Is There an Alternative to the Boom and Bust Cycle?

April 20, 2016

Since commodity prices started crashing in 2013-14, many resource-rich countries around the world have experienced hardship. Some, like Ghana, Mongolia, and Venezuela, have experienced budget crises, requiring painful public spending cuts. Others, like Guinea, Kazakhstan, and Zambia, have delayed oil or mining projects or reduced taxes to try to attract investment. "The question," explained moderator Andrew Bauer, "is how can countries escape the cycle of boom and bust in commodities?" Bauer, senior economic analyst at the Natural Resource Governance Institute, explained that this cycle is completely predictable, which makes it all the more puzzling that so many countries seem to be unprepared for periods of low commodity prices. The panel discussion was part of the SPP-NRGI (Natural Resource Governance Institute) course, Reversing the Resource Curse: Theory and Practice, which is taking place at the School of Public Policy's Global Policy Academy, April 18-29, 2016.

Rani Febrianti, head of the Legal Information Subsection of the Directorate General of Mineral and Coal at the Ministry of Energy and Mineral Resources in Indonesia, shared some of the lessons that Indonesia has learned from past mistakes in managing its natural resources. She noted that the government is planning a new mining law to encourage investment, and to revamp its licensing system so that companies have to pay royalties in advance in order to export. Febrianti concluded by observing that Indonesia is working to come up with its own solutions.

"What have we learned? That boom and bust cycles are part of the game in extractives," said Dr. Donald Mmari, executive director of REPOA, an independent Tanzanian research institution. Noting that relying too much on natural commodities can be "disastrous," Mmari said that Tanzania had diversified its economic base in recent years to make it less vulnerable to the boom and bust cycle. Tanzania is also thinking ahead and planning for the future, said Mmari. He pointed to the Oil and Gas Revenues Management Act 2015, which calls for the establishment of the Oil and Gas Fund, as one example of how Tanzania is planning for the future. One of the goals of this fund is to safeguard resources for future generations.

"If you get the boom right, you save a lot," said Sir Paul Collier. The problem, according to Collier, is that many governments spend their resource revenues during boom times. They then struggle when commodity prices collapse. "Surviving boom and bust cycles of extractives is not hard, but politics drives a short-term vision," he said. Collier explained that one of the reasons that national governments were eager to borrow funds from the IMF is that it gave them someone to blame for the "inevitable" hardship. "The austerity measures are not caused by the IMF, but by the idiocy of governments," he said. Collier stressed the importance of "getting the social learning right" so as to not repeat past mistakes.

The panelists agreed that one of the keys to surviving boom and bust cycles is having strong national institutions. Mmari went so far as to counsel, "When you have weak institutions, don't extract." Collier noted, "The strength of institutions depends on the strength of the civil society behind them." While Mmari agreed that it was unwise for countries to rely on volatile natural resources for national development, Febrianti countered that some countries, citing the example of Indonesia at independence, were poor and did not have many options. Panelists agreed though that all countries would be better off if they diversified their economies.