Natural Resource Stabilization Funds in Latin America

According to the 2010 World Bank report "Natural Resources in Latin America and the Caribbean: Beyond Booms and Bust?", the current commodity bonanza, if managed wisely, can propel Latin America to rich-world growth levels, contradicting the long-held view that commodities are a curse to a country’s development. Is there something for Africa to learn?

The Report indicates that Latin American countries are increasingly savvier with commodities, implying that Latin America may be breaking the “natural resource curse” – a huge deal for a region where similar to Africa, 93 percent of the population and 97 percent of economic activity is in countries that are net commodity exporters.  For instance, in 2008, commodity exports for the seven largest economies in LAC reached a high of nearly US$400 billion. This accounted for just over half of overall exports (52 percent). In the Southern Cone of the region (Argentina, Uruguay, Paraguay, and Southern Brazil) the share of agriculture related exports represents more than 50% of total exports, as an average.

The commodity boom seems to working in South America because those countries that are rich in natural resources are being smarter in the way they manage their income.  For instance, Chile’s copper stabilization fund is a good example of wisely managing a commodity boom. By saving the proceeds of its copper windfall during good times Chile has been able to maintain its social programs and invest in new industries during lean times. Chile even used part of the stabilization fund to finance the country’s reconstruction following its February 27 earthquake. Other commodity-exporting countries such as Peru, Colombia and Brazil, which are following responsible economic policies, may be following Chile's steps. 

The report further argues that well-designed natural resource stabilization or long term savings funds could help the region deal with revenue instability and wealth preservation. Of five countries that began the boom in 2002 with stabilization funds or similar fiscal arrangements, Chile and Trinidad and Tobago ended it with significant savings to be able to finance a counter cyclical response to the downturn. The Report however warns that many stabilization funds have failed because it is hard to resist political pressure to spend unduly during the boom. 

Along similar lines, a recent report indicates that Ghana is expected to adopt the Norwegian model for managing petroleum revenue. The Government has also presented Parliament with a Petroleum Revenue Management Bill, drafted along the lines of the Norwegian model, which  divides petroleum revenue into three modules; Budget, Heritage and Stabilization Funds, aimed at preventing volatility shock in the market whilst promoting budget stability and continuity in government expenditures.  The Heritage Fund will ensure intergenerational equity because of the finite nature of resource revenue which compels some governments to save windfall revenues for future generation. The Stabilization Fund on the other hand would be used to mitigate volatile situations that might arise in future.

Herein lies the lesson and the solution for Africa. good governance, political stability. If Latin America can do it, so can we. Ghana seems to be on the right track.