The aim of this report is to distil lessons from the experience-sharing and peer-learning process of the OECD Policy Dialogue on Natural Resource-based Development on natural resource revenue management and spending. Two principal concerns underlie the challenge of transforming natural finite assets into human, social and physical capital: managing the counter-cyclical nature of resource revenue flows to ensure that there is a consistent level of resources available for spending; and ensuring productive gains from the funds that are spent, in line with the 2030 Sustainable Development Agenda.
The first part of this report identifies the main lessons from peer-learning exercises on how to manage natural resource revenues through the establishment and good governance of stabilisation funds. These mechanisms support the objectives of fiscal sustainability and macroeconomic stability as a basis for efficient public spending and government decision making over time. The second part of the report focuses on how natural resource revenues can be spent to support sustainable development objectives through an appropriate fiscal policy framework that considers the level of savings necessary to ensure stability of spending over the commodity price cycle, the time horizon of natural resource production and the absorptive capacity of the economy.
The second part is divided into four sections. The first section addresses the trade-offs of spending more now versus savings. This decision is country-specific and it should reflect countries’ development needs. In general, poorer countries should emphasise sustainable development spending rather than saving but conforming with the absorptive capacity of the economy and the deepening of the financial market, whereas higher income countries should prioritise savings. In both cases, the time horizon of natural resource production matters, where a short time horizon skews the decision towards savings and a long time horizon skews the decision towards spending.
The second section shows that earmarking natural resource revenues for specific spending items is not necessary to ensure spending is focused on sustainable development outcomes, as the experiences of Botswana and Indonesia show. The evidence on the effectiveness of earmarking is, in contrast, mixed and in some cases highly negative.
The third section considers the pros and cons of using direct distribution schemes that allocate resource revenues to the population. While there are potential benefits in terms of mobilising citizen support for managing natural resource revenues effectively, there is insufficient evidence to recommend natural resource producing countries experiment with them. A better option, as the case of Timor-Leste suggests, are targeted cash transfer schemes that operate via the budget. This option assumes, however, that the natural resource revenues entering the budget are managed sustainably.
The fourth section reviews the emerging trend of some countries, including natural resource-rich countries, of establishing strategic investment funds to facilitate diversification of the domestic economy. Strategic investment funds adopt the practices and methods of similar investment funds operating in the private sector, but invest with the aim of generating both a financial return and a developmental return.