you discover and tax natural assets to how you invest and save. It is completely independent. The board is headed by Ernesto Zedillo, former president of Mexico. He said, “I saw oil ruin Mexico. There was a huge opportunity, which turned bad. I don’t want that to happen elsewhere.”
The board is entirely southern—there is the head of the Arab Development Fund; a former African prime minister, Mo Ibrahim; a philanthropist; there is a Chinese—there is not a single northerner on this board.
The big opportunity facing a lot of Africa is its natural resources. Commodity prices are high, and over the next decade that will trigger a lot of natural resource discovery in Africa. If Africa manages to capture that money and harness it for development, that is really the big opportunity for Africa to finance its own development. Its fate will be in its own hands.