CHPTER 8 Sustainable Fiscal Policy for Mineral-Based Economies

Amadou Sy, Rabah Arezki, and Thorvaldur Gylfason
Published Date:
January 2012
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Kirk Hamilton and Eduardo Ley 


Economic management in mineral- and energy-based extractive economies must confront a wide range of challenges: investments in the sector are large and long- term in nature, rents from extraction are often large relative to GDP (as are potential tax revenues), the resources’ extent and future prices are highly uncertain, information between producers and governments is asymmetric, and the resource deposits themselves are exhaustible.1 The latter point—exhaustibility—raises particular concerns about the sustainability of growth and development in these economies, and this in turn is strongly linked to fiscal policy.

As noted in Where Is the Wealth of Nations? (World Bank, 2006), there are no sustainable diamond mines, but there are sustainable diamond-mining countries. While individual mines eventually are exhausted or cease to be economic, the country that owns the minerals being mined has the option of investing the rents from extraction in other assets that can sustain income generation beyond the life of the mine. This insight suggests an important linkage between sustaining development and maintaining wealth, an inference that is borne out by a large body of research.2

In this chapter, we argue that the exhaustibility of mineral resources raises two specific concerns for economic management: (i) How should we measure economic performance? and (ii) How should we design fiscal policies to sustain growth and development in the face of exhaustibility? The chapter is broken into two main parts to deal with these two questions. The concluding section draws the pieces together.


While GDP growth is the canonical measure of economic performance used by finance ministries everywhere, there is good reason to question its usefulness in economies that depend on exhaustible resources, particularly smaller developing countries where resource extraction may be a very large portion of the economy. There are two main reasons for this. First, national income, rather than domestic product, is a more appropriate income measure in countries where largely foreign-operated extractive industries are substantial, since payments to foreign-owned factors are often considerable. Second, in resource-rich countries, national income must be adjusted by offsetting a part of the credits for resource extraction with the corresponding depletion costs, which are similar to capital depreciation.

This suggests using a measure of national income adjusted for resource depletion as the measure of economic performance. This adjusted net national income (aNNI) is defined as follows:

Net national income (NNI) = GDP + (net foreign factor income)—(depreciation of fixed capital)

Adjusted net national income (aNNI) = NNI – (depletion of natural capital)

After adding net foreign factor income to GDP and subtracting the consumption of fixed and natural capital, we obtain the country’s aNNI. This is a better measure of the available income, which can be consumed or invested to increase the nation’s future consumption.

Taking mineral-dependent sub-Saharan African countries as a group,3Figure 8.1 plots GDP and aNNI since 1990.

Figure 8.1.Real GDP and aNNI in mineral-dependent African countries (in 2005 US$ billions), 1990–2008

Source: Authors’ calculations.

As the figure makes clear, adjusting for factor payments abroad and resource depletion produces a significant difference in the level of the national accounting aggregates, more than an $80 billion difference in 2008. The annual growth rates also diverge sharply, averaging 6.4 percent for GDP but only 3.8 percent for aNNI. This reflects the resource boom that started during the early 2000s, boosting real commodity prices, levels of extraction, the value of resource depletion, and flows of profits out of these economies.

This difference in levels and growth rates indicates the scope for governments to make policy mistakes during boom times: they believe that income is much higher than it is in fact, and they believe that economic growth is much higher as well. Governments may be tempted to opt for expansionary policies that are at variance with the true state of the economy.

If we switch the policy focus from growth to the sustainability of growth—a real concern when resources are being depleted—then it is clear that aNNI alone is not going to be a sufficient indicator. aNNI is an accurate measure of current income, but it does not indicate the prospects for future social welfare. For that, it is necessary to look at the national balance sheet and at net wealth creation in particular. The appropriate measure of net creation of real wealth is adjusted net saving,4 calculated as follows:

  • Gross domestic saving (GDS) = GDP—consumption
  • Net national saving (NNS) = GDS + (net foreign factor income) + (net transfers)—(consumption of fixed capital)
  • Adjusted net saving = NNS + (education expenditure)—depletion—(pollution damage)

Adjusted net saving aims to be comprehensive, classifying education expenditures as investment rather than consumption (contrary to the practice of the System of National Accounts (SNA)), deducting the value of mineral and energy depletion and net depletion of forests, and finally deducting the damage to assets associated with exposure to pollution. Figure 8.2 plots gross domestic saving and adjusted net saving for the resource-extracting African economies appearing in Figure 8.1.

