Humphreys and Sandbu - The Political Economy of Natural Resource Funds

Humphreys, M., and Sandbu, M.E., The Political Economy of Natural Resource Funds in Escaping the Resource Curse, Humphreys, M., Sachs, J.D., Stiglitz, J.E., eds. (New York, Columbia University Press, 2007)

Using empirical evidence the authors analyze the various ways incentives can affect the decisions policy makers take. They delve into the connection between these political incentives and inefficient resource management, more specifically through Natural Resource Funds (NRFs), and argue that there is a lack of evidence indicating that NRFs restrain government expenditure. In cases where there appears to be a positive correlative relationship between NRFs and expenditure smoothing, the data does not follow that NRF’s themselves rather than the political economy are responsible. Furthermore, there has been no evidence to suggest that the existence of NRFs contributes to a sound fiscal policy.

Using various scenarios, the authors set out to explain the different incentives that politicians may face in countries with accumulated revenues and cites inefficient overspending as a result of diverging interests and competition for power in advancing political interests. This can be overcome, they argue, when policy‐makers make clear commitments not to take full advantage of their power whilst in government. NRFs therefore can provide a tool for controlling such spending by placing a cap on expenditure. Since NRFs do not necessarily provide a rationale for institutional solutions to the political economy problem, the right political economy must exist prior to the setting up of NRF’s otherwise the effect is that NRF initiatives would be largely ignored or at worst violated (citing the Chad example). Under the right circumstances, therefore, NRFs have the potential to thrive where they are instituted to augment the political economy and created with broad decision‐making authority. Where power to administer them is not given to an individual or a minority interest group, where there are inbuilt transparency mechanisms designed to check and report abuses, NRFs can make discretionary uses of finances more difficult, which would in turn reduce incentives to spend too much in any given period.

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