Effective natural resource management for inclusive and sustainable growth

“The world demand for commodities have increased considerably over the last 10 years, owing to the entering of China to the global capitalist economy, and the rapid growth exhibited by this country since then. This has brought about large increases in world prices of natural resources, such as food, energy and minerals”.

 Commodity exporting developing countries have benefited significantly from higher world prices of natural resources. Many Latin American countries have reversed their historically chronic deficit positions, both fiscal and external, and presented surplus positions for the first time in many years. Many countries have been able to accumulate large external foreign exchange reserves and maintain economic stability. For the first time in many years, governments had the room to conduct countercyclical policies in order to offset the recessionary effects of the global crisis and carry out more aggressive social policies, including unconditional cash transfers to households. This has been attained without the need to resort to external debt, which proved to have very negative effects in the long run. These policies have resulted in the reduction of poverty incidence, bringing out of poverty those segments of the society that were closer to poverty threshold line.

However, the current bonanza has not been exempted of problems. First, higher commodity prices have resulted in increased prices of food, which has had negative effects on the levels of real incomes and basic consumption of the poor sectors of the society. Exports have tended to crowd-out domestic consumption, bringing about scarcity of basic products and social discontent.

Second, large inflows of foreign exchange have brought about a Dutch Decease effect in the economies, appreciating the exchange rates and increasing the specialization of developing countries in the production of raw materials. The weight of natural resources in total exports and total GDP has steadily increased in the last years, which has made countries more vulnerable to potential external shocks.

Third, higher prices have increased the exploitation of natural resources, enlarging the environmental footprint, in the form of higher deforestation rates, climate change and natural disasters. These negative externalities have not been internalized in the costs of neither small scale nor large producers, resulting in an increased depilation of natural resources and the environment.

Against this background, the long term objective for developing countries should be to seek an appropriate and effective use of natural resources. For this purpose, countries should take full advantage of the current window of opportunity that nature is giving them, in order to use the resource rent in the most efficient way to attain inclusive and sustainable growth. In other words, countries are exploiting their natural capital endowment and thus, the resource rent should not be consumed but invested in other forms of capital, mainly and most importantly in human capital. Most prominently, improving the education systems should be the primary policy objective. Enlarging human capital should be the most effective and perhaps the only way to attain inclusive and sustainable long term growth.

Therefore, countries should move from natural-resource based growth to human capital and technology based growth. During this transition, policies should be aimed at ensuring efficient resource management, which will guarantee and promote inclusive and sustainable growth. There are many trade-offs that should be managed and balanced in this process. For instance, on one hand, governments have to create the conditions to guarantee the access of the population to food, water and energy, but at the same time they have to give companies the necessary incentives to invest and enlarge supply of these goods and services.

The management of natural resources during the transition becomes a very important issue in order to ensure inclusive and sustainable economic growth to take place and guarantee the access of the population to basic goods and services. This can be attained through different alternative institutional arrangements. Most of the countries are moving in the direction of promoting larger private sector participation, with the state intervening through regulation and supervision. Few countries are promoting greater direct participation of the state, as a direct provider of these goods and services through state companies. Is important to analyze which of the schemes are producing better results and contributing more decisively to the main objective of attaining inclusive and sustainable growth.

How can countries use natural resource rent to achieve inclusive and sustainable growth? Leave your thoughts below.

(*) Words pronounced by Luis Carlos Jemio, Senior Researcher at INESAD, at the ERD Research Workshop: Effective natural resource management for inclusive and sustainable growth in the context of increased scarcity and climate change: What role for the public and private sector? Brussels, 6 April 2011. The author happily receives comments at luiscarlosjemio@gmail.com.