Transcript Herbert_Mcleod_PPP

INTERNATIONAL POLICY CONFERENCE
“COMPETITIVENESS & DIVERSIFICATION:
STRATEGIC CHALLENGES IN A PETROLEUMRICH ECONOMY”
Dealing with the Dutch Disease in a fragile political
economy environment
Herbert M’cleod
14 – 15 March 2011, Accra, Ghana
.
Dealing with the Dutch Disease in a
fragile political economy
environment
Dutch disease and fragile states
 Fragile states exhibit features that render the
implementation of cures for the DD extremely difficult
 The symptoms of the disease are more severe and
display slightly different forms in fragile situations
 Measures to consider for fragile situations
The Dutch disease and its effects
 Causes and symptoms;
 Windfall revenues (foreign) lead to:
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
Appreciation of local currency
Contraction of tradable sectors (resource movement effect
Spending effect.
Secondary effect; structural changes in patterns of
production; Domestic cost inflation (via construction/services)
 Unearned Revenues can:
 Disrupt the social contract between Govt and citizenry
 Reinforce rentier state tendencies
The Dutch disease and its victims
some examples past and present, in developed and
developing countries
 Sierra Leone
 Canada:
 Nigeria:
Sierra Leone’s Dutch Disease
 1952 – 1954 large windfalls from diamonds and iron ore
led to displacement of workers from agriculture to
mining. Food shortages became rampant, and
inflation ensued. So the effect is not always only
through currency appreciation – at the time there was
the West African Currency Board.
 Distortion of production patterns
 Social instability
 Emerged as independent but with these warts!
Canada and the DutchDisease
 IMF study (3) presents Canada as a case of Dutch
disease between 2002 – 2007. exchange rate
appreciated by 25% following increases in TOT by
similar amount. Manufcontrib to GDP fell by 3%.
 non-intervention in the currency mkt is better than
exchange controls as the latter leads to misallocation of
resources
 Artificial exchange rate depreciation keeps tradables
competitive but distorts production patterns?
Canada and the Dutch
Disease(cont)
 Another study(2) points to successfully
adjustment in the economy.
 Lesson from both studies: an advance vibrant nonfragile economy confronts difficulties in applying
the remedies for the disease successfully
Fragile and “as if” fragile states
 Selected indicators
Country
CPIA
RWI rank
RWI index
Ghana
4
35
32.3
DRC
2.5
39
22.5
Sierra Leone
3.2
29
38.2
Fragile and “as if” fragile states
Features of a fragile political economy.
 Weak and ineffective governance systems
 Institutions and social arrangements that reinforce stagnation or
decline
 Political systems that promote fragility (winner takes all type of
elections results)
 Minimal accountability in economic management (corruption
rather than development results as compared to US/UK)
 Capacity shortcomings at all levels
 Vulnerability to external and internal shocks
Dutch disease in fragile states
Features of a fragile political economy
environment (cont);
 Pervasive informality
 Inability to withstand sustained internal and external
pressures
 all are natural resource based and export-led
economies.
 Revenue management policy shortcomings
The cure for the Dutch disease; and the symptoms in a
fragile political economic environment.
 An article in the Times eloquently even if
simplistically, characterised the cure as:
The Dutch Disease - economics
just straightforward economic fundamentals:
 sound monetary policy,
 open trade and investment regimes,
 enforce anti-corruption laws, and
 use revenue flows to make other sectors more
efficient (from Time magazine. 8 March 2008)
Apply all four to a fragile political economy
environment…
Dutch Disease – direct effects
Return to classical three effect categories:
1. Resource movement
2. Spending effect
3. Currency appreciation
.Dutch Disease – direct effects
 Resource movement. While for oil this is limited, for
alluvial precious metals, iron ore or other base metals
this can be significant:
 Labour
 Services and
 financial
 Review supply chain to identify opportunities for pre-
empting some of the negative effects of Dutch disease.
Dutch Disease – direct effects
Resource movement (cont)
 Can some proportion of windfall be used to
“compensate” lagging sectors?