Figure 8.2.Gross and adjusted net saving in mineral-dependent African countries (percent), 1990–2008

Source: Authors’ calculations.

As Figure 8.2 makes clear, the finance ministers in these mineral- and energy-exporting countries are almost certainly looking at the wrong numbers when it comes to wealth creation and the sustainability of development. Gross domestic saving shows an upward trend since 1990, approaching roughly 25 percent of GDP. Adjusted net saving has been negative every year except 1996, with the mean value approaching –10 percent of GNI since the year 2000.

It is important to understand what these savings figures mean for development. The discovery and development of a mineral or energy resource offers a country the opportunity to put well being, measured narrowly as consumption, onto a permanently higher plateau. The policy rule for achieving this, described below, is the Hartwick rule: invest rents from resource extraction in other forms of capital. The fact that we observe negative saving in Figure 8.2 is a straightforward reflection of the fact that the Hartwick rule is not being followed: rents are actually being consumed. Negative saving reflects an opportunity not taken, and future generations will be poorer as a result.

Government Finance Statistics and Exhaustible Resources

This discussion of adjusted national accounting aggregates as the basis for measuring economic performance has strong parallels in the development of government finance statistics in mineral-extracting economies. The IMF’s Government Finance Statistics Manual 2001 (IMF, 2001) brings the treatment of government finance in line with the 1993 System of National Accounts (SNA93) by including publicly owned commercial natural resources in the government’s balance sheet account. This has potential implications for the derivation of basic government fiscal balances.

The Government Finance Statistics Manual 2001 follows the SNA93 convention of treating the depletion of natural resources as another volume change rather than as capital consumption. As a result, the depletion of natural resources has no impact on the measured operating balance for government operations. To get a true measure of the government’s fiscal stance, therefore, an adjusted measure of the operating balance is required, similar to the adjustment discussed for the national accounting aggregate measures of income and saving. We therefore have the following:

  • Gross operating balance = Revenue – expense (excluding consumption of fixed capital)
  • Net operating balance = Gross operating balance – consumption of fixed capital
  • Adjusted net operating balance = Net operating balance – depletion of natural resources

For countries where fiscal revenues from taxing petroleum and mineral extraction are large, the adjusted net operating balance provides the most comprehensive measure of the government’s fiscal stance. Similarly, the most general measure of the change in fiscal space in a country is the change in the government’s balance sheet, which will be directly affected by the depletion of petroleum and mineral deposits.


While the proper measurement of economic performance and the government’s fiscal balance in mineral-extracting economies is obviously important, the central tool for achieving sustainability has to be public policy. How can government policy, fiscal policy in particular, contribute to sustainable growth and development?

The Hartwick Rule for Sustainable Development with Exhaustible Resources

In 1973, at the height of the first oil crisis, the economics profession turned its attention to the question of sustainability: If an essential resource like energy is finite in extent, can economic output be sustained indefinitely, or will output eventually begin to decline? Solow (1974) showed that consumption can be sustained even with a fixed production technology as long as the share of the exhaustible resource in production is less than that of produced capital, and there is sufficient substitutability between the two production factors. Hartwick (1977), in a justly famous result, showed that underlying the Solow finding is a simple policy rule: invest resource rents in other assets.

The Hartwick rule accords with common-sense notions of keeping capital intact, but actually implementing the rule has been a challenge for many governments. The evidence for this lies in a simple counterfactual: If resource rents had actually been invested in fixed capital over the 25 years from 1980 to 2005, we could construct a hypothetical estimate of capital stock and compare it with the observed capital stock in each resource-extracting economy. The result, drawn from The Changing Wealth of Nations (World Bank, 2011), is shown in Figure 8.3

Figure 8.3.The Hartwick counterfactual: Actual vs. hypothetical fixed capital in 2005, selected countries

(in U.S. dollars per capita)

Source: Authors’ estimates.

