Eifert et al - The Political Economy of Fiscal Policy and Economic Management

Eifert, B., Gelb, A., and Tallroth, N. B., The Political Economy of Fiscal Policy and Economic Management in Oil-Exporting Countries in Fiscal Policy  Formulation and Implementation in Oil Producing Countries, Davis, J.M., Ossowski, R., and Fedilino, A., (eds.), (Washington D.C.: IMF 2003)

This book chapter considers the political economy dimension of the challenges faced by oil exporting countries in designing and implementing effective fiscal and economic management policies. It does so through a comparative analysis of the performance of a number of oil exporting countries acting under different political typologies, i.e. mature democracy, factional democracy, paternalistic autocracy, reformist autocracy and predatory autocracy. Drawing from these varied country experiences, positive and negative, the authors attempt suggestions of good practices to be followed by countries in managing their oil rents.

The authors argue that oil exporting countries should  adopt a transparent political process in reaching consensus over how to expend oil revenue and that this process should have a long horizon focus. Constituency consultations involving civic societies, members of parliament and other stakeholders, including those from non-oil trade sectors, are also very important in plotting a strategy for the cautious management of oil revenues. The authors also suggest that where special oil funds are established they should be integrated into the budget, as is the case in Norway, and that market instruments like hedging may be used to buffer downside in export price risks.

External agents of restraint on government discretion such as players in the private sector, credit rating agencies, or Alaska-style schemes for the distribution of oil rents to the public may be used to promote good management of oil revenues. The authors conclude that there is no single approach to reaching a solution and that countries may adopt a combination of approaches in managing their oil revenues and related expenditures.

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