How Should Donors Respond to Resource Windfalls in Poor Countries? From Aid to Insurance
Natural resources are being discovered in more countries, both rich and poor. Many of the new and aspiring resource exporters are low-income countries that are still receiving substantial levels of foreign aid. Resource discoveries open up enormous...
Main Authors: | , , |
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Language: | English en_US |
Published: |
World Bank, Washington, DC
2014
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Subjects: | |
Online Access: | http://documents.worldbank.org/curated/en/2014/06/19737142/donors-respond-resource-windfalls-poor-countries-aid-insurance http://hdl.handle.net/10986/19372 |
Summary: | Natural resources are being discovered
in more countries, both rich and poor. Many of the new and
aspiring resource exporters are low-income countries that
are still receiving substantial levels of foreign aid.
Resource discoveries open up enormous opportunities, but
also expose producing countries to huge trade and fiscal
shocks from volatile commodity markets if their exports are
highly concentrated. A large literature on the
"resource curse" shows that these are damaging
unless countries manage to cushion the effects through
countercyclical policy. It also shows that the countries
least likely to do so successfully are those with weaker
institutions, and these are most likely to remain as clients
of the aid system. This paper considers the question of how
donors should respond to their clients' potential
windfalls. It discusses several ways in which the focus and
nature of foreign aid programs will need to change,
including the level of financial assistance. The paper
develops some ideas on how a donor like the International
Development Association might structure its program of
financial transfers to mitigate volatility. The paper
outlines ways in which the International Development
Association could use hedging instruments to vary
disbursements while still working within a framework of
country allocations that are not contingent on oil prices.
Simulations suggest that the International Development
Association could be structured to provide a larger degree
of insurance if it is calibrated to hedge against large
declines in resource prices. These suggestions are intended
to complement other mechanisms, including self-insurance
using Sovereign Wealth Funds (where possible) and the
facilities of the International Monetary Fund. |
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