For the five major extractive resource exporters shown in Figure 8.3, there is clearly a large gap between how rich they were in 2005 and how rich they could have been if they had followed the Hartwick rule. World Bank (2011) shows this to be true for a very wide range of extractive economies, while countries like Malaysia, Tunisia, Colombia, and China featured both heavy resource dependence (where rents on extractive resources exceeded 5 percent of GDP) and a 2005 stock of fixed capital that exceeded its hypothetical value under the Hartwick rule—these countries were saving their resource rents, and more.

There is a danger in looking at counterfactuals, however, because they make the application of the Hartwick rule seem like something mechanical, something that is easily achieved by government fiat. In practice, there is a sequence of actions, mostly in the fiscal domain, that needs to be implemented if resource wealth is to be parlayed into sustainable growth and development.

Achieving Fiscal Sustainability

The Hartwick rule provides the policy prescription for achieving sustainable growth and development in exhaustible resource-based economies. Sustainability at the economy-wide level is equated to maintaining or increasing real wealth. The same principles can be applied to achieving fiscal sustainability, which can be defined to be the maintenance of real government wealth when part of the endowment consists of stocks of exhaustible resources owned by the public sector. Fiscal sustainability is therefore a pillar of macro sustainability.

For governments to achieve fiscal sustainability, a number of distinct elements of the fiscal system need to work efficiently and effectively, including these:

  • Effective rent capture by government (assuming that exploitation of the natural resource is carried out by private actors)
  • Fiscal rules to limit discretionary use of resource revenues
  • Operation of natural resource funds, and
  • Effective public investment management.

In the following discussion, each of these elements is addressed in turn.

Effective Revenue Instruments

Since the economic value of a resource asset is the present value of total resource rents, the perfect revenue instrument would capture all available rents. In practice, there are a number of constraints on government’s ability to capture resource rents.5 A key issue is information asymmetry—firms know their costs with more precision than government, so it is difficult to design the perfect fiscal instrument, one that captures resource rents (economic profits) but neither depresses after-tax profits below “normal” levels nor leaves windfall profits in the hands of firms. Firms can also distort reported profit levels by using transfer pricing.

As Sunley, Baunsgaard, and Simard (2003) note, governments tend to use a range of fiscal instruments in order to capture resource rents, including these:

  • Royalties, charged either as specific taxes or at assessed-value rerates, administered on gross production. Royalties are unpopular with producers because they place all down-side market risks on them, rather than on government.
  • Income taxes, typically with some restrictions on consolidation of income and tax deductions across different activities such as exploration, development, and production.
  • Resource rent taxes, which attempt to tax away super-normal profits but are subject to the information asymmetry limitations noted above.
  • Production-sharing agreements, which split gross income into a cost-recovery component and a profit component that is shared between producer and government according to an agreed formula—in principle, mimicking a resource rent tax.
  • Indirect taxes, including tariffs, export duties, and value-added taxes.

There is a large literature on resource taxation, a considerable portion of which is summarized by Boadway and Keen (2010). They note the range of issues that make the taxation of mineral and energy resources particularly complex, including high sunk costs and long production periods (which can lead to time-inconsistency problems), uncertainty about resource extent, extraction cost, and future market conditions, and problems of market power.

Complexities abound, therefore, but the basic principle is clear: As the owner of the natural resource, a government can only realize the benefits of ownership through effective and efficient fiscal instruments to capture resource rents.

Fiscal Rules Limiting the Uses of Resource Revenues

A defining characteristic of petroleum revenues is that they often amount to tens of percentage points of national income and correspondingly larger shares of government revenues. There is consequently a strong temptation for governments to spend resource revenues on public sector consumption. In the face of these temptations, some governments have implemented fiscal rules to limit what is quite literally capital consumption.

