In this post we will be looking at Maximizing Revenues from Natural Resource, the economic significance of natural resources and Policies to Avoid The “Resource Curse”.
In a time of energy transition and rising demand for metals and minerals, resource-rich governments in Sub-Saharan Africa have an opportunity to better leverage their resources to finance their public programs, diversify their economy, and expand energy access. Full taxation of natural resources is also important to charge the full cost of environmental and social impacts not always fully covered by producers, including petroleum resources. Failing to do so can act as an implicit production subsidy and raise carbon emissions.
The prospect of higher revenues or Maximizing Revenues is particularly welcome in countries that find themselves unable to make badly needed development investments because of high borrowing and debt service costs. The global transition away from fossil fuels is creating unprecedented demand for a host of minerals and metals such as cobalt, lithium, copper, nickel, and rare earth elements (REEs) that are required to develop green technologies such as wind turbines, solar panels, and batteries. Many of these resources are found in abundance across Africa. However, experience shows that natural resource wealth does not automatically translate into inclusive growth and prosperity.
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Natural resources, both renewable and non-renewable and ecosystem services are a part of the real wealth of nations. They are the natural capital out of which other forms of capital are made. They contribute towards fiscal revenue, income, and poverty reduction. Sectors related to natural resources use provided jobs and are often the basis of livelihoods in poorer communities. Owing to this fundamental importance of natural resources, they must be managed sustainably. Government plays the essential role in putting into place policies that ensure that resources contribute to the long-term economic development of nations, and not only to short-term revenue generation.
Maximizing Revenues from Natural Resource
Maximizing government revenues in the form of royalties and taxes paid by private natural resource industries, alongside attracting new investment, would offer a double dividend for people and planet by increasing fiscal space and removing implicit production subsidies.
Limited possibilities of substitution between natural and physical capital and the fact that the quality of natural capital can change abruptly also introduces the potential for bottlenecks which can substantially reduce growth.
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Sustaining renewable resources largely concerns conserving the stocks of resources and their quality, as well as maintaining a quantity of steady flows over an indefinite period of time. Even though non-renewable resources cannot be sustained because of their finite stocks, countries using these resources can achieve sustainability by investing the revenues derived from them into other forms of capital.
The Economic Significance of Natural Resources
The economic significance of natural resources depends upon the magnitude of two basic variables: current flows of income and potential future flows of income. The first is largely a function of production costs and market demand, and the second of natural resource endowments and management planning. In order to understand the true importance of natural resources, both current and future flows of income must be taken into account.
The former can be a deceptive indicator of how natural resources will contribute to economic development over time if income is derived from the depletion of the natural capital. Managing natural resources sustainably – in the case of renewable resources – and as sources of revenue for investment in future growth – in the case of non-renewable resource – allows resource rich countries to establish the foundation for long-term development and poverty alleviation. The following show significance of natural resources.
- Contribution towards fiscal revenue, income and poverty reduction: natural resources can play a central role in poverty reduction efforts. The poor generally depend upon natural resources directly for their livelihoods, especially the rural poor. Consequently, policies that improve natural resources management can have immediate and meaningful poverty reduction impacts.
- Employment and job creation potential: A synthesis of objectives – growth, employment and long-term economic stability – can be found in adopting policies that put countries on the path towards green growth. Natural resources have the potential to provide a significant number of jobs.
- Value of ecosystem services: Properly functioning ecosystems provide a range of services that include waste absorption, water and nutrient cycling, seed dispersal and pollination, controlling agricultural pests and providing food and habitat for species. These services allow ecosystem goods otherwise known as natural resources – to be produced and maintained.
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- Losses from poor natural resource management: poor natural resource management represents lost opportunities for sustainable economic development, and costs to human beings and the environment. While aggregate losses of missed opportunities are difficult to quantify, the costs to people and the environment of poor resource management practices and policies are clearly evident.
Natural resources and Policies to Avoid The “Resource Curse”.
Natural resource abundance should be the basis for the creation of national wealth because of increased exports that allow more capital goods to be imported and because natural resource rents can also be used to make capital investments. However, in many cases and from many regions of the world the reverse has been true. The term the natural resource curse is refers to the counter-intuitive phenomenon wherein an abundance of resources has often been associated with poor governance, irrational resource exploitation, and poor development outcomes. The explanation for how the resource curse works differs from country-to-country, though a common denominator is a weakness in governance institutions that is exacerbated by the windfall profits from resource liquidation that are directed to governments themselves and economic elites. The resource curse includes a number of possible effects of natural resource abundance and resource exploitation including:
- Rent seeking and corruption,
- The crowding out of manufacturing and underinvestment in human capital,
- Rising exchange rates and consequent underperformance of other sectors
- The unsustainability of non-renewable resource extraction (depletion of natural capital)
- Boom and bust cycles
CONCLUTION
Maximizing the value of natural resources for sustained growth and development and avoiding the resource curse, requires policies that formalize and codify revenue management procedures. Such laws are being put into place in countries around the world, and typically involve the creation of a fund that receives resource revenues and that is overseen by a specialized administrative unit. Such funds allow countries to invest wisely when commodity prices are high, and supply funds when commodity prices, and therefore government revenues fall.