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How to Avoid a Canadian Resource Curse

By: Helena Ball - Jun 30, 2015, 8:06 am
Las provincias canadienses de la costa atlántica pueden beneficiarse de las experiencias de las de la costa Pacífica (c7.jalisco.com)
Canadian provinces on the Atlantic coast can benefit from the experience of their Pacific coast counterparts in handling commodity price shocks. (c7.jalisco.com)

EspañolCanada is not the first country that comes to mind when discussing the resource curse — yet its provincial governments have not escaped the problems inherent to sporadic windfall revenues. The Atlantic Institute for Market Studies (AIMS) published a policy paper this month urging Atlantic Canada to learn from the hardships western provinces experienced following the sharp decline in oil prices.

The PanAm Post spoke with Marco Navarro-Génie, AIMS President and coauthor of “A Good Problem to Have: Lessons for Atlantic Canada from Alberta’s Experience with Natural Resource Revenue,” about the paper’s key findings.

He emphasized that all resource-rich countries could benefit from better resource management, for which the institute recommends: saving all revenues in an inflation-protected fund whose income should have a specific, predefined use; utilize only earnings for operational expenses, prioritizing debt repayment; place annual earnings in the bank before they are included in the budget; and finally, submit the savings plan to a referendum.

Is it true that most governments use up resource revenues as they come in?

Yes, it is a permanent condition for those economies that have lots of natural resources and get a lot of revenue when the prices of whatever commodity they are selling are really high. Typically, what happens is that they are not set up to manage that properly. As the money comes in, they spend and they budget lots of money coming in, and then when the price of the resource drops (which of course invariably they do) they get into this huge economic and fiscal bind.

That is fundamentally the problem; we call it a nice problem to have, because it is always a nice problem to manage lots of money. It’s a lot better than not having any at all.

What are you proposing to solve the problem?

What we propose is something that looks like Norway’s sovereign fund, where revenues from natural resources get saved — that they manage properly and that is inflation proof — until they grow enough. And once they grow enough, one can begin to benefit from the proceedings of that money but not touch the capital.

It is a little bit of bitter medicine to cut oneself off from the stream of revenue that comes in right away, separate it, and pay for what you need to pay from the tax base. Once it grows into a sizable fund, it will be a lot easier to be able to afford a few more things from the proceeds and from whatever interest you derive from that.

Instead of saving, Canadian provinces have spent billions in resource revenues, right?

That’s right. In the Atlantic Canadian setting, for example, no one has set up a savings account. New Finland has had resource revenue for decades now, and billions of dollars have been spent as they come in.

We point at the example of Alberta in the paper, and it is a little bit of the example of what to do, and a little bit of what not to do. In terms of what to do, Alberta set up its fund back in the mid-1970s to save 20 percent of resource revenue. But as soon as the price of the commodity dropped, they stopped putting more money into the fund and they started pillaging the fund.

Alberta now has some $15 billion in the fund, which sounds like a lot of money but when you consider, for example, what the Norwegians have done, which is to save it all, in a shorter span of time they have managed to accumulate close to $1 trillion. It is estimated that the Norwegian fund will probably hit the trillion-dollar mark in about 5 years from now.

Would it be problematic to use it as a “rainy-day” fund?

Yes. The problem with calling it a rainy-day fund is that, when we say we are going to put money aside for an emergency, it is very easy to declare emergencies when there are none. So we can declare a fund to be a rainy-day fund, but as soon as we see a drop, we can declare that it is raining and raid the fund, which is what happened in Alberta.

Should the fund then be set up so that money cannot be taken out on a whim?

To make it very difficult. The Norwegians, for example, don’t allow themselves to take money from the capital; you can only take money from the interest, and the politicians don’t really have much of a say because it is managed at arms’ length. North Dakota has set up something similar; they save 30 percent into a state fund and they are not allowed to draw money until 2017.

And whenever they might be able to draw money, they are required to have a vote from both legislative chambers of the state. Even then, when you want to touch the capital, the rules say that they cannot draw out of the fund more than 15 percent of the existing fund in a period of two years. So there are strict rules about what to do, precisely because they want to discourage pillaging the fund.

Why is it a good opportunity now for Atlantic Canada to make reforms?

The opportunity that exists is quite significant, because at a time when the prices of the revenue are so low, the royalties of the income is very low or virtually non-existent. So this is a time when people can plan and say, “we’re making due without it now, let’s set the plan properly so that we continue to function without that revenue and start putting it in the bank.” It is a lot easier to do it a moment like now, instead of when there is a torrent of money coming in and there is a political price to pay.

Is the opportunity also present for other resource-rich countries, such as in Latin America?

Absolutely. Well, Venezuela is a basket case, so nothing really applies to Venezuela, but certainly to places like Mexico and others. This is not just about oil; it can be about mining resources; it can be about forestry; it can be about a lot of natural resources that fetch a high price in the international markets.

Why do you propose a referendum to approve the savings plan?

This is probably the most contentious and perhaps even the most dangerous part of the paper. We argue that the money that comes from the resources is money that belongs to the population and not to the government. To be consistent with that idea, government alone should not decide whether to keep money, spend money, put it in the bank, or what have you.

It should be the population that is consulted and decides exactly what to do with the money. So we proposed that the mechanism to figure out what people want should be a referendum type of mechanism.

Is lack of leadership responsible for the ongoing cycle of unsuccessful resource management?

Yes. Lately, with all these technological mechanisms that exist to consult people, many politicians rule by public-opinion polls. So, in a way, they are not leading, but they are following public opinion. And if public opinion starts to say we want that money and we want it now, then nothing is going to happen.

The part where it is required to have leadership is for somebody to understand the nature of the problem and say, “I’m going to stick my political neck out on this one, and I am going to try to lead the population into understanding that [saving] is what needs to be done.”

Helena Ball Helena Ball

Helena is managing editor of the PanAm Post. She previously worked at Inc. Magazine, the Financial Times' fDi Magazine, and London-based business newspaper City A.M. Helena holds a master’s degree in business and economic reporting from New York University and a bachelor's degree in economic history from the London School of Economics. Follow her @helemball