The best-known example of such a fiscal rule is Botswana’s Sustainable Budget Index. It is calculated this way:

Here the definitions are important: Recurrent expenditure excludes spending on health and education, since these are defined as development expenditure, while recurrent revenue excludes revenue from the mining sector. Botswana’s policy aims to ensure that the Sustainable Budget Index does not exceed 1, since that would indicate that resource revenues are being consumed. Resource revenues are invested domestically in infrastructure, health, and education, or invested in financial assets when the government feels that the domestic absorptive capacity for investment is being stretched.

As Kojo (2010) reports, government policy has generally been successful in following the Sustainable Budget Index rule, but the index did exceed 1 in 1994–95 as well as from 2000–01 to 2004–05. Kojo (2010) also notes that “diamonds are not forever”—in fact, by the mid-2020s the low-cost diamond reserves will be exhausted, and new reserves will likely have much higher extraction costs. Botswana will have to plan for a fiscal transition before that point is reached, improving tax administration, increasing non-mining revenue generation, and reducing overall government expenditures in order to ensure medium-term fiscal sustainability.

Operation of Natural Resource Funds

Even if governments are prudent and choose to invest resource revenues rather than consuming them, this raises two interlinked issues: (i) the limited capacity of developing countries to absorb large amounts of investment, and (ii) the effectiveness of public investment management systems. The latter point is discussed in the next section.

If government investments in physical and human capital are bumping into the constraints of absorptive capacity in the economy,6 then investing in financial assets is the obvious alternative. This is typically achieved by establishing natural resource funds that invest in a variety of financial assets.

Natural resource funds (NRFs) are a particular class of fiscal rules, or more generally of rules-based fiscal policy. In recent times, several countries—often in response to the deterioration of their public finances—have adopted rules constraining the extent of discretionary fiscal policy in order to correct for the deficit bias. A fiscal policy rule is defined as a permanent constraint on fiscal policy, expressed as a summary indicator of fiscal performance, such as the government budget deficit, borrowing, debt, or a major component thereof (Kopits and Symansky, 1998). Kopits and Symansky identify a list of characteristics for an ideal fiscal rule: it should be well-defined, transparent, simple, flexible, adequate relative to the final goal, enforceable, consistent, and supported by sound policies, including structural reforms if needed.

As Davis, Ossowski, and Fedelino (2003) note, NRFs serve to buffer the economy from the volatility of natural resource markets, can limit Dutch disease symptoms by spreading the conversion of resource receipts into domestic currency over time, and can provide a useful source of liquidity for governments concerned with running countercyclical fiscal regimes. They highlight two broad types of natural resource funds: stabilization funds and saving funds.

Stabilization funds, as the name implies, are primarily aimed at stabilizing public finances by buffering the budget from the volatility of natural resource revenues. These funds often use contingent rules for determining whether funds are accumulating or being withdrawn for use in the government budget, setting thresholds for prices or revenues above which revenues can accumulate and below which they are drawn down. While this buffering effect can obviously be important for the stability of public finances over the business cycle,7 there is no guarantee that stabilization funds are financially sustainable, owing to significant uncertainties about whether the thresholds for accumulation and drawdown are representative of normal deviations from long-term averages. For example, if resource prices move to permanently higher or lower mean levels, the stabilization fund could either accumulate in perpetuity or eventually be driven to zero.

Savings funds generally aim to invest some specified proportion of resource revenue. Consequently, they have a potential stabilizing effect on government revenues, particularly if the funds can be drawn upon at the low point of the business cycle. But governments are still free to run deficits, which can offset these savings, so the issue is ultimately whether governments wish to run prudent fiscal policies.

The institutional setting and management of NRFs also raises a number of important questions for government. A key issue is integration with the budget: If resource funds are free to make domestic investments outside of the budget process, this undermines the integrity of the overall budgetary system. It could also raise questions of transparency in the use of the resource fund. There are also important questions about asset management. To the extent that fund investments, whether in physical or financial assets, are made in the domestic economy, this risks transmitting natural resource sector volatility back into the domestic economy. Investing in foreign assets may be the preferred option from this perspective, but doing so may be politically difficult if there are constituencies pushing for investing “at home.”

