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Can Oil Money Be Spent Well? Alan Gelb on Resource Revenues and Development.

9/14/10

Alan GelbMany developing countries have found that large deposits of oil or other natural resources are more a curse than a blessing. My guest on this week's Wonkcast is Alan Gelb, a senior fellow at the Center for Global Development. Together with co-author Sina Grassman, Alan has written a paper that explores the options facing developing countries with abundant natural resources and draws on historical evidence to recommend best practices for dodging the 'resource curse.'

We begin with a discussion of that curse. Alan explains the various problems that accompany oil revenues. Most obviously, that money is easy to misdirect and can often end up fueling corruption. But even for honest and well-intentioned leaders, oil money still presents special headaches. The extreme volatility of oil prices, which can vary by hundreds of percent from one year to the next, make it exceedingly difficult to plan national budgets. The trick is to stock away money in boom oil years to smooth spending in bust years—not easy even when small surpluses are involved. "Clearly you've got to save," Alan explains. But to flatten the boom-bust revenue cycle, "the typical producer may have to save an equivalent of its whole GDP."

We consider how these dynamics have played out in several case studies. In a range of countries, including Indonesia, Malaysia, and Chile, resource rents have been harnessed well for development. In the past decade, Nigeria, Africa's largest oil producer, has begun to institute reforms that may allow it to do the same.

Finally, we consider the ways that rich country and international partners can nudge developing countries in the right direction. Alan explains that this is not easy, since oil money strips away any leverage donors might have in poorer countries. ‘Soft power’ options like sharing information on oil payments and supporting civil society watchdog organizations can perhaps help around the margins.

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My thanks to Wren Elhai for his very able production assistance on the Wonkcast recording and for drafting this blog post.