7 ways to overcome the resource curse

The Roving Bandit summarizes a new survey article by Jeffrey Frankel highlighting seven ways to overcome the resource curse.

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.

These are all valid ideas, but in many cases (e.g. #4) the devil is really in the implementation (or the political economy, if you prefer). I'm a fan of the more thorough treatment in Escaping the Resource Curse, although from a quick glance it looks like this paper covers much of the same ground and sources in a more concise fashion.