Another objective of NRFs is to preserve the quality of spending: by setting limits on spending increases they avoid waste in boom times. As noted by Davis, Ossowski, Daniel, and Barnett (2001), the establishment of NRFs may be justified on political economy grounds, as they help the government to resist spending pressures by formally limiting the resources available to the budget during upswings. In effect, a transparent and well-managed NRF protects resource revenues from the voracity effect and preserves resources for high-quality spending—that is, for well-appraised public investments.

However, Petrie (2009a) notes that an NRF should be introduced only if it is judged likely to change the behavior of political actors in ways that reduce their incentives to spend too much too soon. If it is not likely to do so, an NRF may only succeed in reducing the transparency of fiscal policy by creating a parallel budget or, at least, making it harder to monitor the government’s performance in fiscal management.

Humphreys and Sandbu (2007) suggest three general approaches to designing an NRF that could help to improve the incentives for responsible fiscal policy:

  • Rules-based design—The NRF should operate under rules that determine which revenues will be paid into the fund and limit the discretion of the current government to determine both the size and the allocation of spending from the fund. Determining how hard the rules should be involves the familiar trade-off between commitment and flexibility.
  • Broad governance—Governance of an NRF can be broadened beyond the government of the day by involving other actors in its decision-making, such as the legislature (as in Norway), members of opposition parties (as in Alaska), or new technical bodies that include representatives of civil society.
  • Transparency—Transparent operation of the NRF is critical to its efficacy. Fiscal transparency is a prerequisite for good governance in general (Kopits and Craig, 1998). It should lead to better-informed public debate about the design and results of fiscal policy, make governments more accountable, and thereby strengthen government credibility and enhance public understanding of macroeconomic policies and choices.

With respect to transparency, Collier and others (2009) argue that one approach is to establish new, explicit, and transparent decision processes for natural resource revenues linked to a clear vision of long-term development. While this approach runs counter to the ideal fiscal principle of a fully integrated budget in which all revenues are pooled, Collier and others argue that it might have superior informational properties. By spotlighting the new spending, it may make scrutiny easier and signal to citizens that a windfall will not be captured by special interests.

Concerning the design of NRFs, Collier and others (2009) note that while most of the policy attention to date has been focused on “How much should be saved?” the most important question for low-income countries is “What assets should be acquired?” They answer that, since low-income countries are capital-scarce, the assets should be accumulated by public investment within the country. Thus, for low-income countries, Sachs (2007) and Collier and others (2009) argue strongly for using the natural-resource revenues to increase public investment, spending them on public assets (human capital and physical infrastructure) with a high social rate of return.

This strategy, however, requires that countries invest in their capacity to invest. For public investment to deliver high returns, it must be appropriately appraised and well managed. Countries often encounter managerial and physical bottlenecks when stepping up public investment. In many cases, avoiding bad investments may be as important as identifying the best projects.

Sachs (2007) also argues that well-appraised public investment can help alleviate the effects of Dutch disease. He makes the case that Dutch disease is primarily a concern if the resource boom is used to finance consumption rather than investment. In many resource-rich developing economies, there is a serious gap in public goods. Developing public infrastructure—roads, ports, power, communications, education, and health care services—will raise the productivity of private capital and induce greater private investment. This effect can offset the negative impact of exchange rate appreciation on the nonresource tradable sector.

Resource funds can be a useful tool for stabilizing the fiscal system in the face of revenue volatility, therefore, and can ensure that the revenues from exhaustible resources are saved rather than consumed. But they are not a substitute for overall fiscal discipline and sound budgetary practices.

Examples of NRFs around the world are shown in the Appendix.

Public Investment Management

If governments choose to invest resource revenues in infrastructure and other public projects, then the quality of public investment management becomes key in determining their development outcomes. Harberger (2005) argues that an improved project evaluation system, one that significantly increases the rate of economic productivity of public investments, will have a permanent and continuing effect on a country’s growth rate. This contrasts with other successful policy reforms (e.g., trade, tax, and regulatory reforms) that raise the time path of national income but whose effects on the growth rate are one-off events (that is, yielding benefits only at the time of the reform). An improved public investment management system has the potential to permanently increase the country’s growth rate.

