December 1, 2012

Spend or Send

Developing countries can spend commodity windfalls on physical investment, but it may be better in the short run to distribute part of them to their citizens

THE decade-long boom in commodity prices has boosted government coffers in many traditional producing countries. Following a wave of discoveries, new oil and gas producers—such as Ghana, Mozambique, Tanzania, and Uganda—are also emerging (see table). They may not all be major players at the global level, but the revenues they raise will be substantial for them and will brighten the prospects for growth and poverty reduction.

Still, the future is not without its dark side. New oil income will almost certainly relax constraints on government budgets, but it will also create challenges—as conditions in other resource-rich countries show. Many citizens of these countries remain poor, despite large revenues from resources. In some cases competition over resource wealth has fueled or sustained civil conflict. Economic diversification is a further long-run challenge: nonresource sectors tend to lose competitiveness as a result of exchange rate appreciation.

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