 Anticipate and incorporate compensatory programmes
in a strategic plan ahead of time.
Dutch disease in fragile states
Exchange rate effects
 What is the experience of monetary discipline
 What proportion of economy is in the formal sector?
 Limit currency appreciation by mobilising domestic tax
revenues to complement inflows used for investment
(Sachs’ remedy)
In SL, currency fluctuation is linked to what is happening
in the diamond sector, plus the direction of Diaspora
funds
Dutch disease and fragile states
Operational strategies that have worked, and challenges for
application in fragile states:
.What happens?
 inflation. (Limitations of monetary instruments)
 Spending effect
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High expectations for public service delivery.
Grandiose infrastructure
Loyalty payments and rent-seeking behaviour
 Managing fluctuating revenue streams(booms and bust of business
cycle) CHAD
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Revenue management policies: ring fencing. stabilization funds
Increasing public debt
Appearance of oligarchs(those who by ingenuity or corruption get ever
bigger slices of the cake at the expense of the rest of the population
Dutch Disease and Fragile States
(cont)
 Managing fluctuating revenue streams(booms and bust
of business cycle) CHAD


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Revenue management policies: ring fencing. stabilization
funds
Increasing public debt
Appearance of oligarchs(those who by ingenuity or corruption
get ever bigger slices of the cake at the expense of the rest of
the population
Dutch Disease in fragile states
Operational strategies that have worked, and challenges
for implementation in fragile states:
Careful planning and implementation; public action
and private encouragement
(THE ROLE OF CSOs)
Subsidising supply side production
Direct subsidies to agriculture
Indirect through infrastructure/inputs/etc esp agriculture
Migration and urbanisation thru housing and other social
amenities
Dutch disease in fragile states
Spending effects
 The key question is spending on what?
 The literature is clear on what – education,
infrastructure etc. One difference between oil and base
metals is the the latter needs investments in education
to continue obtaining maximum benefits while oil
needs little in the form of skilled labour for revenues to
flow
 For fragile situations the issue is how are decisions
made on expenditures?
Dutch disease in fragile situations
Spending effects
 The challenge is to ensure effective and efficient
spending.
 The trick is to get a national dialogue on revenue
management even before the windfall (reduce
politicisation, threats to winnings is a long distance
away, greater stomach for objective debate – especially
if elections are in the horizon)
 Plug leakages
Dutch disease in fragile situations
Revenue Management
The challenges of; intergenerational considerations ; local or
national levels; consumption or infrastructure; direct
transfers or indirect on tradeables;
Conditional Cash transfers now reported to be in 45
countries. (Bolivia links gas receipts to pension
payments/Brazil covers 12m families stipends for school
attendance
There are reportedly rigourous evaluations done on some of
these initiatives and they show positive results.
Dutch Disease – the options
 Study on Ghana show 50% leakage in education and
80% in health. (Gauthier 2006) Hence disbursement
under the same system is tantamount to enriching the
few in control.
 Immediate action to strengthen and or put in place
robust systems and measures for better financial
management eg. Expenditure Tracking and budget
hearings
 Weak audit departments are worse than no auditing
system
Recommendations.
 Conditional Cash Transfers
 Givedirectly to citizensthentax(improvingtaxadminst
 Promoteaccountability
 Improveincomeequality
 Politicallydividends
Dutch disease and development
 The biggest challenge is how to diversify and remain
competitive despite all the pressures of the Dutch Disease.
 For oil-rich fragile or “as if” fragile economies; manage
wealth prudently
 Re-evaluate role of Civil Society.
 Invest in strategic planning and introduce results based
management.
The end.
hpm
References
Fidel Ezeala-Harrison Structural re-adjustment in
Nigeria: diagnosis of a severe Dutch disease
syndrome
The American Journal of Economics and Sociology,
, April, 1993
1. (2) Ryan Macdonald, Not Dutch Disease; its China
Syndrome, Statistics Canada (2007)
2. R Lama and JP Medina, (Aug 2010). Is Exchange Rate
Stabilisation an Appropriate Cure for the Dutch
Disease. IMF Working Paper
1.