 How Should Donors Respond to Resource Windfalls in Poor countries? From Aid to Insurance- Working Paper 372Anton Dobronogov
No 372, Working Papers from Center for Global Development Abstract: 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. Keywords: countercyclical; foreign aid; hedging markets; low-income countries; macroeconomic stabilization; natural resources; volatility (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cgd:wpaper:372 Access Statistics for this paper More papers in Working Papers from Center for Global Development Contact information at EDIRC. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to econpapers@oru.se.
EconPapers is hosted by the
School of Business at Örebro University.