As noted by Belli and others (2001), decision makers must look at public projects from several points of view simultaneously, including these three:

  • Profitability: From the country’s viewpoint—to ensure that projects contribute more resources to the economy than they use.
  • Feasibility: From the financial and fiscal viewpoints—to ensure that the implementing agencies will have the necessary resources to implement projects as designed.
  • Fairness: From the viewpoint of the people who are most affected by the projects—to ensure that the distribution of costs and benefits is acceptable to society at large.

Rajaram and others (2008) identify a list of nine key must-have features in any well-functioning system for public investment management. These comprise the bare-bones institutional features that would minimize major risks and provide an effective process for managing public investments:

  • (i) Investment guidance and preliminary screening. Some measure of broad strategic guidance for public investment is often an important way to anchor government decisions and to guide sector-level decision makers. Such guidance may be derived from a national plan or another medium-to long-term strategic document that establishes economy-wide development priorities at the highest decision-making levels. A first-level screening of all project proposals should be undertaken to ensure that they meet the minimum criteria of consistency with the strategic goals of the government, as well as meeting the budget-classification tests for inclusion as a project rather than as a recurrent spending item.
  • (ii) Formal project appraisal. Projects or programs that meet the first screening test should undergo more rigorous scrutiny of their cost-benefit ratio or cost effectiveness. The project selection process needs to ensure that projects proposed for financing have been evaluated for their social and economic value. The quality of beforehand project evaluation depends very much on the quality of this analysis, which in turn depends on the capacity of the staff and their project evaluation skills. Investment in training on project evaluation techniques is an important aspect of an effective public investment system.
  • (iii) Independent review of appraisal. Where departments and ministries (rather than a central unit) undertake the appraisal, an independent peer review might be necessary in order to check any subjective, self-serving bias in the evaluation. It is crucial to kill bad projects before they develop a strong constituency—even the worst projects have groups of beneficiaries and promoters.
  • (iv) Project selection and budgeting. It is important that the process of appraising and selecting public investment projects is linked in an appropriate way to the budget cycle, even though the project evaluation and selection cycle may run on a different timetable. There is clearly a two-way relationship between the budget cycle and the project evaluation and selection cycle. The fiscal framework and the annual budget need to establish envelopes for public investment (on an aggregate and/or sectoral basis) so that a sustainable investment program can be undertaken. Efficient investment also depends on whether the recurrent budget adjusts to reflect the impact of the capital projects.
  • (v) Project implementation. Project design should include clear organizational arrangements and a realistic timetable to ensure that institutional capacity to implement the project is available and adequate.
  • (vi) Project adjustment. The funding review process should be flexible in its disbursement profile to account for changes in project circumstances. Each funding request should be accompanied by an updated cost-benefit analysis and a reminder to project sponsors of their accountability for the delivery of the benefits. These funding mechanisms can reinforce the monitoring process, making it an active rather than a passive form of monitoring. Governments need to create the capacity to monitor implementation in a timely way and to address problems proactively as they are identified.
  • (vii) Facility operation. Asset registers need to be maintained and asset values recorded. Ideally, countries should require their operating agencies to compile balance sheets on which the value of assets created through new fixed capital expenditures would be recorded. Whether there is accrual accounting or not, agencies should maintain thorough asset registers, including legal title to property where necessary.
  • (viii) Post-project evaluation. Evaluation of completed projects should focus on comparing the project’s outputs and outcomes with the objectives set forth in the project design. Good practice suggests that the project design should build in the evaluation criteria and that learning from such post-completion evaluations should be applied to improve future project design and implementation.
  • (ix) A further concern is the public procurement process—since investment projects will need to contract for services and purchase project inputs, it is vital that the procurement system be transparent and rules-based. Weak procurement processes open the door to political interference and waste of public resources.

Petrie (2009a, 2009b) discusses issues pertaining to public investment management in resource-rich countries. Petrie (2009a) notes that a public investment management system is an open system that impacts, and is impacted by, the broader political economy of the state. It is increasingly recognized that the key determinants of success for a resource-dependent economy are the country’s overall governance framework and the political economy of rent extraction and management. Consequently, Petrie (2009b) sets the public investment management system within the context of the broader policy issues relating to natural resource extraction and the overall political environment.


