What do we want to know?
This systematic review sought to understand the efficacy of natural resource funds (NRFs) as an intervention to manage revenues from mineral resources in low- and middle-income countries experiencing politically fragile circumstances. The following three questions were examined through the review:
- How are NRFs used to manage resource revenue in resource-rich countries?
- What has been the impact of existing NRFs?
- How can NRFs be made more effective, especially in low- and middle-income countries experiencing politically fragile conditions?
Who wants to know and why?
This systematic review provides stakeholders, including policy makers, practitioners, and researchers, with information on the different types of NRFs which currently exist, including their objectives, institutional structures and fiscal rules, and key challenges which must be addressed to ensure that NRFs are able to meet their objectives effectively. The findings of the review have been contextualized for Afghanistan and Myanmar in particular to enable stakeholders in these countries to understand the specific challenges of managing resource revenue and if and how NRFs can be used for revenue management in these countries.
What did we find?
We found that mineral-rich countries establish NRFs for a number of reasons, chief among them being macroeconomic stabilization, sterilization against outcomes such as Dutch Disease, promoting socioeconomic development, getting high returns from investments, and promoting intergenerational equity.
Q 1. How are NRFs used to manage resource revenue in resource-rich countries?
Fiscal rules governing NRFs, specifically pertaining to deposits, withdrawals, savings, and investments can play an important role in determining the extent to which an NRF is able to meet its objectives. Countries have adopted a range of fiscal rules and management structures to operationalize NRFs. The fiscal rules which are chosen may be determined by the context in which the NRF is to operate. For example, low income countries may seek to prioritize domestic spending over saving, but may also be constrained by low absorptive capacity. This may have implications on the saving and spending rules, as well as whether investments are made in foreign or domestic entities.
Q 2. What has been the impact of existing NRFs?
Impact of NRFs on outcomes such as avoiding Dutch Disease, smoothing government expenditures, and improving welfare outcomes has been mixed. While some countries, such as Botswana, Chile, and Norway, have successfully used NRFs to meet some or all of these objectives, others have struggled with low returns on investment, and fund mismanagement leading to losses to the exchequer.
Q 3. How can NRFs be made more effective, especially in low- and middle-income countries experiencing politically fragile conditions?
Some measures which countries have undertaken to make NRFs effective include firstly, clearly outlining the objectives for which the NRF is established, and creating fiscal rules to meet those objectives; secondly, clear allocation of roles and responsibilities for fund management; and thirdly, oversight mechanisms to limit discretionary spending and interference in saving and spending decisions by the executive.
What are the conclusions?
Even though NRFs have been used fairly successfully by some countries to meet objectives relating to fiscal stabilization, inter-generational equity, and socio-economic development, in low- and middle-income countries, in the absence of certain enabling factors and safeguards, NRFs may result in losses to the exchequer because of fund mismanagement.
Fiscal rules to govern NRFs should be framed keeping in mind country contexts and objectives which are sought to be achieved by establishing an NRF. Rules would differ based on government priorities, and in low- and middle-income countries governments may face compulsions to spend domestically along with challenges in spending domestically given their low absorptive capacity. While framing fiscal rules, governments should be cognizant of these challenges.
Additionally, ensuring adequate oversight over deposits into and withdrawals from the fund and investments made through the fund can play a critical role in reducing discretionary spending. In this context, establishing independent NRFs can sometimes allow for the development of greater expertise, but may also limit the oversight mechanisms which public agencies such as ministries or central banks are subject to.
Finally, developing public consensus on NRFs which curtail immediate expenditure may be challenging for governments, but may allow them to function more effectively through managing public expectations and aligning objectives of NRFs more closely with civil society demands, both of which can contribute to the long term sustainability of NRFs.
How did we get these results?
Based on our review questions, a comprehensive search of literature was conducted using electronic databases and websites. 7,387 studies were identified which discussed natural resource revenue management in resource rich countries. Using the inclusion and exclusion criteria developed for this particular systematic review, information on 226 of these studies was eventually mapped.
These 226 studies examined a range of natural resource management interventions, including those related to firstly, natural resource revenue generation; secondly, allocation and distribution of natural resource revenue; and thirdly, increasing transparency and accountability in natural resource revenue management.
The focus of the review was narrowed to specifically examine those studies relating to natural resource funds which were able to answer any of the three review questions. 41 such studies were identified. Data pertaining to interventions and outcomes was extracted from these studies, which were also critically appraised by reviewers. In the absence of adequate quantitative estimates of NRF effectiveness, a configurative synthesis was conducted to identify key themes which emerge from the selected studies and answer the three review questions. Finally, findings of the review were contextualized for Afghanistan and Myanmar.
This review should be cited as:
Ghose J, Bakshi SK, Arora N, Sharma R, Deepa N, Govindan M (2017) Natural Resource Revenue Management in Low- And Middle- Income Countries Experiencing Politically Fragile Conditions: A Systematic Review. London: EPPI-Centre, Social Science Research Unit, UCL Institute of Education, University College London.