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How Should Oil Exporters Spend Their Rents? - Working Paper 221

8/10/10
Alan Gelb and Sina Grasmann
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Oil and other mineral rents are, in most countries, owned by producing states on behalf of their citizens. The paper focuses on three questions. First, how should countries take into account the great uncertainty over future export prices in planning their spending programs? Second, how should countries think about the possible range of options for absorbing oil rents, including transferring them to citizen-owners? What expenditures and policies approaches seem to have facilitated efforts to diversify the non-oil economy? Third, what factors seem to have helped some developing countries to avoid the most adverse effects of the “resource curse”?

The paper does not address the full range of issues relating to oil and governance, and it also does not address the longer-run question of how much countries should save in response to the exhaustible nature of oil reserves. It argues for approaches that increase public understanding of the need for prudent spending in booms, and for comprehensive consideration of a range of options for using rents. Drawing on the experience of a few successful countries, it points to a number of common factors that seem to be important in enabling countries to obtain a positive payoff from resource wealth. These include a strong concern for social stability and growth, a capable and engaged technocracy, and interests in the non-oil sectors able to act as agents of restraint. Development partners have little direct leverage on oil-exporting countries, but can help through sharing information, disseminating standards and encouraging civil society, especially constituencies with an interest in spending restraint. These activities should be pursued during the slumps to set the foundation for better management during the booms.

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