Three key characteristics of mineral and energy resources have major impacts on public finances and government development policy:

  • Resource revenues tend to be large relative both to GDP and to the government budget.
  • Resource revenues are volatile, closely tied to the world business cycle.
  • The resources themselves are finite and exhaustible.

While natural resource abundance should be a blessing, these three characteristics complicate a government’s task in ensuring sustainable growth and development: the first two characteristics potentially create a strong procyclical bias in fiscal policy, which can have destabilizing effects on macroeconomic performance; the third characteristic, exhaustibility, has implications for both how economic performance is measured and how a government leverages natural resources for development.

On measuring economic performance, two alternative national accounting measures are needed for resource-extracting economies. Adjusted net national income (aNNI) gives a true measure of income, one that will generally be much lower than GNI, and its growth rate is likely to be considerably lower than the GDP growth rate during resource booms. Tracking aNNI growth can therefore reduce policy mistakes in the form of overly expansionist fiscal policies. A second measure, adjusted net saving, gives a true measure of wealth creation, after accounting for investment in human capital, depletion of natural resources, and pollution damages—both theory and evidence show this to be a leading indicator of the sustainability of development.

Sustainable fiscal policy, essential for sustainable development in resource-extracting economies, requires a foundation built out of five essential materials: (i) tracking adjusted measures of the government’s net operating balance in order to assess fiscal space; (ii) effectively and efficiently taxing the profits on resource exploitation; (iii) applying fiscal rules in order to ensure that resource revenues are saved rather than consumed; (iv) establishing a natural resource fund in order to assist with stabilization and ensure that savings are used effectively; and (v) building a strong public investment management system in order to ensure the quality of public investments financed by resource revenues.

That list of the constituents of sustainable fiscal policy is long, suggesting the size of the challenge that extractive economies face. While the Hartwick rule is easy to state, it is complex to implement, and it requires fiscal discipline. But a growing understanding by policymakers of the need to transform exhaustible resources into other forms of wealth can provide the impetus for reform and policy success.

Appendix. Examples of Natural Resource Funds
Romania: Macroeconomic Outlook


Date establishedAccumulation



with rules/3


changes to




Savings Trust


(prior to 1997

economic and

social development

were also included)
197630% of resource

revenues until

1983. 1984-87:

15%. Transfers




to the budget.



(Members of


and Provincial





Savings197650% of certain

mineral revenues

(increased from

25% in 1980).
Principal (infla-



trustees, ultimately

the governor and





in 1987)
Based on discretionary

reference price determined

by the government.
Transfers to

the budget

(and extra-


lending) based

on discretionary


price determined

by the government.2

Ministry of


Central Bank,

and state copper


Kuwait GRFGeneral Reserve


and savings
1960Residual budgetary


transfers to the

Minister of


Central Bank,

governor, and

other officials

Reserve Fund

for Future
Savings197610% of all government


transfers to

the budget

(with National


Minister of


Central Bank

governor, and

other officials



Reserve Fund

and savings
19564“When surplus

permits,” later


changed to 25%

of all phosphate


transfers to the

budget with


approval and

that of other


Minister of


Secretary of

the Cabinet,

and other


Pension Fund


and savings


in 1995
Net government

oil revenues.

transfers to the

budget to

finance the

non-oil deficit

(approved by


Ministry of


State General

Reserve Fund
Savings1980Since 1998, oil

revenue in excess

of budgeted


transfers to the








in 1993
Residual oil revenue

after budget

and SGRF allocations.

Oil FundOil sector

1993Since 1998,

market value of

15,000 barrels per

Ministry of

Papua New






in 2001
Government mineral



though based

on estimates

of long-run




Stabilization1998Since 1999, 50%

of oil revenue

above reference

values, set by

decree for 1999-2004.5
Transfers to the budget and other state entities based on reference values; discretionary transfers also allowed.5No/Yes:


and the

Sources:Table 11.2 in Davis, Ossowski, Daniel, and Barnett (2001); original sources: national authorities; and IMF staff.

