Paul Collier: The Rules of Resource Management

Newly discovered oil in Kenya presents an important challenge. If proven commercially viable, the oil windfall could help to finance growth and development. Or, in country that ranks near the bottom of Transparency International’s Corruption Perceptions Index, it could be plundered and squandered. As Paul Collier suggests in a recent column, the question comes down to the dynamics of the rules that govern extraction and revenues.

Because good rules for resource management exist elsewhere, Kenyan doesn’t necessarily need to reinvent the wheel. Collier points to Ghana, where the government recently adopted a rule that 30 percent of oil revenues should be saved. In Chile, a fiscal rule prevents the government from squandering copper revenues. In cases where the economy is at full-employment and the price of copper is above its long-run equilibrium (as determined by an independent entity), the Chilean government must run budget surpluses.

Yet, prudent rules are only as effective as their enforcement. Collier uses central banking to illustrate this point. A rule mandating price level stability is unlikely to be effective without an independent central bank that can enforce it. Without an independent central bank, a country runs the risk of politicizing monetary policy and unleashing damaging inflation. Without independent institutions to manage resource extraction and revenues, countries run a higher risk of squandering or plundering their natural wealth.

Though important, both good rules and independent oversight could potentially be undone by irresponsible government. To prevent their undoing, Collier points to the critical importance of support from underlying social norms. Most Kenyans will already agree that using oil wealth to drive growth and development is the right thing to do, but people must also strongly believe that the newly adopted rules and oversight are the right way to do it. 

Collier suggests three ways to align social norms with responsible resource management: top-down leadership, bottom-up pressure, and messaging from external mediators such as journalists, NGOs, and think-tanks. If social norms are well-aligned with responsible management, would-be squanderers will have a much more difficult time of undoing effective, future-oriented rules and oversight. The challenge in Kenya or other resource rich countries will be pulling formal rules, enforcement, and social norms together in a cohesive manner.

Tile image by ezioman.