Managing Oil Wealth

Issue: Research
Organization: International Monetary Fund
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This short article from the International Monetary Fund’s Finance and Development magazine compares the political economy of fiscal policy and economic management across oil-exporting countries. The authors define some of the relevant tools for analysis from political science and present their evidence in an accessible way. They attempt to identify factors that have helped some countries to manage their oil revenues effectively and draw lessons from these experiences.

Oil-exporting countries are classified in terms of five main political systems: mature democracies, factional democracies, paternalistic autocracies, predatory autocracies and reformist autocracies. After describing the characteristics of each political system, and citing the experiences of a range of countries, the authors draw conclusions about how different political systems affect choices about managing natural resource wealth. The authors begin by noting that mature democracies have some advantages in managing oil revenues, though they still face some challenges in terms of implementing cautious expenditure management. Reformist and traditional autocracies can also sustain long-term decision horizons and developmental policies, but their resistance to transparency and tendency to rely on oil-backed spending can lead to corruption and inefficiency.
The authors conclude that while mature democracies have distinct advantages in managing oil revenues in the long term, cautious management of oil revenues remains a struggle in many of these countries.  The authors point to a number of recommended approaches. These include the adoption of more cautious, transparent, and flexible budgeting; more hedging; holding larger reserves; and transferring some oil earnings to individual citizens during boom periods. They also recommend building public awareness and support for longer-term planning among civil society, parliament and those dependent on non-oil traded sectors. Attempting to get the political debate to span longer horizons is seen as critical, the authors argue, since countries that take a long-term view seem most likely to benefit from their oil resources.  However, they do not provide evidence for this claim.