Fixed proportion of the earnings are distributed as cash to Alaskans; earnings are also used to inflation- proof the principal (as required by the 1982 amendment) and to increase capital.

If copper price reaches $0.04 per pound above reference price, no deposit is made; there is a 50 percent deposit between $0.04 and $0.06 per pound, and 100 percent thereafter. Withdrawals are symmetric.

Received 50 percent of GRF assets when established.

Phosphate stock became exhausted in 1979.

Fifty percent (100 percent before 1999 change) of revenue above reference value to be deposited. Withdrawals, with congressional approval, if (a) oil revenues in given year are lower than reference value, or (b) the resources of the fund exceed 80 percent of annual average oil revenue in the five preceding years. Withdrawals under (b) were initially earmarked for debt repayment and capital expenditure. After 1999 these withdrawals were earmarked for social and investment spending and debt repayment. Fund balance at the end of the fiscal year must not be less than one-third of the balance at the end of the preceding year. In late 2001 the rules were modified again, and the central government and the state oil company were exempted from depositing resources in the fund in the last quarter of 2001 and during 2002.

Sources:Table 11.2 in Davis, Ossowski, Daniel, and Barnett (2001); original sources: national authorities; and IMF staff.

Fixed proportion of the earnings are distributed as cash to Alaskans; earnings are also used to inflation- proof the principal (as required by the 1982 amendment) and to increase capital.

If copper price reaches $0.04 per pound above reference price, no deposit is made; there is a 50 percent deposit between $0.04 and $0.06 per pound, and 100 percent thereafter. Withdrawals are symmetric.

Received 50 percent of GRF assets when established.

Phosphate stock became exhausted in 1979.

Fifty percent (100 percent before 1999 change) of revenue above reference value to be deposited. Withdrawals, with congressional approval, if (a) oil revenues in given year are lower than reference value, or (b) the resources of the fund exceed 80 percent of annual average oil revenue in the five preceding years. Withdrawals under (b) were initially earmarked for debt repayment and capital expenditure. After 1999 these withdrawals were earmarked for social and investment spending and debt repayment. Fund balance at the end of the fiscal year must not be less than one-third of the balance at the end of the preceding year. In late 2001 the rules were modified again, and the central government and the state oil company were exempted from depositing resources in the fund in the last quarter of 2001 and during 2002.


    Asheim, G.B., and M.L.Weitzman,2001, “Does NNP Growth Indicate Welfare Improvement?” Economics Letters, Vol. 73, No. 2, pp. 233–39.

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Kirk Hamilton and Eduardo Ley are both lead economists at the World Bank. This chapter is based on the authors’ presentation at “Natural Resources, Finance, and Development: Confronting Old and New Challenges,” a high-level seminar organized by the Central Bank of Algeria and the IMF Institute, which took place in Algiers, on November 4 and 5, 2010. The authors can be contacted at and


These issues and more are discussed in Boadway and Keen (2010).


Figure 8.1 plots aggregate GDP and aNNI for countries where mineral and petroleum rents are greater than 5 percent of GDP and where a sufficient time series is available. The countries are Angola, Cameroon, Chad, Congo (Democratic Republic), Congo (Republic), Gabon, Ghana, Guinea, Mauritania, Mozambique, Sudan, Togo, and Zambia.


Adjusted net saving has been published by the World Bank in the World Development Indicators since 1999. Also termed “genuine saving,” the underlying theory for it is developed in Hamilton and Clemens (1999).


If resources are extracted by a state-owned enterprise, then in principle all rents can be captured through flows of profits to the treasury. But historical experience has not been positive—public-sector firms are often subject to political meddling, a lack of commercial orientation reduces profits, and investment finance may be limited by government capital budgets. See McPherson, 2003 and 2010.


Absorptive capacity constraints are generally signaled by shortages of skills, with consequent delays in implementation and rising prices of inputs.


Davis, Ossowski, and Fedelino (2003) note, however, that there is nothing to prevent governments from running deficits during boom times, when the resource stabilization fund is in accumulation mode, thereby offsetting some or all of the stabilizing effect of the natural resource fund.

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