Margarita Rivière

A commonly held view, and a prevalent thread throughout the reviewed literature, appears to suggest that countries which exhibit extreme dependence on natural resources, such as oil, are always vulnerable to various forms of conflict and civil war (Ross, 2006). However, the impact of natural resources on social capital and institutional structures also needs to be addressed. Ross (2006) suggests that resource rich countries accumulate social capital at a far slower rate than poor countries. An explanation that can be advanced for this is that limited natural resources promote early industrialisation which triggers earlier urbanisation. People who migrate from villages into an urban environment become more enterprising, and better functioning markets develop. Savings are then repatriated into the poorer indigenous regions, thereby increasing the social capital of the region.

An abundance of natural resources not only stimulates dysfunctional economic policy choices, but can also pervert political and social behaviour, leading to conflict over the distribution (and non-distribution) of wealth.

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Countries usually seek to avoid this by using state machinery to bring resources within seemingly rational political control, with Auty (2001b) suggesting strong and transparent governmental involvement is needed in the production of oil. Royalty or taxation policy should guarantee income to the state from oil production. The establishment of an oil fund investment should ideally be a primary requirement to convert a curse into a blessing.

Transparent and judicious involvement of the state in the oil sector strengthens one‘s expectations of benefits one may receive. However, at times, dissatisfaction contributes to reduced political trust in leaders and results in weaker institutional capacities.

An engaged and enlightened private sector, helping promote economic and social diversification, is critical. Hence, building trust through a deep and on-going relationship with the private sector, communities and local governments becomes paramount. Governments and corporations need to co-operate in reducing economic and social costs in order to deliver economic and social benefits. To this end a strong private sector must communicate its integrity in a transparent way. Corporations may seek innovative ways to increase the social and economic benefits that accrue to communities, thereby helping to raise the standards and capacity of public involvement in governance (an absence of which is often a causal mechanism behind conflicts).

Generally it is assumed that an abundance of oil revenue causes broad-based socio-economic and political problems (Ross, 2006). Other authors including Engeli and Pieth (2000) and Wegenast (2007) blame abundance directly for motivating rebellion and allowing the finance of large-scale armed violence. Using a host of alternative measures of natural capital wealth (aggregated as renewable and non-renewable), Soysa (2002) finds that an abundance of renewable resources - not their scarcity - leads to violence and to lower economic, human and institutional development.

According to Wagenast (2007), international sanctions for poor governance

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on all fronts are thus important in ensuring acceptable governmental performance levels in line with the expectations of the different parties.

These expectations have to be managed and in this regard the private sector must contribute seriously. A meaningful partnership needs to be encouraged ensuring a fair deal for all stakeholders. Finally, poor economic performance by resource rich countries may be attributed to a lack of democracy. Many authors, including Auty (2001) and Ross (2005), have identified a negative correlation between oligarchies and democratic rule, arguing a democratic state certainly does not ensure good governance for the poor. The Nobel Laureate Amartya Sen holds another point of view.

His work on poverty eradication and welfare economics suggest that the way most governments measure poverty by basing it on income may be a flawed perception of well-being.

In their seminal work: Harnessing windfall revenues: optimal policies for resource-rich developing economies, Van der Ploeg and Venables (2011) suggest that a windfall of natural resources presents government with an opportunity set of how to manage resources relative to public debt, investment and the distribution of funds for consumption. Generally, the permanent income hypothesis suggests a sustained increase in consumption will be supported by interest on accumulated foreign assets, once resources are depleted. This strategy is not an optimal solution for capital-scarce developing economies. Following this trend of thought, Van der Ploeg and Venables (2011:1) conclude that incremental consumption should be skewed towards present generations and that savings should be directed to accumulation of domestic private and public capital rather than foreign assets. Optimal policy depends on the impact of distortionary taxation and ability of consumers to borrow against future revenues. Van der Ploeg and Venables (2011:2) provide a rigorous analysis of how should a temporary windfall of foreign exchange (from natural resource revenues or foreign aid) be managed by the recipient government? In addressing this issue: they recommend three broad choices:

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Firstly, the amount of the windfall that should be saved and what should be the optimal time profile of consumption from the windfall;

The second concerns the choice of whether to invest in the domestic economy or in foreign assets (by increasing foreign exchange reserves or creating a sovereign wealth fund, SWF);

and

Third concerns the balance between private or public domestic investment.

The solutions to these issues are dynamic and country specific. To analyse these choices Van der Ploeg and Venables (2011:3) derive policy rules for a welfare-maximising government that experiences a temporary windfallof foreign exchange. They build a family of models in increasingly complex economic environments and derive optimal time profiles for consumption, foreign debt ⁄ assets,public investment and tax and transfer policies.